<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 26, 1996
REGISTRATION NO. 333-15257
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MAFCO CONSOLIDATED GROUP INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 2121 02-0424104
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
------------------------
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
BARRY F. SCHWARTZ, ESQ.
MAFCO CONSOLIDATED GROUP INC.
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies of all communications to:
STACY J. KANTER, ESQ.
ALAN C. MYERS, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
919 THIRD AVENUE
NEW YORK, NEW YORK 10022
(212) 735-3000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
PROSPECTUS
23,156,502 VALUE SUPPORT RIGHTS
MAFCO CONSOLIDATED GROUP INC.
------------------------
This Prospectus is being furnished in connection with the distribution (the
'Distribution') by Power Control Technologies Inc., a Delaware corporation
('PCT'), to the holders of record of PCT common stock (the 'PCT Common Stock')
and PCT convertible preferred stock (the 'PCT Preferred Stock,' and, together
with the PCT Common Stock, the 'PCT Stock'), of one Value Support Right (each a
'VSR,' and collectively, the 'VSRs') of Mafco Consolidated Group Inc., a
Delaware corporation (the 'Company'), for each share of PCT Common Stock and 125
VSRs of the Company for each share of PCT Preferred Stock (all of which are
owned by the Company) in each case owned at the close of business on December
23, 1996 (the 'Record Date'). The Distribution will occur, and certificates
evidencing the VSRs will be mailed to holders of PCT Stock, on or about December
30, 1996 (the 'Distribution Date').
The VSRs were originally issued to PCT International Holdings Inc., a
Delaware corporation and a wholly owned subsidiary of PCT ('PCT International'),
in connection with the sale (the 'Disposition') by the Company to PCT
International of all the outstanding shares of common stock (the 'Flavors Common
Stock') of Flavors Holdings Inc., a Delaware corporation and a wholly owned
subsidiary of the Company ('Flavors Holdings'), pursuant to a Stock and VSR
Purchase Agreement, dated as of October 23, 1996 (the 'Purchase Agreement'), by
and among the Company, PCT and PCT International. The Disposition was
consummated and the VSRs were issued to PCT International on November 25, 1996.
The VSRs were subsequently distributed to PCT.
The terms of the VSRs are governed by the Value Support Rights Agreement,
dated as of November 25, 1996 (as amended, the 'VSR Agreement'), between the
Company and American Stock Transfer & Trust Company, as trustee (the 'Trustee').
Each VSR entitles the holder thereof to a payment from the Company equal to the
difference between $11.00, reduced by the Distribution Amount (as defined in
'Description of the Value Support Rights and VSR Notes--Certain Definitions used
in the VSR Agreement'), and the 30-Day Average Market Price (as determined under
the VSR Agreement) of a share of PCT Common Stock on January 1, 1999, if lower,
up to a maximum of $3.25 per VSR, payable, at the option of the Company, in
either cash or, under certain circumstances, senior notes (the 'VSR Notes')
issued by the Company (subject to qualification under the Trust Indenture Act of
1939, as amended (the 'TIA')). Pursuant to the VSR Agreement, the Company has
the right to call the VSRs on each April 1, July 1, October 1 and January 1 from
and including April 1, 1997 to and including October 1, 1998 (each, an 'Optional
Call Date'). If the Company calls the VSRs on or before January 1, 1998, holders
thereof will be entitled to receive a cash payment equal to the greater of (i)
$0.50 and (ii) the difference between $10.25, reduced by the Distribution
Amount, and the 30-Day Average Market Price of a share of PCT Common Stock, if
lower, on such Optional Call Date, up to a maximum of $3.25 per VSR. If the
Company calls the VSRs after January 1, 1998, holders thereof will be entitled
to receive a cash payment, if any, equal to the difference between $11.00,
reduced by the Distribution Amount, and the 30-Day Average Market Price of a
share of PCT Common Stock, if lower, on such Optional Call Date, up to a maximum
of $3.25 per VSR. The Company may also be required to make payments in respect
of the VSRs upon the occurrence of certain extraordinary transactions involving
PCT (each a 'Total Disposition,' as more fully described in 'Description of the
Value Support Rights and VSR Notes--Certain Definitions used in the VSR
Agreement') or upon a good-faith determination by the Company's Board of
Directors that (i) as a result of an event beyond the reasonable control of the
Company, the existence of the VSRs would cause the Company to cease to be a
member of the consolidated group with respect to which the Company files
consolidated federal income tax returns and such situation would be avoided or
cured by the redemption of the VSRs or (ii) the VSRs would create any material
financial or legal impediment to the consummation of any bona fide significant
corporate event or transaction involving the Company, which transaction would,
if consummated, result in a change of control of the Company, and in connection
with which transaction the Company has entered into definitive documentation
which creates a binding obligation upon the Company to consummate such
transaction (subject to customary conditions to closing and fiduciary
obligations), each of the events described in clauses (i) and (ii) being a
Redemption Event upon which the Company may make any Optional Redemption. If the
30-Day Average Market Price were to be below $7.00 on or prior to January 1,
1998 or below $7.75 thereafter, the VSRs would not provide a holder thereof with
the full amount of the difference between such market price and $10.25 or
$11.00, as the case may be, reduced by the Distribution Amount, in the event a
payment were to be made thereon.
The Company's obligations under the VSRs and, if issued, the VSR Notes are
structurally subordinated to the indebtedness and other liabilities of the
Company's subsidiaries. On a pro forma basis, after giving effect to the
Disposition, the Distribution and the other Transactions (as defined herein), at
September 29, 1996, approximately $144.6 million of indebtedness and other
liabilities of the Company's subsidiaries would have been structurally senior to
the VSRs and, if issued, the VSR Notes.
No consideration or surrender of PCT Stock will be required of PCT's
stockholders in return for the VSRs issued pursuant to the Distribution.
The VSRs have been approved for listing on the New York Stock Exchange under
the symbol 'MFOrt.' Prior to the Distribution, no public market has existed for
the VSRs, and no public market currently exists for any VSR Notes that may be
issued.
SEE 'RISK FACTORS' BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS OF THE VSRS AND, IF ISSUED, THE VSR NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS DECEMBER 26, 1996.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus. Unless otherwise indicated or unless the context otherwise requires,
the information contained in this Prospectus gives effect to (i) the payment to
the Company by Flavors Holdings of a $5.4 million cash dividend prior to the
Disposition (the 'Flavors Dividend'), (ii) the Disposition and (iii) the
Distribution. The Flavors Dividend, the Disposition and the Distribution are
collectively referred to herein as the 'Transactions.' Unless the context
otherwise requires, all references in this Prospectus to the 'Company' mean
Mafco Consolidated Group Inc. and its subsidiaries, including its operating
subsidiary Consolidated Cigar Corporation ('Consolidated Cigar').
CERTAIN PAYMENTS RELATED TO THE DISPOSITION AND THE VSRS
In the Distribution, the Company will receive an aggregate of 8,439,400
VSRs, comprised of 5,939,400 VSRs with respect to the PCT Common Stock it holds
and 2,500,000 VSRs with respect to the PCT Preferred Stock it holds. The Company
currently intends to cancel the VSRs it receives. If the Company does not cancel
the VSRs it receives, however, and if the Company were required to make any
payments on the VSRs, the maximum amount that the Company would be required to
pay itself with respect to the VSRs that it will receive is $27,428,050. In
addition, in connection with the Disposition, the Company made a payment of
approximately $3.0 million to the Company's Chief Executive Officer pursuant to
the Company's Transaction Bonus Plan. See 'Management--Transaction Bonus Plan.'
THE COMPANY
GENERAL
The Company is a holding company with no business operations of its own.
After the Disposition, the Company's only material assets are (i) its ownership
of 80.2% of the outstanding shares of capital stock of Consolidated Cigar
Holdings Inc. ('Cigar Holdings') (representing approximately 97.6% of the
combined voting power), which owns 100% of the outstanding shares of capital
stock of Consolidated Cigar, (ii) its ownership of 100% of the outstanding
shares of PCT Preferred Stock and approximately 29% of the outstanding shares of
PCT Common Stock (together, representing approximately 36% of the outstanding
shares of PCT Common Stock on a fully diluted basis), (iii) approximately $412.8
million in cash and marketable securities at September 29, 1996, on a pro forma
basis after giving effect to the Transactions, $172.7 million of which
represents the net proceeds received by the Company in connection with
International, (iv) the Promissory Note and (v) a pension plan asset with a book
value of approximately $62.5 million at September 29, 1996. Through Consolidated
Cigar, the Company manufactures and distributes cigars and pipe tobacco
products. In addition, in connection with the Abex Transactions (as defined
under '--Background and the Disposition--Background'), the Company assumed and
agreed to indemnify PCT against, or to manage on PCT's behalf, various
contingent and other liabilities. See 'Background and the Disposition' and
'Business.'
CONSOLIDATED CIGAR
Through Consolidated Cigar, the Company is the largest manufacturer and
marketer of cigars sold in the United States in terms of dollar sales, with a
1995 market share of approximately 23% according to the Company's estimates. The
Company markets its cigar products under a number of well-known brand names at
all price levels and in all segments of the growing cigar market, including
premium large cigars, mass market large cigars and mass market little cigars.
The Company attributes its leading market position to the following competitive
strengths: (i) well-known brand names, many of which are the leading brands in
their category; (ii) broad range of product offerings within both the premium
and mass market segments of the United States cigar market; (iii) commitment to
and reputation for manufacturing quality cigars; (iv) marketing expertise and
close attention to customer service; (v) efficient manufacturing operations; and
(vi) an experienced management team. The Company is also a leading producer of
pipe tobacco and is the largest supplier of private label and branded generic
pipe tobacco to mass market retailers. In addition, the Company distributes a
variety of pipe and cigar smokers' accessories.
2
<PAGE>
The Company's cigars and pipe tobacco products are marketed under a number
of well-known brand names. The Company's premium cigars include the H. UPMANN,
MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY and
MONTECRUZ brands. The Company's mass market large cigars include the ANTONIO Y
CLEOPATRA (also known as AYC), DUTCH MASTERS, EL PRODUCTO, MURIEL, BACKWOODS,
SUPER VALUE and SUPRE SWEETS brands. The Company's mass market little cigars
include the DUTCH TREATS, SUPER VALUE and SUPRE SWEETS brands. The Company's
pipe tobacco products include the MIXTURE NO. 79 and CHINA BLACK brands.
OWNERSHIP OF THE COMPANY
The following chart sets forth in simplified form the ownership structure
of the Company.
- ------------------------------------------
Ronald O. Perelman
|
100% |
|
Mafco Holdings Inc.
('Mafco Holdings')
|
85% |
|
MAFCO CONSOLIDATED GROUP INC.
(THE 'COMPANY')
|
80.2% |
|
Consolidated Cigar Holdings Inc.
('Cigar Holdings')
|
100% |
|
Consolidated Cigar Corporation
('Consolidated Cigar')
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The Company was incorporated on June 1, 1988 under the laws of the state of
Delaware. The Company's principal executive office is located at 35 East 62nd
Street, New York, New York 10021 and its telephone number is (212) 572-8600.
