<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Amendment to Application or Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
January 21, 1997
CULBRO CORPORATION
(Exact name of registrant as specified in charter)
Filing Fee #026093
AMENDMENT NO. 1
---------------
---------------
THE undersigned registrant hereby amends Culbro Corporation's Form 8-K
dated January 21, 1997 to include the financial statements required by Item
7(a) and the pro forma financial information required by Item 7(b) of the
Form 8-K, in connection with the acquisitions of Villazon & Company, Inc. and
Honduras American Tabaco S.A. de C.V. (collectively "Villazon") by General
Cigar Co, Inc., formerly a wholly owned direct subsidiary of Culbro
Corporation, and now a subsidiary of General Cigar Holdings, Inc., which is a
majority owned subsidiary of Culbro Corporation. The pro forma information
contained herein reflects the acquisition of Villazon, the effect of an
initial public offering of Class A Common Stock of General Cigar Holdings,
Inc., which was completed on February 28, 1997 and the effect of the sale of
the Corporation's subsidiary, CMS Gilbreth Packaging Systems, Inc., which was
completed on November 8, 1996.
1. FINANCIAL STATEMENTS REQUIRED BY ITEM 7(A)
Audited financial statements of Villazon & Company, Inc. and of Honduras
American Tabaco S.A. de C.V. for each of the three years ended December 31,
1996.
2. FINANCIAL STATEMENTS REQUIRED BY ITEM 7(B)
Unaudited pro forma statement of operations of Culbro Corporation for the
fiscal year ended November 30, 1996 assuming that the Villazon acquisition,
the initial public offering of General Cigar Holdings, Inc. and the sale of
CMS Gilbreth Packaging Systems, Inc. had been completed as of the beginning
of the fiscal year;
Unaudited pro forma balance sheet of Culbro Corporation as of November 30,
1996 assuming that the Villazon acquisition and the initial public offering
of General Cigar Holdings, Inc. had been completed as of the balance sheet
date. The effect of the sale of CMS Gilbreth Packaging Systems, Inc. is
reflected in Culbro Corporation's historical balance sheet as of November
30, 1996.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Culbro Corporation
---------------------------
(Registrant)
BY: /s/ Jay Green
---------------------------
(Signature)
DATE: APRIL 7, 1997 EXECUTIVE VICE PRESIDENT
<PAGE>
ITEM 2. BUSINESS ACQUISITIONS AND DISPOSITIONS
On January 21, 1997, General Cigar Co., Inc. ("General Cigar"), a
subsidiary of Culbro Corporation (the "Corporation") completed the acquisitions
of two affiliated companies, Villazon and Company, Inc., a U.S. corporation, and
Honduras American Tabaco, S.A. de C.V., a Honduran corporation (collectively
"Villazon"), for approximately $80.6 million consisting of $90.5 million of
purchase price, including direct acquisition costs, less $9.9 million of cash
acquired at closing. Cash paid to the sellers was $64.6 million 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 will be accounted for using the purchase method of accounting. Cost
in excess of net assets acquired, primarily trade names and other intangible
assets, is estimated to be approximately $70 million. General Cigar entered
into a Credit Agreement to finance the acquisition. The amounts borrowed under
the General Cigar Credit Agreement and $14.4 million of the seller notes were
repaid with the proceeds from the Offering (see Item 5 below).
On November 8, 1996, the Corporation completed the sale of all of the
outstanding common stock of each of the companies that comprised the
Corporation's labeling and packaging systems business, CMS Gilbreth Packaging
Systems, Inc. ("CMS Gilbreth"), to Impaxx, Inc. for net proceeds, after
expenses, of approximately $35 million. The net proceeds from the sale of CMS
Gilbreth were used to reduce the amount outstanding under the Corporation's
Credit Agreement and repay the remaining amount outstanding under the
Corporation's Senior Notes. The Corporation recorded a pretax loss of $5.6
million on the sale of CMS Gilbreth in 1996.
ITEM 5. CERTAIN TRANSACTIONS
On February 28, 1997, the Corporation's newly formed subsidiary, General
Cigar Holdings, Inc. ("GC Holdings"), completed an initial public offering of
6.9 million shares of its Class A Common Stock (the "Offering"), reflecting
approximately 26% of the common equity ownership of GC Holdings. Each share of
Class A Common Stock entitles its holder to one vote. The Corporation owns the
remaining equity of GC Holdings in the form of Class B Common Stock, which
entitles its holder to ten votes for each share. Accordingly, the Corporation
holds approximately 97% of the combined voting power of the outstanding common
stock of GC Holdings. The proceeds from the Offering, after underwriters'
discounts and commissions and estimated other expenses, were approximately $113
million and were used to reduce debt, a substantial portion of which was
incurred in connection with the Villazon Acquisition (see Item 2 above).
GC Holdings has no operations of its own, and its principal asset is all of
the outstanding stock of General Cigar, previously a wholly owned direct
subsidiary of the Corporation. Pursuant to a Distribution Agreement entered
into on February 27, 1997, among the Corporation, GC Holdings and the
Corporation's wholly owned subsidiary, Culbro Land Resources, Inc. ("CLR"), the
Corporation transferred certain assets and liabilities to GC Holdings and CLR.
The Distribution Agreement also provides for a potential distribution of the
stock of CLR to the shareholders of the Corporation (the "Distribution"). The
Distribution is contingent upon (i) either a tax ruling or an opinion of counsel
satisfactory to the Corporation that the Distribution constitutes a tax-free
reorganization under Section 335 of the Internal Revenue Code and (ii) approval
of the Merger (see below) by the Corporation's shareholders. On March 18,
1997, CLR changed its name to Griffin Land & Nurseries, Inc.
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<PAGE>
The assets transferred to GC Holdings included principally 1,100 acres of
land, all of the outstanding common stock of General Cigar Co., Inc., 387 PAS
Corp. (a New York City office building), Club Macanudo, Inc., Club Macanudo
(Chicago) Inc., and GCH Transportation, Inc. The terms of the Distribution
Agreement required GC Holdings to assume certain related liabilities, including
mortgages on certain assets, and the amount outstanding under the Culbro Credit
Agreement. The Distribution Agreement also provided for the assumption of
certain employee benefit arrangements of the Corporation by GC Holdings, and for
a tax sharing agreement between the Corporation, GC Holdings, and CLR. The
assets transferred to CLR included the Corporation's non-tobacco businesses and
investments, principally its nursery business, Imperial Nurseries, Inc.
("Imperial"), most of its New England real estate holdings and the investment in
Centaur Communications Ltd. ("Centaur"). The Distribution Agreement also
required a transfer of $7 million to CLR from GC Holdings.