BACKGROUND AND THE DISPOSITION
BACKGROUND
On June 15, 1995, as part of a series of transactions (collectively, the
'Abex Transactions'), C&F Merger Inc., a wholly owned subsidiary of Mafco
Holdings Inc. ('Mafco Holdings'), which then owned 100% of the outstanding
capital stock of Cigar Holdings and Flavors Holdings, merged (the 'C&F Merger')
with and into Abex Inc. ('Abex'), with Abex being the surviving corporation in
the C&F Merger and being renamed Mafco Consolidated Group Inc. Prior to the Abex
Transactions, Abex was engaged in an aerospace business through its then wholly
owned subsidiary, PCT. In connection with the Abex Transactions, (i) holders of
Abex's common stock ('Abex Common Stock') and related rights to acquire Abex
Common Stock received in exchange therefor, among other consideration, 20% of
the common stock (the 'Company Common Stock') of the Company and all of the
outstanding shares of PCT Common Stock; (ii) Mafco Holdings, through its wholly
owned subsidiary Mafco Consolidated Holdings Inc. ('Mafco Consolidated
Holdings'), received 80% of the Company Common Stock; and (iii) the Company
retained PCT Preferred Stock convertible into approximately 11% of the PCT
Common Stock on a fully diluted basis (in each case, such percentages reflect
the outstanding capital stock immediately following consummation of the Abex
Transactions). In addition, as part of the Abex Transactions, the Company
retained substantially all of Abex's consolidated assets and liabilities other
than those principally related to PCT's aerospace business. Accordingly, as a
result of the Abex Transactions, the Company acquired certain non-aerospace
assets and assumed certain liabilities of Abex as well as acquired an interest
in the
3
<PAGE>
PCT Preferred Stock. PCT, which became a separate publicly-traded company,
continued to operate the aerospace business.
Subsequently, and in a separate transaction, on July 17, 1995, the Company
purchased 5,939,400 shares of PCT Common Stock (thereby increasing its
investment in PCT to approximately 36% of the shares of PCT Common Stock then
outstanding on a fully diluted basis) and 1,484,850 shares of Company Common
Stock from Libra Invest & Trade Ltd. ('Libra') for approximately $63.9 million
in cash. In connection with such purchase, the Company entered into an agreement
with PCT which, subject to certain exceptions, limits the Company's ability to
dispose of its shares of PCT Stock for a period of three years.
On April 15, 1996, PCT sold its entire operations, including substantially
all of its assets, to Parker-Hannifin Corporation ('Parker-Hannifin') for an
aggregate cash consideration of approximately $201.1 million before transaction
costs.
On August 21, 1996, Cigar Holdings completed an initial public offering of
6,075,000 shares of its Class A Common Stock. The net proceeds to Cigar Holdings
from the Cigar IPO of approximately $127.8 million were paid as a dividend to
the Company. As a result of the Cigar IPO, the Company beneficially owns 80.2%
of the outstanding shares of capital stock of Cigar Holdings (representing
approximately 97.6% of the combined voting power), which owns 100% of the
outstanding shares of capital stock of Consolidated Cigar. In connection with
the Cigar IPO, Cigar Holdings issued the Promissory Note in an original
principal amount of $70 million to the Company. See 'Description of Certain
Indebtedness--Promissory Note.'
For a discussion of the events leading up to the Disposition, see
'Background and the Disposition--Background.'
THE DISPOSITION
On November 25, 1996, pursuant to the Purchase Agreement, the Company sold
to PCT International (i) all of the outstanding shares of Flavors Common Stock
and (ii) 23,156,502 VSRs for aggregate consideration of approximately $297.3
million, consisting of $180.0 million cash, the assumption of approximately
$110.1 million of indebtedness of Mafco Worldwide and deferred cash payments
from PCT International aggregating $7.2 million, $3.7 million of which will be
paid on June 30, 1997 and $3.5 million of which will be paid on December 31,
1997. The VSRs were subsequently distributed to PCT. Immediately following the
Disposition, Mafco Worldwide Corporation, a wholly owned subsidiary of Flavors
Holdings ('Mafco Worldwide'), was, through a series of transactions, merged into
Pneumo Abex Corporation ('Pneumo Abex'), an indirect wholly owned subsidiary of
PCT. See 'Background and the Disposition--The Disposition.'
The Company expects to use its cash, including the net proceeds from the
Disposition and the sale of the VSRs, for general corporate purposes, including
acquisitions, although no specific acquisition is currently contemplated by the
Company. Accordingly, there can be no assurance that such proceeds will be
available to pay any of the Company's obligations under the VSRs or, if issued,
the VSR Notes. See 'Risk Factors' and 'Business.'
4
<PAGE>
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Corporation............. Power Control Technologies Inc.
DISTRIBUTED CORPORATION.............. Mafco Consolidated Group Inc.
SECURITIES TO BE DISTRIBUTED......... 23,095,062 VSRs on the Distribution Date. The remaining 61,440 VSRs will
continue to be held by PCT for the account of those stockholders of PCT
that have not yet exchanged their Abex Common Stock for PCT Common Stock
after the C&F Merger.
DISTRIBUTION RATIO................... Each holder of PCT Common Stock will receive one VSR for each share of PCT
Common Stock held on the Record Date and each holder of PCT Preferred
Stock will receive 125 VSRs for each share of PCT Preferred Stock held on
the Record Date. See 'The Distribution.'
RECORD DATE.......................... Close of business on December 23, 1996.
DISTRIBUTION DATE.................... On or about December 30, 1996.
MAILING DATE......................... Certificates representing the VSRs will be mailed to PCT's stockholders on
or about the Distribution Date.
TAX CONSEQUENCES..................... See 'Certain United States Federal Income Tax Consequences.'
NYSE SYMBOL.......................... MFOrt
</TABLE>
THE VALUE SUPPORT RIGHTS AND VSR NOTES
<TABLE>
<S> <C>
SECURITIES........................... 23,095,062 Value Support Rights. Upon the Maturity Date, each VSR will
entitle the holder thereof to an amount equal to the lesser of (x) the
excess, if any, of the Base Amount over the 30-Day Average Market Price
and (y) $3.25, unless the right to receive such payment has been
previously satisfied in connection with an Optional Call Date, a Total
Disposition, an Event of Default or a Redemption Event. See 'Description
of the Value Support Rights and VSR Notes.'
MATURITY DATE........................ January 1, 1999.
BASE AMOUNT.......................... As of any date of determination, the excess of (a) (x) $10.25, if the date
of determination occurs on or before January 1, 1998, or (y) $11.00, if
the date of determination occurs after January 1, 1998, over (b) the
Distribution Amount.
DISTRIBUTION AMOUNT.................. The sum of (i) the value all cash dividends or other cash distributions,
(ii) all cash received as consideration in certain extraordinary
transactions, (iii) the fair market value of all dividends or other
distributions consisting of property or other assets and (iv) the fair
market all dividends or other distributions consisting of property or
other assets received in certain extraordinary transactions, in each case
with respect to the Applicable Number of shares of PCT Common Stock. The
Applicable Number of shares of PCT Common Stock initially shall be equal
to one, subject to equitable adjustment to reflect stock splits, stock
dividends, reverse stock splits or otherwise.
30-DAY AVERAGE MARKET PRICE.......... As of any date of determination, the average of the Market Price of the
Applicable Number of shares of PCT Common Stock for the 30 consecutive
trading days ended on the business day immediately prior to such date of
determination.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
OPTIONAL CALL DATE................... Each April 1, July 1, October 1 and January 1 from and including April 1,
1997 to and including October 1, 1998. Upon an Optional Call Date, the
Company may, in its sole discretion, pay to the Holder of each VSR an
amount payable in cash equal to the lesser of (x) the excess, if any, of
the Base Amount over the 30-Day Average Market Price and (y) $3.25;
provided, however, such amount shall in no event be less than $0.50 if
such Optional Call Date is on or prior to January 1, 1998.
TOTAL DISPOSITION.................... Either (i) one or more mergers, consolidations or other business
combinations, involving PCT after giving effect to which no shares of PCT
Common Stock shall remain outstanding or registered under the Exchange
Act, (ii) a sale, transfer or other disposition in one or a series of
transactions, of all or substantially all of the assets of PCT or (iii) a
reclassification of PCT Common Stock as the capital stock of any other
person (other than an affiliate of PCT).
EVENT OF DEFAULT..................... Either (i) default in the payment of all or any part of the amounts
payable in respect of any of the VSRs as and when the same shall become
due and payable, (ii) default in the performance, or breach, of any
covenant or warranty of the Company, and continuance of such default or
breach for a period of 90 days after written notice has been given to the
Company by the Trustee or to the Company and the Trustee by the holders of
at least 25% of the outstanding VSRs or (iii) certain events of
bankruptcy, insolvency, reorganization or other similar events in respect
of the Company.
REDEMPTION EVENT..................... Either (i) as a result of an event beyond the reasonable control of the
Company, the existence of the VSRs would cause the Company to cease to be
a member of the consolidated group with respect to which the Company files
consolidated federal income tax returns and such situation would be
avoided or cured by the redemption of the VSRs or (ii) the VSRs would
create any material financial or legal impediment to the consummation of
any bona fide significant corporate event or transaction (a 'Redemption
Transaction') involving the Company, which transaction would, if
consummated, result in a change of control of the Company and in
connection therewith the Company has entered into definitive documentation
which creates a binding obligation upon the Company to consummate such
transaction (subject to customary conditions to closing and fiduciary
obligations), in either of clauses (i) and (ii) as determined in good
faith by the Board of Directors of the Company.
VSR NOTES............................ To the extent the aggregate principal amount is at least $25,000,000, all
amounts payable pursuant to the VSRs on the Maturity Date (but not
otherwise) may be paid, at the option of the Company, either in cash or by
the issuance, not later than the date on which the cash amount would
otherwise be payable, of VSR Notes. See 'Description of the Value Support
Rights and VSR Notes--Payment in Cash or VSR Notes.'
</TABLE>
6
<PAGE>
The following table illustrates the operation of the foregoing description
of the Value Support Rights and the VSR Notes. Certain terms used below are
defined in 'Description of the Value Support Rights and VSR Notes-- Certain
Definitions used in the VSR Agreement.'
<TABLE>
<CAPTION>
MATURITY DATE OPTIONAL CALL DATE REDEMPTION EVENT TOTAL DISPOSITION
- -------------------------- -------------------------- -------------------------- --------------------------
<S> <C> <C> <C>
Upon the Maturity Date, Upon an Optional Call Upon the occurrence of a Upon the consummation of a
each VSR will entitle the Date, the Company may, in Redemption Event, the VSRs Total Disposition, the
holder thereof to an its sole discretion, pay may be redeemed by the Company shall pay to the
amount equal to the lesser to the Holder of each VSR Company in whole (but not holder of each VSR an
of (x) the excess, if any, an amount payable in cash in part) at a redemption amount, if any, equal to
of the Base Amount over equal to the lesser of (x) price, payable in cash, the lesser of (x) the
the 30-Day Average Market the excess, if any, of the equal to the lesser of (x) excess, if any, of the
Price and (y) $3.25, Base Amount over the 115% of the excess, if Base Amount determined as
unless the right to 30-Day Average Market any, of the Base Amount of the Total Disposition
receive such payment has Price and (y) $3.25; over the 30-Day Average Payment Date over the
been previously satisfied provided, however, such Market Price and (y) Total Disposition Amount
in connection with an amount shall in no event $3.25. and (y) $3.25.
Optional Call Date, a be less than $0.50 if such
Total Disposition, an Optional Call Date is on
Event of Default or a or prior to January 1,
Redemption Event. 1998.
</TABLE>
RISK FACTORS
See 'Risk Factors' for a discussion of certain factors that should be
considered by holders of the VSRs and, if issued, the VSR Notes.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data set forth below reflect the results
of operations and financial position of the Company, including its operating
subsidiary Consolidated Cigar, its former operating subsidiary Mafco Worldwide
and the assets acquired and liabilities assumed from Abex, for the periods
indicated. On June 15, 1995, as part of the Abex Transactions, C&F Merger, a
wholly owned subsidiary of Mafco Holdings, which then owned 100% of the
outstanding capital stock of Cigar Holdings and Flavors Holdings, merged with
and into Abex, with Abex being the surviving corporation in the Merger and being
renamed Mafco Consolidated Group Inc. The Merger was accounted for as a purchase
of certain assets and the assumption of certain liabilities of Abex, with C&F
Merger treated as the acquiror for accounting purposes. On March 3, 1993, Mafco
Holdings completed the acquisition of Consolidated Cigar (the 'Consolidated
Cigar Acquisition'). Accordingly, the summary historical financial data reflect
for the periods (i) from June 15, 1995, the consolidated results of Cigar
Holdings and Flavors Holdings and the assets acquired and liabilities assumed
from Abex in the Merger, (ii) from March 3, 1993 to June 15, 1995, the combined
results of Cigar Holdings and Flavors Holdings and (iii) prior to March 3, 1993,
the results of Flavors Holdings or its predecessors.
The summary unaudited pro forma statements of operations data for the year
ended December 31, 1995 and the nine month period ended September 29, 1996 give
pro forma effect to the Transactions, assuming that the Transactions had been
consummated on January 1, 1995, and the unaudited pro forma balance sheet as of
September 29, 1996, gives pro forma effect to the Transactions, assuming that
the Transactions had been consummated on September 29, 1996. The pro forma
adjustments are based upon available information and certain assumptions that
the management of the Company believes are reasonable. The summary pro forma
financial data do not purport to represent the results of operations or the
financial position of the Company that actually would have occurred had the
Transactions been consummated on the aforesaid dates, or project the results of
operations or financial position of the Company and its subsidiaries for any
future date or period.
The following summary historical and unaudited pro forma financial data
should be read in conjunction with 'Selected Historical Financial Data,' 'Pro
Forma Financial Data,' 'Management's Discussion and Analysis of Financial
Condition and Results of Operations' and the Consolidated Financial Statements
of the Company and the notes thereto included elsewhere in this Prospectus. The
summary historical financial data as of and for the six month periods are
unaudited but, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the financial data for such periods. The results for such interim periods are
not necessarily indicative of the results for the full fiscal year.
8
<PAGE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
YEAR ENDED DECEMBER 31, ------------------------------------------
--------------------------------------- PRO FORMA
PRO FORMA OCTOBER 1, SEPTEMBER 29, SEPTEMBER 29,
1993(A) 1994 1995(B) 1995(C) 1995(B) 1996 1996(C)
------- ------ ------- --------- ---------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $202.6 $226.9 $261.1 $ 157.9 $195.3 $ 230.4 $ 152.7
Cost of sales............................. 125.0 136.0 154.0 94.0 115.3 131.9 88.3
------- ------ ------- --------- ---------- ------ ------
Gross profit.............................. 77.6 90.9 107.1 63.9 80.0 98.5 64.4
Selling, general and administrative
expenses................................ 33.9 37.9 51.4 42.2 37.2 40.0 33.5
------- ------ ------- --------- ---------- ------ ------
Operating income.......................... 43.7 53.0 55.7 21.7 42.8 58.5 30.9
Interest expense.......................... 26.5 27.5 27.2 13.7 20.4 19.3 9.9
Interest, investment and dividend
income.................................. (0.1) (0.2) (6.0) (5.5) (2.8) (7.1) (6.8)
Amortization of deferred charges and bank
fees.................................... 2.0 2.0 2.1 1.0 1.5 1.5 0.6
Equity in earnings from continuing
operations and preferred dividends of
PCT..................................... -- -- (0.7) (5.0) (0.4) (2.8) (5.5)
Gain on Cigar IPO......................... -- -- -- -- -- (127.8)(d) (127.8)(d)
Other (income) expense, net............... (0.2) (0.2) 0.3 0.2 0.2 0.8 0.9
------- ------ ------- --------- ---------- ------ ------
Income from continuing operations before
income taxes............................ 15.5 23.9 32.8 17.3 23.9 174.6 159.6
Provision for income taxes................ 5.5 7.5 9.7 2.3 7.5 59.1 52.4
------- ------ ------- --------- ---------- ------ ------
Income from continuing operations......... 10.0 16.4 23.1 $ 15.0 16.4 115.5 $ 107.2
--------- ------
--------- ------
Discontinued operations
Equity in discontinued operations of
PCT, net of income taxes................ -- -- 1.3 0.6 15.1(e)
------- ------ ------- ---------- ------
Income before extraordinary item.......... 10.0 16.4 24.4 17.0 130.6
Extraordinary item, net of tax benefit.... -- 2.7(f) -- -- --
------- ------ ------- ---------- ------
Net Income................................ $ 10.0 $ 13.7 $ 24.4 $ 17.0 $ 130.6
------- ------ ------- ---------- ------
------- ------ ------- ---------- ------
Income per share
Continuing operations................... $ 0.50 $ 0.82 $ 1.06 $ 0.69 $ 0.77 $ 4.97 $ 4.61
--------- ------
--------- ------
Discontinued operations................. -- -- 0.06 0.03 0.65
Extraordinary item...................... -- (0.13) -- -- --
------- ------ ------- ---------- ------
Net income per share.................... $ 0.50 $ 0.69 $ 1.12 $ 0.80 $ 5.62
------- ------ ------- ---------- ------
------- ------ ------- ---------- ------
Weighted average common shares outstanding
(in thousands).......................... 19,778 19,778 21,794 21,794 21,315 23,237 23,237
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 29,
DECEMBER 31, ---------------------
-------------------------- PRO FORMA
1993 1994 1995 1996 1996(G)
------ ------ ------ -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets..................................................... $293.6 $282.9 $560.6 $729.7 $ 781.8
Long-term debt (including current portion)....................... 276.4 250.2 229.6 221.1 110.0
Total stockholders' equity (deficit)............................. (25.4) (10.8) 103.7 233.7 356.7
</TABLE>
- ------------------
(a) Includes results of operations of Consolidated Cigar from March 3, 1993, the
date of the Consolidated Cigar Acquisition.
(b) Reflects the restatement of 1995 results to reflect the Company's equity in
the discontinued operations of PCT.
(c) Gives effect to the transactions and events described in the Notes to the
Pro Forma Statement of Operations of the Company as if the transactions and
events referred to therein had occurred at January 1, 1995. Income from
continuing operations assumes that the VSRs are valued at $1.50 per VSR (the
estimated fair market value at the date of issuance) at the beginning and
end of each period presented. Subsequently, the VSRs will be marked to the
closing market price of the security at each financial statement date. As a
result, income in future periods may be affected by any positive or negative
mark to market adjustments. See 'Pro Forma Financial Data.'
(d) Reflects the initial public offering (the 'Cigar IPO') by Cigar Holdings of
6,075,000 shares of its Class A Common Stock on August 21, 1996, which
resulted in a pre-tax gain of $127.8, and the related payment of the net
proceeds thereof as a dividend to the Company.
(e) Includes the Company's equity in the gain on the sale by PCT of its entire
operations to Parker-Hannifin in 1996.
(f) Represents prepayment premiums, fees and expenses, unamortized deferred debt
issuance costs and original issue discount related to the refinancing of
indebtedness at Mafco Worldwide.
(g) Gives effect to the transactions and events described in the Notes to the
Pro Forma Balance Sheet of the Company as if the transactions and events
referred to therein had occurred at September 29, 1996. See 'Pro Forma
Financial Data.'
9
<PAGE>
RISK FACTORS
Holders of the VSRs should consider carefully all of the information set
forth in this Prospectus and, in particular, should evaluate the following risks
in connection with holding the VSRs and, if issued, the VSR Notes.
HOLDING COMPANY STRUCTURE
The Company is a holding company with no business operations of its own.
Although the Company currently holds a significant amount of cash and marketable
securities, including as a result of the Disposition and the related sale of the
VSRs to PCT International, the Company intends regularly to review possible
acquisitions in connection with which such cash and marketable securities could
be substantially utilized as part of the financing for such acquisitions. The
Company's only other material assets are (i) its ownership of 80.2% of the
outstanding shares of capital stock of Cigar Holdings (representing
approximately 97.6% of the combined voting power), which owns 100% of the
outstanding shares of capital stock of Consolidated Cigar, through which the
Company conducts its business operations, (ii) its ownership of 100% of the
outstanding shares of PCT Preferred Stock and approximately 29% of the
outstanding shares of PCT Common Stock (together, representing approximately 36%
of the outstanding shares of PCT Common Stock on a fully diluted basis), (iii)
the Promissory Note and (iv) a pension plan asset with a book value of
approximately $62.5 million at September 29, 1996. Accordingly, the Company will
be dependent upon the earnings and cash flow of, and dividends and distributions
from, Consolidated Cigar or other companies in which it may make investments to
pay its expenses and to pay any amounts owing on the VSRs, or, if issued, the
VSR Notes. There can be no assurance that Consolidated Cigar or such other
companies will generate sufficient cash flow to pay dividends or distribute
funds to the Company or that applicable state law and contractual restrictions,
including negative covenants contained in the debt instruments of the Company's
subsidiaries then in effect, will permit such dividends or distributions. The
terms of Consolidated Cigar's credit agreement (the 'Credit Agreement') and
10 1/2% Senior Subordinated Notes due 2003 (the 'Senior Subordinated Notes')
currently restrict Consolidated Cigar from paying dividends or making
distributions, each subject to certain limited exceptions. The Company's
obligations under the VSRs and, if issued, the VSR Notes are structurally
subordinated to the indebtedness and other liabilities of the Company's
subsidiaries. See '--Indebtedness' and '--Restrictions Imposed by the Terms of
the Company's Indebtedness; Consequences of Failure to Comply.'
INDEBTEDNESS
As of September 29, 1996, after giving effect to the Disposition, the
outstanding consolidated indebtedness of the Company would have been $110.0
million. The Company and, subject to certain limitations contained in their
outstanding debt instruments, the subsidiaries of the Company may incur
additional indebtedness to finance working capital needs, capital expenditures,
acquisitions or for other purposes. See 'Description of Certain Indebtedness.'