Subsequent to the Distribution, the Corporation will have as its only
significant asset its investment in GC Holdings. The Corporation will then be
merged (the "Merger"), subject to approval of 66 2/3% of its shareholders, into
GC Holdings. The Corporation's shareholders at that time will receive
approximately 4.45 shares of Class B Common Stock of GC Holdings in exchange for
each share of the Corporation's stock.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
Audited financial statements of Villazon & Company, Inc. Page 4
for the three years ended December 31, 1996.
Audited financial statements of Honduras American Tabaco, Page 18
S.A. de C.V. for the three years ended December 31, 1996.
(B) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated condensed financial
information gives effect to the acquisition of Villazon, the Offering and the
disposition of CMS Gilbreth. The unaudited pro forma consolidated condensed
statement of operations assumes that these transitions occurred at the beginning
of the year. The unaudited pro forma consolidated condensed balance sheet
presented assumes that the Villazon acquisition and the Offering took place as
of the balance sheet date. The effect of the sale of CMS Gilbreth was already
reflected in the Corporation's 1996 balance sheet. This unaudited pro forma
consolidated condensed financial information may not necessarily reflect the
results of operations and financial position that actually would have been
achieved had these transactions taken place at the assumed dates. The pro forma
consolidated condensed financial information should be read in conjunction with
the Corporation's financial statements included under Item 7 of the
Corporation's 1996 Form 10-K.
Unaudited pro forma consolidated condensed statement Page 26
of operations for the fiscal year ended
November 30, 1996
Unaudited pro forma consolidated condensed balance sheet Page 27
as of November 30, 1996
Notes to unaudited pro forma consolidated financial information Page 28
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders and Directors
of Culbro Corporation
In our opinion, the accompanying balance sheets and the related statements of
income, of changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of the purchased assets of
Villazon & Company, Inc. (as described in Note 1) at December 31, 1995 and 1996,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As disclosed in the financial statements, the Company has extensive transactions
and relationships with related parties. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
/s/ PRICE WATERHOUSE LLP
Tampa, Florida
March 21, 1997
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<TABLE>
<CAPTION>
Villazon & Company, Inc.
STATEMENTS OF INCOME
- -------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Net sales $19,901,972 $24,152,535 $40,446,038
----------- ----------- -----------
Costs and expenses:
Cost of sales 12,491,696 14,975,595 24,645,299
Selling, general and administrative 3,934,883 4,315,678 5,380,206
----------- ----------- -----------
16,426,579 19,291,273 30,025,505
----------- ----------- -----------
Operating income 3,475,393 4,861,262 10,420,533
----------- ----------- -----------
Other income (expense):
Interest income 32,219 133,463 223,998
Interest expense (274,161) (452,401) (552,408)
Other 41,570 17,830 65,861
----------- ----------- -----------
(200,372) (301,108) (262,549)
----------- ----------- -----------
Income from continuing operations before
income taxes 3,275,021 4,560,154 10,157,984
Income taxes 39,496 46,666 113,563
----------- ----------- -----------
Net income $ 3,235,525 $ 4,513,488 $10,044,421
----------- ----------- -----------
----------- ----------- -----------
Earnings per share $ 758.80 $ 1,058.51 $ 2,355.63
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
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<PAGE>
Villazon & Company, Inc.
BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31,
1995 1996
ASSETS
Current assets:
Cash and cash equivalents $ 4,525,753 $ 9,731,183
Accounts receivable:
Trade - less allowance of $3,477 and $1,590 3,572,768 5,566,897
Related party receivables 76,213 299,000
Insurance claim receivable 104,110
Inventories 3,157,553 3,070,966
Advances to suppliers, net - 472,139
Prepaid expenses 182,373 181,604
----------- -----------
Total current assets 11,618,770 19,321,789
Deposits - 40,450
Cash surrender value of insurance on
lives of officers, net of policy
loans of $55,027 and $0 867,186 1,082,706
Available-for-sale securities 41,121 51,021
Property, plant and equipment, net 840,361 718,597
Trademarks, at cost, less accumlulated
amortization of $34,313 and $29,138 96,460 183,379
----------- -----------
Total assets $13,463,898 $21,397,942
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Debt due within one year $468,200 $3,686
Accounts payable 798,532 1,205,128
Related party payables - 1,629,674
Income taxes payable 12,946 66,370
Accrued liabilities:
Bonuses, vacation, salaries and wages 196,294 218,697
Contribution to profit-sharing plan 224,099 248,434
Other 1,423 4,255
----------- -----------
Total current liabilities 1,701,494 3,376,244
Long-term debt 3,260,056 5,139,756
----------- -----------
Total liabilities 4,961,550 8,516,000
----------- -----------
Commitments and contingencies (Notes 7, 8 and 10)
Stockholders' equity:
Common stock, $50 par value: authorized
10,000 shares; issued and outstanding
4,264 shares 213,200 213,200
Capital in excess of par value 223,659 223,659
Unrealized gains on securities 41,121 51,021
Retained earnings 8,024,368 12,394,062
----------- -----------
Total stockholders' equity 8,502,348 12,881,942
----------- -----------
Total liabilities and stockholders' equity $13,463,898 $21,397,942
----------- -----------
----------- -----------
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
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<TABLE>
<CAPTION>
Villazon & Company, Inc.