The Company's level of consolidated indebtedness could have important
consequences to the holders of VSRs and, if issued, the VSR Notes, including the
following: (i) a portion of the Company's consolidated cash flows from
operations must be dedicated to the payment of the interest on and principal of
its outstanding indebtedness and will not be available for other purposes,
including payment of amounts owing under the VSRs or, if issued, the VSR Notes;
(ii) the ability of the Company to obtain financing in the future for working
capital needs, capital expenditures, acquisitions or other purposes may be
limited or impaired; (iii) the Company's level of indebtedness may reduce the
Company's flexibility to respond to changing business and economic conditions;
and (iv) certain of the Company's borrowings are and will continue to be at
variable rates of interest, which could result in higher interest expense in the
event of increases in interest rates.
The Company intends to satisfy anticipated cash requirements on a
consolidated basis, including for debt service, through cash flows from
operations and funds from borrowings under credit facilities. There can be no
assurance, however, that cash flows from operations and funds from available
borrowings under the Company's existing credit facilities will be sufficient to
meet the Company's cash requirements on a consolidated basis. If the Company is
unable to satisfy such cash requirements, the Company could be required to adopt
one or more alternatives, such as reducing or delaying capital expenditures,
refinancing or restructuring its indebtedness,
10
<PAGE>
selling assets (including additional shares of capital stock of its
subsidiaries) or operations, seeking capital contributions or loans from
affiliates of the Company or issuing additional shares of capital stock. There
can be no assurance that any of such actions could be effected, that they would
enable the Company to continue to satisfy its capital requirements or that they
would be permitted under the terms of the Company's various debt instruments
then in effect. See '--Holding Company Structure.'
RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS;
CONSEQUENCES OF FAILURE TO COMPLY
The terms and conditions of the debt instruments of Consolidated Cigar,
including the Credit Agreement and the Senior Subordinated Notes, impose
restrictions on Consolidated Cigar and its subsidiaries that affect, among other
things, their ability to incur debt, pay dividends or make distributions, make
acquisitions, create liens, sell assets, create restrictions on the payment of
dividends and other payments and make certain investments. The terms of the
Credit Agreement also require Consolidated Cigar to maintain specified financial
ratios and satisfy certain tests, including maximum leverage ratios and minimum
interest coverage ratios. In addition to limiting the overall operating and
financial flexibility of the Company and its subsidiaries, the restrictions
imposed by these debt instruments restrict the ability of Consolidated Cigar to
pay dividends and distribute funds to the Company. As a result, the Company's
ability to satisfy its obligations under the VSRs and, if issued, the VSR Notes,
as well as the Company's sources of funds for other purposes, will be limited by
such provision. As of September 28, 1996, there was approximately $20.0 million
outstanding and $16.4 million available under the Credit Agreement and $90.0
million aggregate principal amount of Senior Subordinated Notes outstanding.
Consolidated Cigar's obligations under the Credit Agreement are guaranteed
by Cigar Holdings and by all of the domestic subsidiaries of Consolidated Cigar.
Such guarantees and borrowings under the Credit Agreement are secured by first
priority liens on all of the material assets of Consolidated Cigar and its
domestic subsidiaries and pledges of the capital stock of all of Consolidated
Cigar's subsidiaries (with certain exceptions for the capital stock of foreign
subsidiaries) and a pledge of all of the shares of common stock of Consolidated
Cigar owned by Cigar Holdings (collectively, the 'Collateral'). The occurrence
of a change of control of Cigar Holdings would be an event of default under the
Credit Agreement and would permit the lenders under the Credit Agreement to
accelerate the debt outstanding thereunder and, if the debt is not paid, to
proceed to realize on the Collateral. Moreover, such event would permit the
holders of outstanding Senior Subordinated Notes to require the repurchase of
their notes. The events that would constitute a change of control are described
under 'Description of Certain Indebtedness.'
The ability of the Company and its subsidiaries to comply with the terms of
their respective debt instruments can be affected by events beyond their
control, including events such as changes in prevailing economic conditions,
changes in consumer preferences and changes in the competitive environment,
which could have the effect of impairing the Company's operating performance,
and there can be no assurance that the Company and its subsidiaries will be able
to comply with the provisions of their respective debt instruments, including
compliance by Consolidated Cigar with the financial ratios and tests contained
in the Credit Agreement. Breach of any of these covenants or the failure to
fulfill the obligations thereunder and the lapse of any applicable grace periods
would result in an event of default under the applicable debt instruments, and
the holders of such indebtedness could declare all amounts outstanding under
their debt instruments to be due and payable immediately. Any such declaration
under a debt instrument is likely to result in an event of default under one of
the other debt instruments of the Company and its subsidiaries. There can be no
assurance that the assets or cash flows of the Company or its subsidiaries would
be sufficient to repay in full borrowings under their respective outstanding
debt instruments, whether upon maturity or if such indebtedness were to be
accelerated upon an event of default, or upon a required repurchase in the event
of a change of control, or that the Company would be able to refinance or
restructure the payments on such indebtedness. In the case of the Credit
Agreement, if such indebtedness were not so repaid, refinanced or restructured,
the lenders could proceed to realize on the Collateral. See '--Indebtedness,'
'--Holding Company Structure' and 'Description of Certain Indebtedness.'
11
<PAGE>
DECLINING MARKET FOR CIGARS THROUGH 1993
According to industry sources, the cigar industry experienced declining
consumption between 1964 and 1993 at a compound annual rate of 3.6% (and, with
respect to large cigar consumption, at a compound annual rate of 5.0%). The
Company experienced similar trends in the unit volume of its cigars during such
period. While the cigar industry has experienced significantly better trends in
unit consumption since 1993 compared to this historical trend, there can be no
assurance that the recent positive trends will continue or that the Company
would be able to offset any future decline in consumption. See 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
'Business--Market Overview.'
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels.
Federal law has required health warnings on cigarettes since 1965 and has
recently required states, in order to receive full funding for federal substance
abuse block grants, to establish a minimum age of 18 years for the sale of
tobacco products, together with an appropriate enforcement program. The recent
trend is toward increasing regulation of the tobacco industry. A variety of
bills relating to tobacco issues have been recently introduced in the Congress
of the United States, including bills that would have (i) prohibited the
advertising and promotion of all tobacco products and/or restricted or
eliminated the deductibility of such advertising expenses; (ii) increased
labeling requirements on tobacco products to include, among other things,
addiction warnings and lists of additives and toxins; (iii) modified federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; (iv) shifted regulatory control of
tobacco products and advertisements from the U.S. Federal Trade Commission (the
'FTC') to the U.S. Food and Drug Administration (the 'FDA'); (v) increased
tobacco excise taxes; and (vi) required tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Hearings have been held on certain of these proposals; however, to
date, none of such proposals have been passed by Congress. In addition, various
federal agencies have recently proposed to regulate the tobacco industry. The
FDA recently adopted final regulations relating to the marketing, promotion and
advertisement of smokeless tobacco and cigarettes. These regulations are
currently being challenged in the United States District Court for the Eastern
District of North Carolina and the United States District Court for the Southern
District of New York. While the Company is unable to predict the effect of these
regulations on its business, these and other regulations promulgated by the FDA
in the future could have a material adverse effect on the operations of the
Company. Numerous proposals have also been considered at the state and local
legislative level and by regulatory bodies, including restricting smoking in
certain public areas, requiring cigar or pipe tobacco to carry health warnings
and requiring little cigars to be 'fire-safe' (i.e., cigars that extinguish
themselves if not continuously smoked). Passage of legislation requiring little
cigars to be 'fire-safe' could have a material adverse effect on the Company's
little cigar sales because of the technological difficulties in complying with
such legislation. The Company does not expect the passage of any such
legislation to have a material adverse effect on the Company's business or
results of operations taken as a whole. There can be no assurance as to the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse affect on the Company's business. See 'Business--The Tobacco Industry--
Regulation.'
TOBACCO INDUSTRY LITIGATION
The cigarette industry has experienced and is experiencing significant
health-related litigation involving tobacco and health issues. Plaintiffs in
such litigation have and are seeking compensation and, in some cases, punitive
damages, for various injuries resulting from the use of tobacco products or
exposure to tobacco smoke, including health care costs. In one such recent case
against a cigarette manufacturer, the plaintiffs were awarded compensatory
damages totalling $750,000. Although, to date, the Company has not been the
subject of any such material health-related litigation and the cigar industry
has not experienced material health-related litigation, there can be no
assurance that there will not be an increase in health-related litigation
against the cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against
12
<PAGE>
manufacturers of cigars, cigarettes or smokeless tobacco or suppliers to the
tobacco industry could have a material adverse effect on the Company's business.
See 'Business--The Tobacco Industry--Litigation.'
EFFECTS OF INCREASES IN EXCISE TAXES
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
In particular, there have been proposals by the federal government in the past
to reform health care through a national program to be funded principally
through increases in federal excise taxes on tobacco products. Enactment of new
or significant increases in existing federal, state or local excise taxes would
result in decreased unit sales of cigars and pipe tobacco, which could have a
material adverse effect on the Company's business. See 'Management's Discussion
and Analysis of Financial Condition and Results of Operations--Taxation and
Regulation--Excise Taxes' and 'Business--The Tobacco Industry--Excise Taxes.'
SUBSTANTIAL EFFECTS OF FAILURE TO RECEIVE POSSESSIONS TAX CREDIT
The Company derives a significant amount of its income from its Puerto Rico
operations. Prior to December 31, 1993, income earned by the Company from its
Puerto Rico operations was subject to the provisions of Section 936 of the
Internal Revenue Code of 1986, as amended (the 'Code'). Section 936 of the Code
allowed for a 'possessions tax credit' against United States federal income tax
for the amount of United States federal income tax attributable to the Puerto
Rico taxable earnings. As part of the Omnibus Budget Reconciliation Act of 1993
('OBRA 93'), for the years after December 31, 1993, the possessions tax credit
has been limited based upon a percentage of qualified wages in Puerto Rico, plus
certain amounts of depreciation (the 'Current Limitation'). While the Company
believes that it qualified for the possessions tax credit during 1995, 1994 and
1993, and expects that it will continue to qualify for the possessions tax
credit for every year that such credit is available in amounts to offset the
majority of any United States federal income tax related thereto, the future
eligibility and the amounts of the credit will depend on the facts and
circumstances of the Company's Puerto Rico operations during each of the taxable
years subsequent to 1995. Failure to receive the Section 936 possessions tax
credit attributable to the Company's Puerto Rico operations would have a
material adverse effect on the Company.
On August 20, 1996, the Small Business Job Protection Act of 1996 (the
'SBJPA') was enacted into law. Under the SBJPA, Section 936 of the Code, the
'possessions tax credit,' was repealed, subject to special grandfather rules for
which the Company would be eligible, provided that the Company does not add a
'substantial new line of business.' Under the grandfather rules, for the
Company's taxable years beginning after December 31, 2001 and before January 1,
2006, the Company's business income from its Puerto Rico operations eligible for
the possessions tax credit would, in addition to the Current Limitation,
generally be limited to its average annual income from its Puerto Rico
operations, adjusted for inflation, computed during the Company's five most
recent taxable years ending before October 14, 1995 and excluding the highest
and lowest years. For taxable years after December 31, 2005, the possessions tax
credit would be eliminated. The repeal of the possessions tax credit could have
a material adverse effect on the Company for taxable years beginning after
December 31, 2001 and before January 1, 2006 to the extent that the Company's
annual income from its Puerto Rico operations exceeds its average annual income
from its Puerto Rico operations (as computed in the manner described in the
preceding sentence), and for taxable years after December 31, 2005. Although it
does not currently have any definitive plans with respect thereto, the Company
expects to evaluate alternatives that may be available to it in order to
mitigate the effects of the SBJPA. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations--Taxation and Regulation--
Possessions Tax Credit.'
SUBSTANTIAL EFFECTS OF ELIMINATION OF PUERTO RICO TAX EXEMPTION
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by Congar International Corporation, an indirect wholly owned
subsidiary of the Company ('CIC'), from the manufacture of cigars in Puerto Rico
enjoys a 90% income tax exemption from Puerto Rican income taxes. The remaining
10% of such income is taxed at a maximum surtax rate of 45%, resulting in an
effective income tax rate for such income of approximately 4.5% under current
tax rates. Funds repatriated to the Company are subject to a maximum Puerto
Rican tollgate tax of 10%. Legislation enacted in Puerto Rico in 1993 included a
provision for
13
<PAGE>
prepaying a portion of these tollgate taxes effective for the 1993 fiscal year
and subsequent periods. There can be no assurance that the Puerto Rico tax
exemption will not be limited or eliminated in the future. Any significant
limitation on or elimination of the Puerto Rico tax exemption would have a
material adverse effect on the Company. See Note 9 of the Notes to the
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND
As a result of the increased demand for its hand made premium cigars, the
Company had backorders at the end of 1994 and 1995 of 3.2 million and 4.3
million cigars, respectively, and 12.0 million cigars at June 29, 1996. The
Company's ability to increase its production of premium cigars and decrease its
backorders is constrained by a shortage of experienced skilled laborers.
Although the Company is hiring and training new skilled laborers, the training
process averages up to one year and not all trainees are able to successfully
complete the Company's training program. While the Company is pursuing measures
to increase its production of premium cigars, there can be no assurance that
these measures will be successful or that they will enable the Company to meet
any future level of demand for its premium cigars. Any material inability of the
Company to fill its premium cigar backorders in a timely manner could have a
material adverse effect on the Company's business, including the loss of sales
by the Company.
The Company's ability to manufacture premium and mass market cigars may
also be constrained by the ability of tobacco growers and suppliers to meet the
Company's demands for its raw materials in a timely manner. Tobacco, as a crop
that is harvested annually, restricts the ability of tobacco growers to adjust
acreage grown in any given year to meet changes in market demands. In addition,
increases in acreage of tobacco grown requires significant capital, which
growers may be unable or unwilling to invest. If the rate of escalation in
consumption of cigars and other tobacco products continues, but the supply of
tobacco remains constant or increases at a lower rate than demand, the Company's
ability to increase its production of cigars, and thereby reduce its backorders,
could be inhibited. Although the Company has recently experienced shortages in
certain types of its natural wrapper and premium cigar tobaccos due to the
increase in demand for high quality natural wrapped cigars, to date, these
shortages have not adversely affected cigar manufacturing or the Company's
profitability. See '--Social, Political and Economic Risks Associated with
Foreign Operations and International Trade,' 'Business--Backorders' and
'Business--Raw Materials.'
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND
INTERNATIONAL TRADE
A substantial portion of the manufacturing operations of the Company are
located in territories and countries outside of the United States, including
Puerto Rico, the Dominican Republic, Jamaica and Honduras, and the manufacturer
and supplier of the Company's TE-AMO cigars is located in Mexico. In addition,
the Company buys tobacco directly from a large number of suppliers located in
territories and countries outside the United States, including Brazil, Cameroon,
the Central African Republic, Costa Rica, Germany, Italy, the Dominican
Republic, Paraguay, the Philippines, Indonesia, Honduras and Mexico. The Company
is exposed to the risk of changes in social, political and economic conditions
inherent in foreign operations and international trade, including changes in the
laws and policies that govern foreign investment and international trade in
territories and countries where it currently has operations and conducts
international trade, as well as, to a lesser extent, changes in United States
laws and regulations relating to foreign investment and trade. Any such social,
political or economic changes could pose, among other things, the risk of
finished product and raw material supply interruption or significant increases
in finished product and raw material prices. Accordingly, there can be no
assurance that any such changes in social, political or economic conditions will
not have a material adverse effect on the Company's business.
CERTAIN CONTINGENT LIABILITIES; INSURANCE AND INDEMNIFICATION ARRANGEMENTS
In connection with the Abex Transactions, the Company assumed, or assumed
management of, substantially all of Abex's consolidated assets and liabilities,
other than those relating to PCT's aerospace business. These non-aerospace
liabilities, which primarily relate to businesses previously owned by Abex and
its former affiliates or their predecessors, include contingent liabilities,
retiree health obligations, insurance matters, litigation matters, environmental
matters and tax matters. Certain of these matters are covered by insurance
and/or
14
<PAGE>
indemnification arrangements from various third parties, including
indemnification arrangements that cover matters for which insurance may be
ultimately unavailable or insufficient. The Company believes that such insurance
and indemnification arrangements are, in the aggregate, adequate to respond to
the covered matters. In those cases where the insurers have declined to cover
matters as to which coverage has been sought or otherwise indicated an inability
or unwillingness to pay, coverage litigation has been brought that, through
interim rulings or settlements, has caused a portion of such insurers to make
substantial payments with respect to such matters. While no assurance can be
given that the Company will ultimately succeed in such coverage litigation, or
that available insurance will be adequate or that the insurers and indemnitors
will remain in a financial position to pay, the Company does not expect, based
upon its experience to date (including the existence of what the Company
believes are adequate reserves for these matters and its experience with such
insurance and/or indemnification arrangements), such matters to have a material
adverse effect on the Company's financial condition or results of operations.
The amount and timing of payments required for these matters are not entirely
predictable, however, and there can be no assurance that the existing reserves
will be adequate. See 'Business--Contingent and Other Liabilities Assumed in
Connection with the Abex Transactions.'
CONTROL BY MAFCO HOLDINGS
Mafco Holdings currently indirectly owns approximately 85% of the
outstanding shares of the Company Common Stock. Mafco Holdings is wholly owned
by Ronald O. Perelman. As a result of Mafco Holdings' stock ownership, the
Company's Board of Directors is, and is expected to continue to be, comprised
entirely of designees of Mafco Holdings, and Mafco Holdings is, and is expected
to continue to be, able to direct and control the policies of the Company and
its subsidiaries, including with respect to mergers, sales of assets and similar
transactions. The Company's Certificate of Incorporation and By-laws provide for
certain procedural and other requirements that govern, among other things, an
acquisition of control of the Company and transactions between the Company and
Mafco Holdings. All of the shares of Company Common Stock owned by Mafco
Holdings are, and shares of intermediate holding companies may from time to time
be, pledged by Mafco Holdings to secure the obligations of certain of its
affiliates under outstanding indebtedness. Subject to applicable law and the
terms of such indebtedness, Mafco Holdings could sell any or all of the shares
of Company Common Stock owned by it from time to time for any reason. In
addition, such shares may be sold in the event that Mafco Holdings or its
affiliates fail to comply with their obligations under the indebtedness which is
secured by the pledge of such shares and the lenders thereunder proceed to
realize on such security. A sale of a sufficient number of shares of Company
Common Stock or of intermediate holding companies owned by Mafco Holdings may
result in a change of control of the Company. The occurrence of a change of
control of the Company would be an event of default under the Credit Agreement
and would give the holders of the Senior Subordinated Notes the right to require
the repurchase of their Notes, which could require a potential acquiror to
either repay or refinance such indebtedness. See '--Restrictions Imposed by the
Terms of the Company's Indebtedness; Consequences of Failure to Comply,'
'Security Ownership of Certain Beneficial Owners and Management,' 'Certain
Relationships and Related Transactions--Relationship with Mafco Holdings' and
'Description of Certain Indebtedness.'
NO PRIOR MARKET FOR THE VSRS
Prior to the Distribution, no public market for the VSRs has existed, and
no public market currently exists for any VSR Notes that may be issued. The VSRs
have been approved for listing on the New York Stock Exchange ('NYSE') under the
symbol 'MFOrt.' There can be no assurance, however, as to the development or
liquidity of any trading market for the VSRs following the Distribution or, if
issued, the VSR Notes.
15
<PAGE>
BACKGROUND AND THE DISPOSITION
BACKGROUND
On June 15, 1995, as part of the Abex Transactions, C&F Merger Inc., a
wholly owned subsidiary of Mafco Holdings, which then owned 100% of the
outstanding capital stock of Cigar Holdings and Flavors Holdings, merged with
and into Abex, with Abex being the surviving corporation in the C&F Merger and
being renamed Mafco Consolidated Group Inc. Prior to the Abex Transactions, Abex
was engaged in an aerospace business through its then wholly owned subsidiary,
PCT. In connection with the Abex Transactions, (i) holders of Abex Common Stock
and related rights to acquire Abex Common Stock received in exchange therefor,
among other consideration, 20% of the Company Common Stock and all of the
outstanding shares of PCT Common Stock; (ii) Mafco Holdings, through its wholly
owned subsidiary Mafco Consolidated Holdings, received 80% of the Company Common
Stock; and (iii) the Company retained PCT Preferred Stock convertible into
approximately 11% of the PCT Common Stock on a fully diluted basis (in each
case, such percentages reflect the outstanding capital stock immediately
following consummation of the Abex Transactions). In addition, as part of the
Abex Transactions, the Company retained substantially all of Abex's consolidated
assets and liabilities other than those principally related to PCT's aerospace
business. Accordingly, as a result of the Abex Transactions, the Company
acquired certain non-aerospace assets and assumed certain liabilities of Abex as
well as acquired an interest in the PCT Preferred Stock. PCT, which became a
separate publicly-traded company, continued to operate the aerospace business.
Subsequently, and in a separate transaction, on July 17, 1995, the Company
purchased 5,939,400 shares of PCT Common Stock (thereby increasing its
investment in PCT to approximately 36% of the shares of PCT Common Stock then
outstanding on a fully diluted basis) and 1,484,850 shares of Company Common
Stock from Libra for approximately $63.9 million in cash. In connection with
such purchase, the Company entered into an agreement with PCT which, subject to
certain exceptions, limits the Company's ability to dispose of its shares of PCT
Stock for a period of three years.
On April 15, 1996, PCT sold its entire operations, including substantially
all of its assets, to Parker-Hannifin for an aggregate cash consideration of
approximately $201.1 million before transaction costs.
On August 21, 1996, Cigar Holdings completed an initial public offering of
6,075,000 shares of its Class A Common Stock. The net proceeds to Cigar Holdings
from the Cigar IPO of approximately $127.8 million were paid as a dividend to
the Company. As a result of the Cigar IPO, the Company beneficially owns 80.2%
of the outstanding shares of capital stock of Cigar Holdings (representing
approximately 97.6% of the combined voting power), which owns 100% of the
outstanding shares of capital stock of Consolidated Cigar. In connection with
the Cigar IPO, Cigar Holdings issued the Promissory Note in an original
principal amount of $70 million to the Company. See 'Description of Certain
Indebtedness--Promissory Note.'