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,235,525 $ 4,513,488 $10,044,421
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of assets (21,000) - -
Depreciation and amortization 119,061 138,295 169,978
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable - trade (510,166) (516,934) (1,994,129)
Related party receivable (44,609) 12,446 (222,787)
Insurance claim receivable - (104,110) 104,110
Inventories 938,262 278, 095 86,587
Advances to suppliers - - (472,139)
Prepaid expenses 27,980 (54,702) 769
Trademarks (28,391) (34,069) (96,485)
Deposits - - (40,450)
Increase (decrease) in liabilities:
Accounts payable 130,786 79,166 406,596
Related party payables (647,472) (77,500) 1,629,674
Income taxes payable 10,988 (12,011) 53,424
Accrued liabilities 31,924 16,196 49,570
----------- ----------- -----------
Net cash provided by operating activities 3,242,888 4,238,360 9,719,139
----------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in cash surrender value of insurance
on lives of officers 96,546 (51,655) (215,520)
Purchase of property, plant and equipment (46,290) (538,880) (35,802)
Proceeds(payments) from sale of property, plant and
equipment 51,055 16,337 (2,846)
----------- ----------- -----------
Net cash provided by (used in) investing activities 101,311 (574,198) (254,168)
----------- ----------- -----------
FINANCING ACTIVITIES
Net proceeds (payments) on related party debt 10,498 (45,347) (461,352)
Net proceeds from long-term debt 378,764 689,177 1,876,538
Distributions to stockholders (1,314,685) (3,300,699) (5,674,727)
----------- ----------- -----------
Net cash used in financing activities (925,423) (2,656,869) (4,259,541)
----------- ----------- -----------
Net increase in cash 2,418,776 1,007,293 5,205,430
Cash and cash equivalents
at beginning of year 1,099,684 3,518,460 4,525,753
----------- ----------- -----------
Cash and cash equivalents
at end of year $ 3,518,460 $ 4,525,753 $ 9,731,183
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for income taxes $ 18,307 $ 58,678 $ 60,139
----------- ----------- -----------
----------- ----------- -----------
Cash paid for interest $ 274,161 $ 452,356 $ 553,830
----------- ----------- -----------
----------- ----------- -----------
NONCASH INVESTING AND FINANCING ACTIVITIES:
Available-for-sale securities received as a result
of demutualization of insurance company $ - $ 41,121 $ -
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
-7-
<PAGE>
<TABLE>
<CAPTION>
Villazon & Company, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
- ------------------------------------------------------------------------------------------------------------------------------
Capital in Total
Common Stock Excess of Unrealized Retained Stockholders'
Shares Amount Par Value Gains Earnings Equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 4,264 $ 213,200 $ 223,659 $ - $ 4,890,739 $ 5,327,598
Net income for the year 1994 3,235,525 3,235,525
Distributions to stockholders (1,314,685) (1,314,685)
---------- --------- --------- --------- ------------ ------------
Balance at December 31, 1994 4,264 213,200 223,659 - 6,811,579 7,248,438
Change in unrealized gains on
available-for-sale securities 41,121 41,121
Net income for the year 1995 4,513,488 4,513,488
Distributions to stockholders (3,300,699) (3,300,699)
---------- --------- --------- --------- ------------ ------------
Balance at December 31, 1995 4,264 213,200 223,659 41,121 8,024,368 8,502,348
Change in unrealized gains on
available-for-sale securities 9,900 9,900
Net income for the year 1996 10,044,421 10,044,421
Distributions to stockholders (5,674,727) (5,674,727)
---------- --------- --------- --------- ------------ ------------
Balance at December 31, 1996 4,264 $ 213,200 $ 223,659 $ 51,021 $ 12,394,062 $ 12,881,942
---------- --------- --------- --------- ------------ ------------
</TABLE>
The accompanying Notes to Financial Statements are
an integral part of these financial statements.
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Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION AND SUBSEQUENT EVENT
Pursuant to a purchase agreement dated December 20, 1996 (effective January
1, 1997), General Cigar Co., Inc., ("General") a subsidiary of Culbro
Corporation, acquired certain operations and substantially all of the
assets of Villazon and Company, Inc. (the "Company"), which is in the
business of producing and selling of cigars. The final purchase price of
$38,450,000 in cash along with $10,000,000 in promissory notes, the 1996
profits and the assumption of certain liabilities, is contingent upon any
purchase price adjustments made on the December 31, 1996 balance sheet.
The assets acquired consist of the Villazon and Company ("Villazon") and
its related divisions, Danby-Palicio ("Danby") and Tinder Box Wholesale
("TBW") (collectively known as Villazon and Co., Inc.). The Company's
principal facilities consist of cigar manufacturing operations in Tampa,
Florida and distribution operations in Upper Saddle River, New Jersey.
Excluded from the assets acquired was the Company's 79.01% ownership
interest in James B. Russell, Inc. ("JBR") (see Note 6) and two pieces of
real property located in Ybor City and Miami, Florida. Prior to the
acquisition, the financial results of the Company included the consolidated
results of JBR, which was not acquired by General. The accompanying
financial statements present the financial position, results of operations
and cash flows of Villazon and Co., Inc., on a carved out basis as if the
assets acquired had been an independent reporting entity for all periods
presented.
The statements of income include all revenues and costs directly
attributable to the Company, and the allocation of certain corporate
expenses which were allocated to JBR (see Note 6). Expenses have
historically been allocated based on the nature of the expense. Allocated
expenses include administrative services, rent, legal and accounting fees,
certain employee benefits and other similar overhead costs. All of the
allocations and estimates in the statements of income are based on
assumptions that the Company's management believes are reasonable under the
circumstances. However, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted
if JBR had operated as a separate entity.
Subsequent to the purchase transaction, the stock and remaining assets of
the Company will be known as Preferred Havana, Inc.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit in time deposit accounts
which mature within 90 days of purchase.
INVENTORIES
Supplies, work in process and finished goods are valued at the lower of
cost (using the first-in, first-out method) or market. Leaf tobacco is
valued at the lower of cost (using the specific identification method) or
market.
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Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Leaf tobacco includes tobacco in the process of aging, a substantial amount
of which may not be used within one year. It is industry practice to
include such inventories as current assets. Leaf tobacco also includes
tobacco in bond which is subject to custom duties upon withdrawal from
bond. Following industry practice, the Company does not include such
duties in inventories until paid.
AVAILABLE-FOR-SALE SECURITIES
Management determines the appropriate classification of securities at the
time of acquisition and re-evaluates such designation as of each balance
sheet date. Marketable equity securities are classified as
available-for-sale. Available-for-sale securities are carried at fair
value, with the unrealized gains and losses reported in a separate
component of stockholders' equity. Available-for-sale securities at
December 31, 1995 and 1996 are equity securities in an insurance company
issued at the time of conversion from a mutual to a stock company with zero
cost basis and estimated fair value of $41,121 and $51,021, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and depreciated using
either straight line or accelerated methods. Maintenance and repairs are
charged to expense as incurred.
TRADEMARKS
Trademarks consist of registered trade names of cigars or other tobacco
brands, and are initially capitalized at acquisition cost. Costs
associated with renewal of trademark registrations are also capitalized.
Trademarks are being amortized on a straight line basis over 5 to 15 years.
Related amortization expense of $2,956, $8,769 and $9,566 for the years
ended December 31, 1994, 1995 and 1996, respectively, is included in
selling, general and administrative expenses.
REVENUE RECOGNITION
Sales and the related costs of sales are recognized upon shipment of
products. Excise taxes for the years ended December 31, 1994, 1995 and
1996, were approximately $1,005,000, $1,149,000 and $1,571,826,
respectively, and are included in net sales and cost of sales in the
statements of income.
EARNINGS PER SHARE
Earnings per share of common stock is computed by dividing net income by
the weighted average number of common shares outstanding during the period.
Primary and fully diluted earnings per share are equivalent.
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Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
ESTIMATES
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements. Actual
results could differ from the estimates.
FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, advances to suppliers, cash surrender value of
insurance on lives of officers, available-for-sale securities, notes
payable, accounts payable and long-term debt. In the opinion of
management, the carrying amount of these financial instruments approximates
their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
The Company's customers are geographically dispersed but are concentrated
in the tobacco industry. The Company historically has had no material
losses on its accounts receivable from customers in excess of allowances
provided.