On July 8, 1996, the Board of Directors of the Company authorized its
management to commence discussions with PCT in order to determine whether PCT
would be interested in pursuing a possible transaction between PCT and the
Company, pursuant to which PCT would acquire the Company's licorice extract and
other flavoring agents manufacturing and distributing business, which was
conducted through Mafco Worldwide. From early July until the consummation of the
Disposition in late November, the Company and PCT, and their respective counsel
and financial advisors, held numerous ongoing discussions and negotiations
regarding the potential structure of any proposed transaction, including the
amount and type of consideration, the terms of the Purchase Agreement and the
VSR Agreement, the mechanics of the VSRs and the settlement of the Stockholder
Litigation referred to below.
On July 11, 1996, a complaint (the 'Stockholder Litigation') was filed in
the Court of Chancery in Delaware by alleged stockholders of PCT against members
of its Board of Directors (the 'Individual Defendants'), the Company and PCT, as
a nominal defendant. The lawsuit was filed as a purported class action on behalf
of all stockholders of PCT, and as a purported derivative action on behalf of
PCT. The complaint alleged, among other things, that the Individual Defendants
and the Company, as the beneficial owner of 36.4% of the stock of PCT on a fully
diluted basis, breached their fiduciary duties of care, loyalty and good faith
to PCT and its stockholders by (i) pursuing the transfer of the Company's
licorice extract business to PCT, (ii) failing to implement procedures to ensure
that any transaction between the Company and PCT was conducted in the best
interests of PCT and its public stockholders, (iii) facilitating a self-dealing
transaction for the benefit of the Company to the detriment of PCT and (iv)
subordinating the interests of PCT and its public stockholders to those of the
Company and its controlling stockholder. The complaint sought, among other
things, (a) class certification, (b) a declaratory judgment that the Individual
Defendants and the Company violated their fiduciary duties to PCT and the class,
(c) injunctive relief, (d) a court order directing the Individual Defendants to
carry out their fiduciary
16
<PAGE>
duties to plaintiffs, PCT and the class, (e) compensatory damages and (f) costs
and disbursements, including attorneys' fees.
In early July, PCT informed the Company that it had formed a special
committee (the 'Special Committee'), which consisted of those directors of PCT
who were not officers or employees of PCT or any of its affiliates (including
the Company), Messrs. Lance A. Liebman, Paul M. Meister and James G. Roche, to
consider the terms of any potential transaction. The Special Committee retained
Lazard Freres & Co. LLC ('Lazard Freres'), as its financial advisor, in
connection with its review of any potential transaction with the Company, and
the Company retained Morgan Stanley & Co. Incorporated ('Morgan Stanley') to
provide a financial opinion in connection with any potential transaction with
PCT.
From early July until late October, Lazard Freres and legal counsel to the
Special Committee conducted financial and legal due diligence in respect of
Mafco Worldwide and its businesses. In this regard, PCT's advisors met with
members of the management of Mafco Worldwide on several occasions to discuss
numerous aspects of its businesses. Concurrently therewith, Lazard Freres and
Morgan Stanley held discussions and negotiations regarding the terms of any
potential transaction. In addition, legal counsel to the Company and legal
counsel to the Special Committee exchanged drafts of, and held negotiations
regarding, definitive agreements that would govern PCT's acquisition of the
Flavors Common Stock.
During September and early October, the parties negotiated the terms of a
security that would be issued by the Company to PCT and then subsequently
distributed to PCT's stockholders designed to provide them certain price
protections in the event that the market price of PCT Common Stock did not
achieve certain levels after consummation of the transaction.
In early November, the Company and PCT reached an agreement in principle as
to the consideration to be received by the Company in exchange for the Flavors
Common Stock and the VSRs, subject to negotiation of definitive documentation.
The amount and type of consideration to be received pursuant to the Purchase
Agreement, approximately $297.3 million, consisting of $180.0 million cash, the
assumption of approximately $110.1 million of indebtedness of Mafco Worldwide
and deferred cash payments of $7.2 million, were determined principally through
arm's-length negotiations between Morgan Stanley and Lazard Freres, in each
case, with substantial consultation with, and input from, the Board of Directors
of the Company and the Special Committee of PCT.
In addition, certain provisions of the VSR Agreement set forth in Amendment
No. 1 to the VSR Agreement, dated as of December 20, 1996, between the Company
and the Trustee ('Amendment No. 1 to the VSR Agreement'), were determined by
negotiations between the independent financial advisor for the plaintiffs in the
Stockholder Litigation (the 'Plaintiffs' Advisor') and plaintiffs' counsel, on
the one hand, and the Company and its advisors, on the other hand. Such
provisions relate to the future involvement of the Plaintiffs' Advisor in
determining the interest rate and redemption provisions of the VSR Notes and the
requirement that the VSR Notes receive an initial rating of at least B+ from
Moody's Investors Service or B1 from Standard & Poors. See 'Description of the
Value Support Rights and VSR Notes--Payment in Cash or VSR Notes.'
PCT has informed the Company that on October 23, 1996, Lazard Freres
delivered to the Special Committee of the Board of Directors of PCT an oral
opinion, which was subsequently confirmed in writing in an opinion dated October
23, 1996, to the effect that, as of such date and based upon the factors and
assumptions set forth in such opinion, the consideration to be paid by PCT
pursuant to the Purchase Agreement was fair from a financial point of view to
PCT. In addition, on October 23, 1996, Morgan Stanley delivered to the Board of
Directors of the Company an oral opinion, which was subsequently confirmed in
writing in an opinion dated October 23, 1996, to the effect that, as of such
date and based upon the factors and assumptions set forth in such opinion, the
consideration to be received by the Company pursuant to the Purchase Agreement
was fair from a financial point of view to the Company. On October 23, 1996, at
meetings of the Boards of Directors of each company, the Purchase Agreement was
unanimously approved by the Boards of Directors of the Company and PCT and, in
the case of PCT, by the Special Committee, and the Purchase Agreement was
executed.
On November 5, 1996, the parties to the Stockholder Litigation executed a
Memorandum of Understanding setting forth the terms of their agreement in
principle to settle the Stockholder Litigation, and evidencing the Plaintiffs'
Advisor's and counsel's review, negotiation and approval of the consideration
paid by PCT International for the Flavors Common Stock and the VSRs, including
certain terms thereof discussed above. As a result of the settlement, the
Plaintiffs' Advisor has an ongoing role in determining the interest rate and
redemption provisions of the VSR Notes, if they are issued. See 'Description of
the Value Support Rights and VSR Notes--Payment in Cash or VSR Notes.' The
settlement is subject to the execution of a Stipulation of Settlement by the
parties to the Stockholder Litigation, which is expected to occur in January of
1997, and the
17
<PAGE>
approval of the Delaware Court of Chancery, which is expected to occur in the
second quarter of 1997. After the Stipulation of Settlement has been executed,
notice of a hearing at which stockholders will be able to object to the
settlement will be directed by the Delaware Court of Chancery to PCT's
stockholders. The Company anticipates that after the settlement is approved by
the Delaware Court of Chancery, no stockholder will be able to challenge the
consummation of the Disposition based upon the same or related grounds as
alleged in the Stockholder Litigation.
THE DISPOSITION
On November 25, 1996, pursuant to the Purchase Agreement, the Company sold
to PCT International (i) all of the outstanding shares of Flavors Common Stock
and (ii) the 23,156,502 VSRs for an aggregate consideration of approximately
$297.3 million, consisting of $180.0 million cash, the assumption of
approximately $110.1 million of indebtedness of Mafco Worldwide and deferred
cash payments from PCT International aggregating $7.2 million, $3.7 million of
which will be paid on June 30, 1997 and $3.5 million of which will be paid on
December 31, 1997. The VSRs were subsequently distributed to PCT. The net
proceeds to the Company from the Disposition and the sale of the VSRs to PCT
International were approximately $172.7 million. This amount reflects estimated
transaction costs related to the Disposition of approximately $7.3 million,
including a payment of approximately$3.0 million pursuant to the Company's
Transaction Bonus Plan. See 'Management--Transaction Bonus Plan.'
After the Disposition, the Company's only material assets are (i) its
ownership of 80.2% of the outstanding shares of capital stock of Cigar Holdings
(representing approximately 97.6% of the combined voting power), which owns 100%
of the outstanding shares of capital stock of Consolidated Cigar, through which
the Company conducts its business operations, (ii) its ownership of 100% of the
outstanding shares of PCT Preferred Stock and approximately 29% of the
outstanding shares of PCT Common Stock (together, representing approximately 36%
of the outstanding shares of PCT Common Stock on a fully diluted basis), (iii)
approximately $412.8 million in cash and marketable securities, at September 29,
1996, on a pro forma basis after giving effect to the Transactions, $172.7
million of which represents the net proceeds received by the Company in
connection with the Disposition and the sale of the VSRs to PCT International,
(iv) the Promissory Note and (v) a pension plan asset with a book value of
approximately $62.5 million at September 29, 1996. The Company expects to use
its cash, including the net proceeds from the Disposition and the sale of the
VSRs, for general corporate purposes, including acquisitions, although no
specific acquisition is currently contemplated by the Company, and pursuant to
the Company's share repurchase program. Accordingly, there can be no assurance
that such proceeds will be available to pay any of the Company's obligations
under the VSRs or, if issued, the VSR Notes. See 'Risk Factors' and 'Business.'
For a discussion of the Company's material liabilities, see 'Business--
Contingent and Other Liabilities Assumed in Connection with the Abex
Transactions' and 'Description of Certain Indebtedness.'
Immediately following the Disposition, PCT International contributed all
the outstanding shares of common stock of Pneumo Abex, a wholly owned subsidiary
of PCT International, to Flavors Holdings and Flavors Holdings contributed such
shares to Mafco Worldwide, which resulted in Pneumo Abex becoming a wholly owned
subsidiary of Mafco Worldwide. Thereafter, Mafco Worldwide merged (the 'Mafco
Worldwide Merger') with and into Pneumo Abex with Pneumo Abex being the
surviving corporation, the directors of Mafco Worldwide becoming the directors
of Pneumo Abex and Pneumo Abex becoming a wholly owned subsidiary of Flavors
Holdings. After giving effect to the Disposition and the Mafco Worldwide Merger,
the business formerly conducted by Mafco Worldwide is now conducted by Pneumo
Abex as the successor in the
18
<PAGE>
Mafco Worldwide Merger. The following chart sets forth in simplified form the
ownership structure of PCT following the Disposition and the Mafco Worldwide
Merger:
- -----------------------------------------
Power Control Technologies Inc.
('PCT')
|
100% |
|
PCT International Holdings Inc.
('PCT International')
|
100% |
|
Flavors Holdings Inc.