The Company's two largest customers accounted for approximately $3,516,139
(16%) and $3,136,208 (14%) in 1994, $4,048,250 (15%) and $3,633,613 (13%)
in 1995; and $10,040,082 (25%) and $4,831,586 (12%) of net sales in 1996.
2. INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
1995 1996
Leaf tobacco $ 502,959 $ 857,985
Work in process 899,229 322,896
Finished goods 1,322,395 1,288,066
Supplies 432,970 602,019
----------- -----------
$ 3,157,553 $ 3,070,966
----------- -----------
----------- -----------
3. ADVANCES TO SUPPLIERS:
Advances to Suppliers at December 31, 1996 consist of the following:
Advances to tobacco grower $ 410,000
Advances - other 175,830
Reserve for uncollectible advances (113,691)
-----------
$ 472,139
-----------
-----------
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Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During 1996, the Company, under a three year verbal agreement with a
tobacco supplier, advanced $410,000 to finance the growing, harvesting,
curing and sorting of tobacco. The Company will be reimbursed for its
advances from annual proceeds from the sale of crop. In addition, annual
net income, if any, of the supplier during the term of the arrangement will
be divided equally between the supplier and the financiers of the tobacco
growing venture. The Company will have the right of first refusal to
purchase its proportionate share of tobacco grown during the term of the
arrangement. The Company is at risk for potential crop loss. As of
December 31, 1996, no tobacco has been purchased by the Company from the
supplier.
The Company has also advanced approximately $176,000 to two tobacco
suppliers in South America and Mexico during 1996 as a deposit on future
purchases.
4. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment and related accumulated depreciation and
amortization of capital leases are summarized as follows:
DECEMBER 31,
1995 1996
Land $ 49,998 $ 49,998
Buildings and improvements 374,682 377,528
Machinery and equipment 601,866 597,583
Transportation equipment 543,423 543,854
Office furniture and equipment 347,856 369,085
Leasehold improvements 146,574 151,790
----------- -----------
2,064,399 2,089,838
Less accumulated depreciation (1,224,038) (1,371,241)
----------- -----------
$ 840,361 $ 718,597
----------- -----------
----------- -----------
Depreciation is determined on the straight-line and accelerated methods
using estimated useful lives as follows:
Buildings and improvements 5 - 31 1/2 years
Machinery and equipment 4 - 15 years
Transportation equipment 3 - 12 years
Office furniture and equipment 5 - 10 years
Leasehold improvements 5 - 10 years
Depreciation expense was $116,105, $129,526 and $160,412 in 1994, 1995 and
1996, respectively.
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Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. DEBT:
DECEMBER 31,
1995 1996
Prime plus 1/2% (8.75% at December
31, 1995) unsecured demand notes
payable to related parties $ 461,352 $ -
Prime plus 1/2% (8.75% at December 31, 1996)
unsecured notes payable to officers and
stockholders, due in 1999 or payable
13 months after notice 3,256,370 5,139,756
10.38% capital lease obligation on UPS
manifest system, due $1,912 per quarter
through 1997 10,534 3,686
----------- -----------
3,728,256 5,143,442
Less amount due within one year (468,200) (3,686)
----------- -----------
Long-term debt due after one year $ 3,260,056 $ 5,139,756
----------- -----------
----------- -----------
Total interest expense to related parties was $267,634 in 1994, $445,180 in
1995 and $549,702 in 1996.
The maturities of long-term debt at December 31, 1996 are as follows:
1997 $ 3,686
1998 -
1999 5,139,756
-----------
$ 5,143,442
-----------
-----------
Subsequent to December 31, 1996 long term debt payable to the officers and
stockholders of the Company was repaid by General in accordance with the
purchase agreement (see Note 1).
6. RELATED PARTY TRANSACTIONS:
The Company has had transactions in the normal course of business with
various other corporations, certain of whose directors or officers are also
directors of the Company.
HATSA
Certain stockholders of the Company hold a 45% interest in Honduras
American Tabaco, S.A. ("HATSA"). The Company purchases cigars, boxes and
tobacco leaf from HATSA, and the Company sells tobacco and other supplies
purchased from third parties to HATSA. Purchases and sales are netted,
resulting in a net receivable or payable to HATSA. The net receivable
(payable) was $17,587 at December 31, 1995 and ($1,629,674) at December 31,
-13-
<PAGE>
Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1996. Payments to HATSA are made when requested by HATSA. Approximately
$5,668,000 in purchases were made in 1994, $7,450,000 in 1995 and
$12,414,000 in 1996, and approximately $1,590,000 in sales were made in
1994, $2,141,000 in 1995 and $2,790,000 in 1996.
NATSA
Nicaragua American Tobacco S.A. ("NATSA") was formed in 1996 and is owned
by parties related to the Company including a minority stockholder and an
employee. The Company began purchasing cigars from NATSA in 1996 and, at
December 31, 1996, is the only customer. The Company has advanced money to
NATSA for future purchases and sells tobacco purchased from other suppliers
to NATSA, resulting in a net receivable from NATSA of approximately
$255,622 at year-end. The Company had total purchases from NATSA of
approximately $2,129,000 during the year.
Prior to the acquisition of the Company by General, all interests held in
NATSA were divested by the Company's stockholders in accordance with the
purchase agreement referred to in Note 1.
MANUFACTURERS BANK
Certain stockholders and members of the Company's Board of Directors are
also stockholders and members of the Board of Directors of The
Manufacturers Bank of Florida. The Company uses banking services provided
by and purchases certificates of deposit issued by The Manufacturers Bank
of Florida. Fees paid to The Manufacturers Bank of Florida were
immaterial.
TINDER BOX INTERNATIONAL
A major stockholder of the Company owns 37.5% of Tinder Box International,
Ltd. (TBI). In August 1989, the Company entered into a ten-year license
agreement with TBI which provides the Company the right to sell and
distribute specialized products. In consideration of the license granted,
the Company remits a royalty to TBI based on a percentage of net sales of
the products sold under the license. The license agreement provides for a
6% royalty percentage which will increase to 7% or 8% if related sales
during any twelve-month period exceed $3,000,000 or $5,000,000,
respectively. Prior to 1994, the license agreement was verbally amended to
reduce the royalty percentage to 3% on sales $3,000,000 and less. Royalty
expense for the years ended December 31, 1994, 1995 and 1996 was
approximately $37,000, $43,000 and $64,000, respectively (at 3% of the
related sales).
The terms of the license agreement also contain certain covenants whereby
at the option of the licensee or licensor, the license agreement may be
terminated. These terms include the sale of majority ownership of the
Company or a sale of all or a substantial portion of the Company's stock.
Additionally, the Company has agreed that if TBI is sold, the Company will
terminate its ownership of Tinderbox Wholesale Division which was
originally purchased from TBI. TBI shall purchase all of the Company's
inventories of Tinder Box Products, at
-14-
<PAGE>
Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
licensee's cost, and all of the equipment, fixtures and supplies which the
Company purchased from TBI at the lesser of market value or depreciated
cost.
JBR
Certain stockholders and members of the Board of Directors own the 20.99%
of JBR that is not owned by the Company. Two of the Company's divisions,
Danby and Tinder Box Wholesale ("TBW"), occupy the same premises as JBR in
Upper Saddle River, New Jersey, and share certain administrative services
(see Note 10). Danby, TBW and JBR incur certain related administrative and
overhead expenses as a result of occupying these same premises. At
December 31, 1995 and 1996 Villazon had a receivable of approximately
$58,000 and $38,000, respectively, from JBR for administrative expenses
incurred on behalf of JBR. During the years ended December 31, 1994, 1995
and 1996, $242,000, $266,000 and $270,000 in administrative and rental
expenses were allocated to JBR.
OTHER
Rentals paid to related parties were approximately $253,000 in 1994, 1995
and 1996. See Note 10 for related party leases. Also see Note 5 for
related party debt.
7. STOCK PURCHASE AGREEMENT:
Under an agreement between the Company and its stockholders, any
stockholder desiring to pledge, encumber or otherwise dispose of his stock
in the Company during his lifetime shall first obtain the written consent
of the Company and the stockholders. Stock may be sold, however, if the
stock is first offered to the Company and the nonselling stockholders at
the same price and on the same terms and conditions as those offered to the
third party. The offered shares may be sold to any other person if both
the Company and the remaining stockholders do not exercise their rights.
Under terms of the agreement, the purchase price of each share of stock
purchased in a transfer upon death shall be $3,517.82 unless redetermined
by agreement of the Company and the stockholders.
The stock purchase agreement also calls for the Company to maintain life
insurance policies to insure or partially insure its obligations under the
agreement. Additionally, in the event a stockholder sells all of his stock
in the Company, the stockholder shall have the right to purchase from the
Company the insurance policies on his life for a price equal to the cash
surrender value and accumulated dividends, less the balance of any
outstanding loans.
8. EMPLOYEE BENEFITS:
All factory employees are participants in the Cigar Makers' Union Local
533, Retail, Wholesale and Department Store Union Plan which is a
multi-employer defined contribution plan. The Company's contribution is
based on the rate of $.70 per hour for the first 40 hours per week per
employee in 1994, 1995 and 1996. Under the Employee Retirement Income
Security Act of 1974, as amended by the Multi-employer Pension Plan
Amendments Act of 1980, an employer is liable for a proportionate part of
the plan's unfunded vested benefits.
-15-
<PAGE>
Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The relative position of each employer with respect to actuarial present
value of accumulated benefits and net assets available for benefits,
however, is not available to the Company.
Profit-sharing plans cover nonunion employees who meet certain eligibility
requirements. The plans are funded by discretionary contributions from the
Company and JBR.
The expenses of these plans are as follows:
YEAR ENDED DECEMBER 31,
1994 1995 1996
Union plan charge to cost of sales $128,976 $143,234 $144,793
Profit-sharing plan charged to selling,
general and administrative expenses 185,727 211,763 218,066
-------- -------- --------
$314,703 $354,997 $362,859
-------- -------- --------
-------- -------- --------
9. INCOME TAXES:
The Company has elected by unanimous consent of its stockholders to be
taxed under the provisions of Subchapter S of the Internal Revenue Code.
Under those provisions, the Company generally does not pay federal
corporate income taxes on its taxable income. Instead, the stockholders
are liable for individual federal income taxes on their respective share of
the Company's taxable income. Certain states do not recognize the
Subchapter S election and, accordingly, require the payment of taxes by the
Company. Income tax expense associated with those states that do not
recognize the Subchapter S election was approximately $39,000, $47,000 and
$114,000 at December 31, 1994, 1995 and 1996, respectively.
10. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company occupies premises in Upper Saddle River, New Jersey. The
building is owned by Glordiane Realty, a partnership of the principals of
the Company. A ten year lease, effective December 1, 1984, provided for
rent of approximately $24,000 ($4,000 relating to JBR) per month effective
July 1, 1985 plus a proportionate share of any increase in realty taxes and
expenses. Subsequent to year-end the rental agreement was revised and
provided for monthly rentals of approximately $13,500 per month. This
rental agreement became effective January 1, 1997 and extends through
December 31, 2000.
-16-
<PAGE>
Villazon & Company, Inc.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Future minimum rental commitments for all noncancelable operating leases
are as follows:
YEAR ENDING
DECEMBER 31, TOTAL
1997 $ 184,223
1998 162,223
1999 162,223
2000 162,223
LITIGATION
The Company is party to litigation in the normal course of business. While
the result of litigation cannot be predicted with certainty, the Company
believes that the final outcome of all litigation will not have a material
adverse effect on the Company's financial condition.
TOBACCO TAXES
On February 25, 1997, the Company was notified by subpoena that the New
York State Department of Taxation and Finance, as part of an industry wide
investigation, is investigating six years of financial information to
determine if the Company is liable for back taxes on the import of tobacco.
The state of New York requires a tobacco import tax to be paid by a
distributor, on behalf of a retailer, and is calculated as 20% of the
wholesale cost. While management believes that the final outcome will not
have a material effect on the Company's financial condition, the result of
this litigation cannot presently be determined.
-17-
<PAGE>
[PRICE WATERHOUSE LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
Culbro Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations and retained earnings and of cash flows present fairly, in all
material respects, the financial position of Honduras American Tabaco, S. A. de
C. V. at December 31, 1996 and December 31, 1995 and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995 and
1994 in conformity with generally accepted accounting principles in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in the financial statements, the Company has extensive transactions
and relationships with related parties. Because of these relationships, it is
possible that the terms of these transactions are not the same as those that
would result from transactions among wholly unrelated parties.
/s/ Price Waterhouse
Tegucigalpa, Honduras
March 12, 1997
-18-
<PAGE>
Honduras American Tabaco, S. A. de C. V.
Balance Sheets
- -----------------------------------------------------------------------------
(EXPRESSED IN US DOLLARS)
DECEMBER 31,
1996 1995
ASSETS
Current assets:
Cash $ 176,508 $ 611,512
Accounts receivable - trade 95,820 115,314
Related party receivable 1,629,673 -
Inventories 3,693,247 3,670,742
Prepaid expenses 18,070 14,424
----------- -----------
Total current assets 5,613,318 4,411,992
Property, plant and equipment, net 569,369 395,808
Other assets 6,000 6,000
----------- -----------
Total assets $ 6,188,687 $4,813,800
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 27,233 $ 83,020
Related party payables 6,058 280,623
---------- ----------
Total current liabilities 33,291 363,643
---------- ----------
Stockholders' Equity:
Common stock 2,105,328 2,105,328
Retained earnings 4,050,068 2,344,829
---------- ----------
Total stockholders' equity 6,155,396 4,450,157
---------- ----------
Total liabilities and stockholders' equity $6,188,687 $4,813,800
---------- -----------
---------- -----------
The accompanying notes to financial statements are an integral part
of these financial statements.