('Flavors Holdings')
|
100% |
|
Pneumo Abex Corporation
('Pneumo Abex,' as successor to
Mafco Worldwide Corporation)
- -----------------------------------------
THE DISTRIBUTION
On December 11, 1996, the Board of Directors of PCT declared a
distribution, payable to the holders of record of PCT Stock, of one VSR of the
Company for each share of PCT Common Stock and 125 VSRs of the Company for each
share of PCT Preferred Stock, in each case owned at the close of business on the
Record Date. The distribution ratio of the VSRs was determined by the Company
and PCT in order to achieve a pro rata distribution based upon the conversion
ratio of the PCT Preferred Stock into PCT Common Stock (1:125). The Distribution
will occur, and certificates representing the VSRs will be mailed to PCT's
stockholders, on or about December 30, 1996. PCT will effect the Distribution by
providing for the delivery of the VSRs to PCT's Registrar for distribution to
the holders of record of PCT Common Stock and PCT Preferred Stock on the Record
Date. A total of 23,095,062 VSRs will be distributed to PCT's stockholders,
including 8,439,400 VSRs to be distributed to the Company with respect to its
shares of PCT Stock. The remaining 61,440 VSRs will continue to be held by PCT
for the account of those stockholders of PCT that have not yet exchanged their
Abex Common Stock for PCT Common Stock after the C&F Merger. PCT will bear the
costs related to the Distribution.
The VSRs were originally issued to PCT International in connection with the
Disposition and were subsequently distributed to PCT.
No PCT stockholder will be required to pay any cash or other consideration
for the VSRs received in the Distribution, and the Company will not receive any
proceeds from the Distribution. In addition, no PCT stockholder will be required
to surrender or exchange shares of PCT Common Stock or PCT Preferred Stock in
order to receive the VSRs, nor will the Distribution affect the number of, or
the rights attaching to, outstanding shares of PCT Common Stock or PCT Preferred
Stock.
Each VSR entitles the holder thereof to a payment from the Company equal to
the difference between $11.00, reduced by the Distribution Amount, and the
30-Day Average Market Price of a share of PCT Common Stock on January 1, 1999,
if lower, up to a maximum of $3.25 per VSR, payable, at the option of the
Company, in either cash or, under certain circumstances, the VSR Notes issued by
the Company (subject to qualification under the TIA). Pursuant to the VSR
Agreement, the Company has the right to call the VSRs on each April 1, July 1,
October 1 and January 1 from and including April 1, 1997 to and including
October 1, 1998. If the Company calls the VSRs on or before January 1, 1998,
holders thereof will be entitled to receive a cash payment equal to the greater
of (i) $0.50 and (ii) the difference between $10.25, reduced by the Distribution
Amount, and the 30-Day Average Market Price of a share of PCT Common Stock, if
lower, on such Optional Call Date, up to a maximum of $3.25 per VSR. If the
Company calls the VSRs after January 1, 1998, holders thereof will be entitled
to receive a cash payment, if any, equal to the difference between $11.00,
reduced by the Distribution Amount, and the 30-Day Average Market Price of a
share of PCT Common Stock, if lower, on such Optional Call Date, up to a maximum
of $3.25 per VSR. The Company may also be required to make payments in respect
of the VSRs upon the occurrence of certain extraordinary transactions involving
PCT (each a 'Total Disposition,' as more fully described in 'Description of the
Value Support Rights and VSR Notes--Certain
19
<PAGE>
Definitions used in the VSR Agreement') or upon a good-faith determination by
the Company's Board of Directors that (i) as a result of an event beyond the
reasonable control of the Company, the existence of the VSRs would cause the
Company to cease to be a member of the consolidated group with respect to which
the Company files consolidated federal income tax returns and such situation
would be avoided or cured by the redemption of the VSRs or (ii) the VSRs would
create any material financial or legal impediment to the consummation of any
bona fide significant corporate event or transaction involving the Company,
which transaction would, if consummated, result in a change of control of the
Company, and in connection with which transaction the Company has entered into
definitive documentation which creates a binding obligation upon the Company to
consummate such transaction (subject to customary conditions to closing and
fiduciary obligations), each of the events described in clauses (i) and (ii)
being a Redemption Event upon which the Company may make any Optional
Redemption. If the 30-Day Average Market Price were to be below $7.00 on or
prior to January 1, 1998 or below $7.75 thereafter, the VSRs would not provide a
holder thereof complete price protection in the event a payment is required to
be made thereon. See 'Description of the Value Support Rights and VSR Notes.'
The Company's obligations under the VSRs and, if issued, the VSR Notes are
structurally subordinated to the indebtedness and other liabilities of the
Company's subsidiaries. On a pro forma basis, after giving effect to the
Disposition, the Distribution and the other Transactions at September 29, 1996,
approximately $144.6 million of indebtedness and other liabilities of the
Company's subsidiaries would have been structurally senior to the VSRs and, if
issued, the VSR Notes.
The VSRs have been approved for listing on the NYSE under the symbol
'MFOrt.' The VSRs will be freely transferable, except for VSRs received by
persons who may be deemed to be 'affiliates' of the Company under the Securities
Act. Persons who may be deemed to be affiliates of the Company after the
Distribution generally include individuals or entities that control, are
controlled by, or are under common control with, the Company and may include the
directors and principal executive officers of the Company as well as any
principal stockholder of the Company. Persons who are affiliates of the Company
will be permitted to sell their VSRs only pursuant to an effective registration
statement under the Securities Act or an exemption from the registration
requirements of the Securities Act, including an exemption contained in Rule 144
thereunder.
CERTAIN INFORMATION RELATING TO PCT
BUSINESS OF PCT
PCT is a holding company with no business operations of its own. PCT
conducts its business operations through its indirect, wholly owned subsidiary,
Pneumo Abex. Since the consummation of the Disposition and the Mafco Worldwide
Merger, Pneumo Abex, doing business under the name 'Mafco Worldwide
Corporation,' has conducted the business formerly operated by Mafco Worldwide.
Mafco Worldwide is the only manufacturer of licorice extract in the United
States, and Mafco Worldwide believes that it manufactures more than 70% of all
licorice extract sold to end-users worldwide. Mafco Worldwide is the leading
supplier of licorice extract to the major U.S. and international cigarette
manufacturers and also sells licorice extract to U.S. manufacturers of pipe and
smokeless tobacco (chewing tobacco and snuff) and worldwide confectioners, food
processors and pharmaceutical manufacturers for use as flavoring or masking
agents. In addition, Mafco Worldwide sells licorice root residue as a garden
mulch under the name RIGHT DRESS. Mafco Worldwide's other products include
non-licorice natural flavors, spices and botanicals that are used as flavoring
ingredients in food and tobacco products.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of PCT prior to the Disposition
remained as the directors and executive officers of PCT following the
Disposition, except that Theo W. Folz, who is also the President and Chief
Executive Officer of Mafco Consolidated Group's Tobacco Products Group, was
named President and Chief Executive Officer and J. Eric Hanson was named
Executive Vice President of Finance and Administration of PCT. These positions
had been vacant prior to the time they were filled by Messrs. Folz and Hanson.
Mr. Folz also became a director of PCT.
20
<PAGE>
MARKET PRICE DATA
The PCT Common Stock is listed on the NYSE and began trading on June 16,
1995, immediately following consummation of the Abex Transactions. The following
table sets forth, for the calendar quarters indicated, the high and low closing
prices per share of the PCT Common Stock on the NYSE based on published
financial sources:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
CALENDAR 1995
Second Quarter (since June 16, 1995)... $6 3/4 $5
Third Quarter.......................... 8 1/8 6 3/8
Fourth Quarter......................... 8 1/4 7 1/8
CALENDAR 1996
First Quarter.......................... 9 5/8 7 3/8
Second Quarter......................... 9 3/4 8 1/2
Third Quarter.......................... 9 3/8 7 1/4
Fourth Quarter (through December 23)... 8 1/2 7 3/8
</TABLE>
On December 23, 1996, the most recent practicable date prior to the date of
this Prospectus, the closing price per share of PCT Common Stock on the NYSE was
$8 1/8.
AVAILABLE INFORMATION
PCT is subject to the informational requirements of the Exchange Act. In
accordance with the Exchange Act, PCT files proxy statements, reports and other
information with the Commission. This filed material can be obtained through the
Commission or the NYSE. See 'Available Information.'
21
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data set forth below reflect the results
of operations and financial position of the Company, including its operating
subsidiary Consolidated Cigar, its former operating subsidiary Mafco Worldwide
and the assets and liabilities of Abex, for the periods indicated. On June 15,
1995, as part of the Abex Transactions, C&F Merger, a wholly owned subsidiary of
Mafco Holdings, which then owned 100% of the outstanding capital stock of Cigar
Holdings and Flavors Holdings, merged with and into Abex, with Abex being the
surviving corporation in the Merger and being renamed Mafco Consolidated Group
Inc. The Merger was accounted for as a purchase of certain assets and the
assumption of certain liabilities of Abex, with C&F Merger treated as the
acquiror for accounting purposes. On March 3, 1993, Mafco Holdings completed the
Consolidated Cigar Acquisition. Accordingly, the selected historical financial
data reflect for the periods (i) from June 15, 1995, the consolidated results of
Cigar Holdings and Flavors Holdings and the assets and liabilities of Abex
acquired in the Merger, (ii) from March 3, 1993 to June 15, 1995, the combined
results of Cigar Holdings and Flavors Holdings and (iii) prior to March 3, 1993,
the results of Flavors Holdings or its predecessors.
The following selected historical financial data should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus. The
selected historical financial data as of and for the nine month periods are
unaudited but, in the opinion of the Company, include all adjustments
(consisting of normal recurring accruals) necessary for the fair presentation of
the financial data for such periods. The results for such interim periods are
not necessarily indicative of the results for the full fiscal year.