-19-
<PAGE>
<TABLE>
<CAPTION>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
- ----------------------------------------------------------------------------------------------------
(EXPRESSED IN US DOLLARS)
YEAR ENDED DECEMBER 31,
1996 1995 1994
<S> <C> <C> <C>
Net sales $ 12,585,145 $ 7,282,830 $5,832,953
------------ ------------ ----------
Cost and expenses:
Cost of goods sold 8,297,715 5,249,450 3,818,682
Administrative expenses 278,555 202,965 168,099
------------ ------------ ----------
Operating profit 4,008,875 1,830,415 1,846,172
Other income (expense) 36,171 (2,045) 9,048
Foreign currency losses (47,579) (337,799) (344,818)
------------ ------------ ----------
Net income 3,997,467 1,490,571 1,510,402
Retained earnings - beginning of year 2,344,829 2,302,035 1,562,881
Distribution to stockholders (2,292,228) (1,447,777) (771,248)
------------ ------------ ----------
Retained earnings - end of year $ 4,050,068 $ 2,344,829 $2,302,035
------------ ------------ ----------
------------ ------------ ----------
Earnings per share $ 19.98 $ 7.45 $ 7.55
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
-20-
<PAGE>
<TABLE>
<CAPTION>
HONDURAS AMERICAN TABACO, S.A. DE C.V.
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------------------------------
(EXPRESSED IN US DOLLARS)
YEAR ENDED DECEMBER 31,
1996 1995 1994
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 3,997,467 $ 1,490,571 $ 1,510,402
ADJUSTMENTS TO RECONCILE NET
INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Depreciation 84,957 78,359 78,900
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) decrease in assets:
Accounts receivable - trade 19,494 (32,426) 66,124
Related party receivables (1,629,673) 77,500 930,820
Inventories (22,505) (608,206) (840,352)
Prepaid expenses (3,646) (4,485) 7,503
Increase (decrease) in liabilities:
Related party payables (274,565) 107,438 23,050
Accounts payable and accrued
liabilities (55,787) (38,105) (248,452)
---------- ----------- ------------
Net cash provided by operating activities 2,115,742 1,070,646 1,527,995
---------- ----------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (258,518) (76,672) (290,381)
---------- ----------- -----------
Net cash used in investing activities (258,518) (76,672) (290,381)
---------- ------------ -----------
FINANCING ACTIVITIES:
Paid in capital - 475,698 -
Distribution to stockholders (2,292,228) (1,447,777) (771,248)
---------- ------------ -----------
Net cash used in financing activities (2,292,228) (972,079) (771,248)
---------- ----------- ------------
Net (decrease) increase in cash (435,004) 21,895 466,366
Cash at beginning of year 611,512 589,617 123,251
---------- ------------ -----------
Cash at end of year $ 176,508 $ 611,512 $ 589,617
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
The accompanying notes to financial statements are an integral part
of these financial statements.
-21-
<PAGE>
HONDURAS AMERICAN TABACO, S. A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
1. NATURE OF OPERATIONS
Honduras American Tabaco, S. A. de C.V. ("the Company") manufactures and
sells cigars and related tobacco products. The Company sells approximately
95% of its production to Villazon & Company, Inc ., a related party company
located in the United States.
The Company's maximum authorized fully paid common stock is L 10,000,000
(equivalent to $2,105,328 at December 31, 1996) represented by 200,000
shares of par value L 50 each.
2. SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies adopted by the Company, in
accordance with generally accepted accounting principles in the United
States, are summarized as follows:
TRANSLATION OF FINANCIAL STATEMENTS INTO U. S. DOLLARS. The Company's
records are maintained in Honduran lempiras (L), and in U.S. dollars as
from November 1, 1996, consequently a translation into U.S. dollars was
applied to the local currency prepared financial statements at December
31, 1995 and 1994 in accordance with Statement of Financial Accounting
Standards ("SFAS") No.52, "Foreign Currency Translation". U.S. dollars was
established as functional currency for purposes of the translation.
Monetary assets and liabilities are translated at year end exchange rates
and non-monetary items are translated at historical rates. Income and
expense accounts are translated at the average rates in effect during the
year, except for depreciation and cost of product sales which are
translated at historical rates. Gains and losses from changes in exchange
rates are recognized in income in the year of occurrence.
INVENTORIES. Supplies, work in process and finished goods are stated at
the lower of cost or market using the first-in, first-out method. Leaf
tobacco is valued at the lower of cost or market using the specific
identification method. Leaf tobacco includes tobacco in the process of
aging, a substantial amount of which may not be used within one year. It is
industry practice to include such inventories as current assets.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are recorded
at cost. Depreciation is determined on a straight-line basis over the
estimated useful assets lives for financial statement reporting purposes.
Expenditures for maintenance and repairs are charged to expense when
incurred.
REVENUE RECOGNITION. Sales and the related costs of sales are recognized
primarily upon shipment of products. Sales are presented net of goods
returned by customers.
EARNINGS PER SHARE. Earnings per share of common stock is computed by
dividing net income by the number of common shares outstanding during the
year.
-22-
<PAGE>
HONDURAS AMERICAN TABACO, S. A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
ESTIMATES. Preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from the estimates.
FINANCIAL INSTRUMENTS. The Company's financial instruments include cash,
accounts receivable and accounts payable. In the opinion of management,
the carrying amount of these financial instruments approximates their fair
value.
CONCENTRATION OF CREDIT RISKS. Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
accounts receivable. The Company historically has had no material losses
on its accounts receivable from customers in excess of allowances provided.
The Company's largest customer is Villazon & Company, Inc. which accounted
for approximately 92%, 95% and 92% of net sales for the years ended
December 31, 1996, 1995 and 1994, respectively.
SEVERANCE COMPENSATION. Accrued severance compensation for employees under
the terms of the Honduran Labor Code may be payable to them in the event of
dismissal. It is Company's policy to pay this compensation to its
employees regardless of dismissal events at year end.
ADJUSTMENTS AND RECLASSIFICATIONS. Certain adjustments and
reclassifications in the financial statements have been made to comply with
accounting principles generally accepted in the United States.
3. INVENTORIES
As of December 31, inventories consist of the following:
1996 1995
Leaf tobacco $ 2,596,163 $ 2,747,267
Supplies 999,634 914,982
Leaf tobacco in transit 90,029 -
Goods in transit - 7,421 8,493
----------- -----------
$ 3,693,247 $ 3,670,742
----------- -----------
----------- -----------
-23-
<PAGE>
HONDURAS AMERICAN TABACO, S. A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and related accumulated depreciation are
summarized as follows:
1996 1995
Land $ 80,242 $ 36,595
Buildings and improvements 549,662 422,731
Machinery and equipment 566,179 486,496
Transportation equipment 127,967 127,967
Office furniture and equipment 99,385 91,128
----------- ----------
1,423,435 1,164,917
Less - Accumulated depreciation (854,066) (769,109)
----------- ----------
$ 569,369 $ 395,808
----------- ----------
----------- ----------
Depreciation is determined on the straight-line method using estimated
useful lives as follows:
Buildings and improvements 10 years
Machinery and equipment 4-5 years
Transportation equipment 5 years
Office furniture and equipment 4-5 years
5. STOCK PURCHASE AGREEMENT AND PROPOSED SALE
Under an agreement between the Company and its stockholders, any
stockholder desiring to pledge, encumber or otherwise dispose of his stock
in the Company during his lifetime shall first obtain the written consent
of the Company and the stockholders. Stock may be sold, if the stock is
first offered to the nonselling stockholders at the same price and on the
same terms and conditions as those offered to the third party. The offered
shares may be sold to any other person if both the Company and the
remaining stockholders do not exercise their rights. Under terms of the
agreement, no purchase price has been predetermined for each share of stock
purchased in a transfer upon death.
6. TAX BENEFITS
The Company is eligible to benefit from the Temporary Import Regime (RIT)
through resolutions issued by the Ministry of Economy, which expire in the
year 1998. Tax benefits include:
a) Exemption from payment of certain taxes and customs duties on imports
of equipment and raw materials used in the production and exportation
of cigars and related products.
-24-
<PAGE>
HONDURAS AMERICAN TABACO, S. A. DE C.V.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
b) Exemption from payment of income tax, for a 10 year period, on profits
generated by cigars and related products exports to foreign countries,
excluding the Central American region.
7. OPERATING LEASES
Future minimum rental payments under a noncancellable lease agreement with
a related party as of December 31, 1996 are:
1997 $ 45,000
1998 48,000
1999 12,000
----------
$ 105,000
----------
----------
Total rental expenses for operating leases were approximately $33,800,
$16,000 and $12,000 in 1996, 1995 and 1994, respectively.
8. SUBSEQUENT EVENT
Pursuant to a stock purchase agreement dated December 23, 1996, General
Cigar Co., Inc., a subsidiary of Culbro Corporation, acquired all the stock
of the Company for $20 million in cash. The transaction was completed
January 21, 1997 and is effective as of January 1, 1997. The final
purchase price is contingent upon any purchase price adjustments made on
the December 31, 1996 financial statements.
-25-
<PAGE>
<TABLE>
<CAPTION>
CULBRO CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996
(dollars in thousands except per share data)
ADJUSTMENTS FOR ADJUSTMENTS ADJUSTMENTS
CULBRO VILLAZON VILLAZON FOR SALE OF FOR CULBRO
HISTORICAL HISTORICAL (1) ACQUISITION CMS GILBRETH OFFERING PRO FORMA
---------- ----------- ------------ ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales and other revenue $204,812 $40,617 $ - $ - $ - $245,429
Cost and expenses:
Cost of goods sold 120,449 20,830 - - - 141,279
Selling, general and administrative
expenses 60,010 5,658 2,498(2) - - 68,166
Other expense 4,500 - - - - 4,500
------- ------- ------- ------- ------- -------
Operating profit 19,853 14,129 (2,498) - - 31,484
Other nonoperating income items, net 2,220 278 - - - 2,498
Interest expense 8,758 552 6,908(3) (2,859)(5) (8,747)(6) 4,612
------- ------- ------- ------ ------ -------
Income before taxes 13,315 13,855 (9,406) 2,859 8,747 29,370
Income tax provision 4,916 114 1,621(4) 1,115(4) 3,411(4) 11,177
------- ------- ------- ------ ------ -------
Income before minority interest 8,399 13,741 (11,027) $1,744 5,336 18,193
Income attributable to minority interest
in subsidiary - - - - (4,722)(7) (4,722)
------- ------- ------- ------- ------ --------
Income from continuing operations $ 8,399 $13,741 $(11,027) $1,744 $ 614 $13,471
------- ------- -------- ------- ------ --------
------- ------- -------- ------- ------ -------
Income per common share from
continuing operations $1.80 $2.89
------ ------
------ ------
Weighted average common shares and
equivalents outstanding 4,664,000 4,664,000
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMATION.
-26-
<PAGE>
<TABLE>
<CAPTION>
CULBRO CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
NOVEMBER 30, 1996
(dollars in thousands)
ADJUSTMENTS
CULBRO VILLAZON FOR VILLAZON ADJUSTMENTS CULBRO
HISTORICAL HISTORICAL(1) ACQUISITION FOR OFFERING PRO FORMA
---------- ---------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,409 $ 9,907 $ - $ - $ 15,316
Receivables, net 35,257 5,962 - - 41,219
Inventories 81,232 6,464 - - 87,696
Other current assets 7,923 672 - - 8,595
-------- ------- -------- -------- ---------
Total current assets 129,821 23,005 - - 152,826
Property and equipment, net 66,829 1,288 3,000(8) - 71,117
Intangible assets - 183 70,443(9) - 70,626
All other assets 46,794 1,180 1,000(10) - 48,974
-------- ------- -------- -------- ---------
Total assets $243,444 $25,656 $74,443 $ - $343,543
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
<CAPTION>
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 27,502 $ 1,775 $ - $ - $ 29,277
All other current liabilities 6,889 4 74,370(11) (74,370)(15) 6,893
-------- ------- -------- -------- ---------
Total current liabilities 34,391 1,779 74,370 (74,370) 36,170
Long-term debt 49,925 5,140 12,010(12) (38,630)(15) 28,445
All other noncurrent liabilities 23,340 - 6,800(13) - 30,140
-------- ------- -------- -------- ---------
Total liabilities 107,656 6,919 93,180 (113,000) 94,755
Minority interest in subsidiary - - - 40,466(16) 40,466
Shareholders' equity 135,788 18,737 (18,737)(14) 72,534(17) 208,322
-------- ------- -------- -------- ---------
Total liabilities, minority interest
and shareholders' equity $243,444 $25,656 $74,443 $ - $343,543
-------- ------- -------- -------- ---------
-------- ------- -------- -------- ---------
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL
INFORMATION.
</TABLE>
-27-
<PAGE>
CULBRO CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(dollars in thousands)
(1) Represents the combined totals of both Honduras American Tabaco, S. A. de
C.V. ("HATSA") and Villazon & Co., Inc. The unaudited pro forma combining
statement of operations for 1996 and balance sheet as of December 31, 1996
are presented below and reflect the elimination of sales, cost of goods sold,
receivables, payables and profit in ending inventory.
UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS
YEAR ENDING DECEMBER 31, 1996
<TABLE>
<CAPTION>
HATSA VILLAZON ELIMINATIONS COMBINED
----- -------- ------------ --------
<S> <C> <C> <C> <C>
Net sales $12,585 $40,446 $(12,414) $40,617
Cost of goods sold 8,298 24,646 (12,114) 20,830
------- ------- -------- -------
Gross profit 4,287 15,800 (300) 19,787
Selling, general and administrative
expenses 278 5,380 - 5,658
------- ------- -------- -------
Operating profit 4,009 10,420 (300) 14,129
Other nonoperating income (expense),
net (12) 290 - 278
Interest expense - 552 - 552
------- ------- -------- -------
Income before income taxes 3,997 10,158 (300) 13,855
Income tax provision - 114 - 114
------- ------- -------- -------
Net income $3,997 $10,044 $ (300) $13,741
------- ------- -------- -------
------- ------- -------- -------
</TABLE>
-28-
<PAGE>
UNAUDITED PRO FORMA COMBINING BALANCE SHEET
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
HATSA VILLAZON ELIMINATIONS COMBINED
----- -------- ------------ --------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 176 $ 9,731 $ - $ 9,907
Accounts receivable, net 1,726 5,866 (1,630) 5,962
Inventories 3,693 3,071 (300) 6,464
Other current assets 18 654 - 672
------ ------- ------- -------
Total current assets 5,613 19,322 (1,930) 23,005
Property and equipment, net 569 719 - 1,288
Intangible assets - 183 - 183
Other assets 6 1,174 - 1,180
------ ------- ------- -------
Total assets $6,188 $21,398 $(1,930) $25,656
------ ------- ------- -------
------ ------- ------- -------
Accounts payable and accrued liabilities $ 33 $ 3,372 $(1,630) $ 1,775
Current portion of long-term debt - 4 - 4
------ ------- ------- -------
Total current liabilities 33 3,376 (1,630) 1,779
Long-term debt - 5,140 - 5,140
------ ------- ------- -------
Total liabilities 33 8,516 (1,630) 6,919
------ ------- ------- -------
Common stock 2,105 213 - 2,318
Additional paid in capital - 224 - 224
Retained earnings 4,050 12,445 (300) 16,195
------ ------- ------- -------
Stockholders' equity 6,155 12,882 (300) 18,737
------ ------- ------- -------
Total liabilities and stockholders' equity $6,188 $21,398 $(1,930) $25,656
------ ------- ------- -------
------ ------- ------- -------
</TABLE>
(2) Reflects estimated amortization expense of intangible assets to be
recorded in connection with the Villazon Acquisition and additional
depreciation expense related to the estimated increase in Villazon's
property and equipment as a result of purchase accounting adjustments.
Estimated intangible assets of $70 million include trademarks and
goodwill, if any, which the Corporation anticipates will be amortized over
30 years on a straight line basis. The additional depreciation expense is
based on an estimated increase of $3 million to the historical cost of
Villazon's property and equipment, depreciated on a straight line basis
over an average useful life of 20 years. The period used for goodwill
amortization is based on a preliminary estimate of the reasonable period
for which such costs are expected to be recovered and is based in part on
the earnings and history of the entities acquired.
(3) Reflects (i) amortization of financing fees relating to the General Cigar
Credit Agreement and (ii) estimated interest expense on $91.5 million of
indebtedness (consisting of $24.4 million of Seller Notes and $67.1
million of indebtedness incurred under the General Cigar Credit Agreement)
used to finance the Villazon Acquisition, excluding interest on $5.1
million of Seller Notes which was previously included on the Villazon
historical balance sheets as long-term debt due to owners. Prior to the
Offering, borrowings under the General Cigar Credit Agreement bear
interest at the Eurodollar rate plus 2% (7.44%). The Seller Notes bear
interest at prime plus 1/2% (8.75%).
(4) Reflects Federal income tax (35%) and state income tax of approximately
4%, which is net of Federal tax benefits.
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<PAGE>
(5) Reflects a decrease in interest expense as a result of net proceeds of
approximately $35.0 million received from the sale of CMS Gilbreth. The
net proceeds were used to reduce the Corporation's debt.
(6) Reflects a decrease in interest expense as a result of net proceeds of
$113.0 million from the Offering applied towards the repayment of (i)
$98.6 million of indebtedness under the General Cigar Credit Agreement
bearing interest at the Eurodollar rate plus 2% (7.44%) and (ii) $14.4
million of indebtedness reflecting a portion of the Seller Notes bearing
interest at a rate of prime plus 1/2% (8.75%). The General Cigar Credit
Agreement provides for a reduction of interest rates to the Eurodollar
rate plus 3/4%.
(7) Reflects the net income of GC Holdings attributed to the approximately 26%
minority ownership as a result of the Offering of Class A Common Stock of
GC Holdings.
(8) Reflects purchase accounting adjustments to increase property and
equipment to its estimated fair value. Based on a preliminary allocation
of the purchase price of $90.5 million (including an estimate of $1.5
million for acquisition costs), Villazon's historical basis of property
and equipment was increased by $3 million representing management's
preliminary determination of estimated fair value which was based upon
current prices of comparable assets.
(9) Reflects the preliminary estimated excess of the purchase price paid for
Villazon over the fair value of net assets acquired, primarily trademarks
and goodwill, if any.
(10) Reflects financing fees paid to the banks in connection with the General
Cigar Credit Agreement used to finance the Villazon Acquisition.
(11) Reflects issuance of short-term Seller Notes of $14.4 million, including
the assumption of $5.1 million of long-term debt due to owners as
previously included on Villazon's historical balance sheet and debt of
$60.0 million incurred under the Credit Agreement in connection with the
Villazon Acquisition.
(12) Reflects (i) the issuance of the long-term Seller Notes of $10.0 million,
(ii) borrowings under the Credit Agreement of $7.1 million, less (iii) the
$5.1 million of long-term debt due to owners previously included on
Villazon's historical balance sheet.
(13) Reflects deferred taxes related to purchase accounting adjustments to the
historical basis of assets acquired in the Villazon Acquisition.
(14) Reflects elimination of shareholders' equity of Villazon.
(15) Reflects net proceeds from the Offering of $113.0 million applied toward
the repayment of (i) $74.4 million of short-term debt consisting of $60.0
million under the Credit Agreement and $14.4 of Seller Notes, and (ii)
$38.6 million of long-term debt outstanding under the Credit Agreement.
(16) Reflects minority interest in GC Holdings as a result of the Offering.
Minority interest reflects approximately 26% of the net book value of GC
Holdings as of the balance sheet date.
(17) Reflects increase in the Corporation's additional paid in capital as a
result of the excess of the Offering proceeds of $113.0 million over the
minority interest in GC Holdings as of the balance sheet date.
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