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED
YEAR ENDED DECEMBER 31, ---------------------------
------------------------------------------------ OCTOBER 1, SEPTEMBER 29,
1991 1992 1993(a) 1994 1995(b) 1995(b) 1996
------ ------ ------- ------ ------- ---------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. $ 95.5 $100.1 $202.6 $226.9 $261.1 $195.3 $ 230.4
Cost of sales.............................. 58.4 60.4 125.0 136.0 154.0 115.3 131.9
------ ------ ------- ------ ------- ---------- ------
Gross profit............................... 37.1 39.7 77.6 90.9 107.1 80.0 98.5
Selling, general and administrative
expenses................................. 8.1 8.9 33.9 37.9 51.4 37.2 40.0
------ ------ ------- ------ ------- ---------- ------
Operating income........................... 29.0 30.8 43.7 53.0 55.7 42.8 58.5
Interest expense........................... 13.9 16.5 26.5 27.5 27.2 20.4 19.3
Interest, investment and dividend income... (0.4) (0.5) (0.1) (0.2) (6.0) (2.8) (7.1)
Amortization of deferred charges and bank
fees..................................... 1.1 1.6 2.0 2.0 2.1 1.5 1.5
Equity in earnings from continuing
operations and preferred dividends of
PCT...................................... -- -- -- -- (0.7) (0.4) (2.8)
Gain on Cigar IPO.......................... -- -- -- -- -- -- (127.8)(c)
Other (income) expenses, net............... 1.1 0.2 (0.2) (0.2) 0.3 0.2 0.8
------ ------ ------- ------ ------- ---------- ------
Income from continuing operations before
income taxes............................. 13.3 13.0 15.5 23.9 32.8 23.9 174.6
Provision for income taxes................. 5.0 4.8 5.5 7.5 9.7 7.5 59.1
------ ------ ------- ------ ------- ---------- ------
Income from continuing operations.......... 8.3 8.2 10.0 16.4 23.1 16.4 115.5
Discontinued operations
Equity in discontinued operations of PCT,
net of income taxes.................... -- -- -- -- 1.3 0.6 15.1(d)
------ ------ ------- ------ ------- ---------- ------
Income before extraordinary item........... 8.3 8.2 10.0 16.4 24.4 17.0 130.6
Extraordinary item, net of tax benefit..... -- 7.6(e) -- 2.7(e) -- -- --
------ ------ ------- ------ ------- ---------- ------
Net income................................. $ 8.3 $ 0.6 $ 10.0 $ 13.7 $ 24.4 $ 17.0 $ 130.6
------ ------ ------- ------ ------- ---------- ------
------ ------ ------- ------ ------- ---------- ------
Earnings per share
Continuing operations.................... $ 0.42 $ 0.41 $ 0.50 $ 0.82 $ 1.06 $ 0.77 $ 4.97
Discontinued operations.................. -- -- -- -- 0.06 0.03 0.65
Extraordinary item....................... -- (0.38) -- (0.13) -- -- --
------ ------ ------- ------ ------- ---------- ------
Net income per share..................... $ 0.42 $ 0.03 $ 0.50 $ 0.69 $ 1.12 $ 0.80 $ 5.62
------ ------ ------- ------ ------- ---------- ------
------ ------ ------- ------ ------- ---------- ------
Weighted average common shares outstanding
(in thousands)........................... 19,778 19,778 19,778 19,778 21,794 21,315 23,237
OTHER DATA:
Ratio of earnings to fixed charges(f)...... 1.9x 1.7x 1.5x 1.8x 2.1x 2.1x 9.2x
<CAPTION>
DECEMBER 31,
------------------------------------------------ SEPTEMBER 29,
1991 1992 1993 1994 1995 1996
------ ------ ------- ------ ------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets............................... $ 89.3 $ 82.6 $293.6 $282.9 $560.6 $ 729.7
Long-term debt (including current
portion)................................. 136.8 134.2 276.4 250.2 229.6 221.1
Total stockholders' equity (deficit)....... (66.1) (67.6) (25.4) (10.8) 103.7 233.7
</TABLE>
- ------------------
(a) Includes results of operations of Consolidated Cigar from March 3, 1993, the
date of the Consolidated Cigar Acquisition.
(b) Reflects the restatement of 1995 results to reflect the Company's equity in
the discontinued operations of PCT.
(c) Reflects the Cigar IPO, which resulted in a pre-tax gain of $127.8, and the
related payment of the net proceeds thereof as a dividend to the Company.
(d) Includes the Company's equity in the gain on the sale by PCT of its entire
operations to Parker-Hannifin.
(e) Represents prepayment premiums, fees and expenses, unamortized deferred debt
issuance costs and original issue discount related to the refinancing of
indebtedness at Mafco Worldwide.
(f) Ratio of earnings to fixed charges is expressed as the ratio of earnings
from continuing operations before income taxes, plus fixed charges to fixed
charges. Fixed charges consist principally of interest on debt, amortization
of deferred charges and interest component of rental expense.
22
<PAGE>
PRO FORMA FINANCIAL DATA
The unaudited pro forma statements of operations for the year ended
December 31, 1995 and the nine-month period ended September 29, 1996 give pro
forma effect to the Flavors Dividend, the Disposition and the Distribution (the
'Transactions'), assuming that the Transactions had been consummated on January
1, 1995, and the unaudited pro forma balance sheet as of September 29, 1996,
gives pro forma effect to the Transactions, assuming that the Transactions had
been consummated on September 29, 1996. The pro forma adjustments are based upon
available information and certain assumptions that the management of the Company
believes are reasonable. The pro forma financial data do not purport to
represent the results of operations or the financial position of the Company
that actually would have occurred had the Transactions been consummated on the
aforesaid dates, or project the results of operations or financial position of
the Company and its subsidiaries for any future date or period.
The following unaudited pro forma financial data should be read in
conjunction with 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and the Consolidated Financial Statements of the
Company and the notes thereto included elsewhere in this Prospectus.
23
<PAGE>
PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 29, 1996
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FLAVORS
COMPANY HOLDINGS PRO FORMA COMPANY
HISTORICAL HISTORICAL(A) ADJUSTMENTS PRO FORMA
---------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and trading securities.............. $244.6 $ (9.9) $ 5.4(b) $ 412.8
172.7(c)
Notes and trade receivables, net........................... 31.3 (12.1) 3.7(c) 22.9
Inventories................................................ 91.0 (43.9) -- 47.1
Prepaid expenses and other................................. 23.8 (1.3) -- 22.5
---------- ------------- ----------- ---------
Total current assets..................................... 390.7 (67.2) 181.8 505.3
Property, plant and equipment, net........................... 48.0 (10.5) -- 37.5
Pension asset................................................ 62.5 -- -- 62.5
Investment in PCT preferred and common stock................. 73.5 -- (49.6)(d) 23.9
Trademarks, net.............................................. 31.4 -- -- 31.4
Intangible assets related to businesses acquired, net........ 61.4 (1.4) -- 60.0
Other assets................................................. 62.2 (4.5) 3.5(c) 61.2
---------- ------------- ----------- ---------
$729.7 $ (83.6) $ 135.7 $ 781.8
---------- ------------- ----------- ---------
---------- ------------- ----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt.......................... $ 11.2 $ (11.2) $ -- $ --
Accounts payable........................................... 14.7 (4.4) -- 10.3
Accrued expenses and other................................. 63.8 (9.1) 43.5(e) 98.2
---------- ------------- ----------- ---------
Total current liabilities................................ 89.7 (24.7) 43.5 108.5
Long-term debt............................................... 209.9 (99.9) -- 110.0
VSRs......................................................... 22.1(c) 22.1
Other liabilities............................................ 196.4 (3.1) (8.8)(e) 184.5
Stockholders' equity:
Common stock............................................... 0.2 -- 0.2
Additional paid-in-capital................................. 167.1 -- 167.1
Retained earnings.......................................... 95.0 45.4 5.4 (b)(c) 219.3
157.8(c)
(49.6)(d)
(34.7)(e)
Currency translation adjustment............................ 1.3 (1.3) -- --
Treasury stock at cost..................................... (29.9) -- -- (29.9)
---------- ------------- ----------- ---------
Total stockholders' equity................................. 233.7 44.1(c) 78.9 356.7
---------- ------------- ----------- ---------
$729.7 $ (83.6) $ 135.7 $ 781.8
---------- ------------- ----------- ---------
---------- ------------- ----------- ---------
</TABLE>
(Footnotes follow on next page)
24
<PAGE>
- ------------------
(a) Reflects the elimination of the historical balance sheet of Flavors Holdings
in connection with the Disposition.
(b) Reflects the Flavors Dividend paid by Flavors Holdings to the Company prior
to the Disposition of $5.4.
(c) Reflects (i) the Disposition and the issuance of the VSRs, net of the
distribution of the VSRs to PCT stockholders (14,717,102 VSRs issued to
stockholders of PCT other than the Company, at the estimated fair market
value per VSR at the date of issuance of $1.50) for net cash proceeds of
$172.7 ($180.0 less estimated transaction expenses of $7.3, including a
payment of approximately $3.0 million pursuant to the Company's Transaction
Bonus Plan) and deferred cash payments of $7.2; (ii) the distribution of the
VSRs to PCT's stockholders and (iii) the resulting pre-tax gain of $207.3,
prior to the deferral of a portion of gain (see Note (d)), calculated as
follows:
<TABLE>
<S> <C>
Net cash proceeds.................................................................... $172.7
Deferred cash payments............................................................... 7.2
Less: VSR obligation representing the contingent gain on the Disposition............. (22.1)
------
157.8
Flavors Holdings stockholder's deficit............................................... 44.1
Flavors Dividend..................................................................... 5.4
------
Pre-tax gain prior to deferral....................................................... $207.3
------
------
</TABLE>
(d) Reflects the deferral of a portion of the gain, net of taxes on the
Disposition, corresponding to the Company's continuing 29% equity interest
in PCT following the Disposition, which is shown as a reduction in the
investment in PCT Stock.
(e) Reflects the tax effect of the gain to the Company on the Disposition, prior
to the deferral of a portion of the gain (see Note (d)).
25
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FLAVORS
COMPANY HOLDINGS PRO FORMA COMPANY
HISTORICAL HISTORICAL(a) ADJUSTMENTS PRO FORMA(e)(f)
---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Net sales................................................. $ 261.1 $ (103.2) $ -- $ 157.9
Cost of sales............................................. 154.0 (60.0) 94.0
---------- ------------- ----------- ---------------
Gross profit.............................................. 107.1 (43.2) -- 63.9
Selling, general and administrative expenses.............. 51.4 (9.2) 42.2
---------- ------------- ----------- ---------------
Operating income.......................................... 55.7 (34.0) -- 21.7
Interest expense.......................................... (27.2) 13.5 (13.7)
Interest, investment and dividend income.................. 6.0 (0.5) 5.5
Amortization of deferred charges and bank fees............ (2.1) 1.1 (1.0)
Equity in earnings from continuing operations and
preferred dividends of PCT.............................. 0.7 -- 4.3(b) 5.0
Other income (expense), net............................... (0.3) 0.1 (0.2)
---------- ------------- ----------- ---------------
Income from continuing operations before income taxes..... 32.8 (19.8) 4.3 17.3
Provision for income taxes................................ (9.7) 7.7 (0.3)(c) (2.3)
---------- ------------- ----------- ---------------
Income from continuing operations $ 23.1 $ (12.1) $ 4.0 $ 15.0
---------- ------------- ----------- ---------------
---------- ------------- ----------- ---------------
Earnings per share from continuing operations $ 1.06 $ 0.69
Weighted average number of shares outstanding (in
thousands).............................................. 21,794 21,794
Ratio of earnings to fixed charges(d)..................... 2.1x 2.1x
</TABLE>
- ------------------
(a) Reflects the elimination of the historical statement of operations of
Flavors Holdings in connection with the Disposition.
(b) Reflects the increase in the Company's equity in earnings from continuing
operations of PCT attributable to the Disposition.
(c) Reflects the tax effect, based on the utilization of a dividend received
deduction, of the pro forma adjustments.
(d) Ratio of earnings to fixed charges is expressed as the ratio of earnings
from continuing operations before income taxes, plus fixed charges to fixed
charges. Fixed charges consist principally of interest on debt, amortization
of deferred charges and interest component of rental expense.
(e) Income from continuing operations assumes that the VSRs are valued at $1.50
per VSR (the estimated fair market value at the date of issuance) at the
beginning and end of each period presented. Subsequently, the VSRs will be
marked to the closing market price of the security at each financial
statement date. As a result, income in future periods may be affected by any
positive or negative mark to market adjustments.
(f) The Pro Forma Statement of Operations does not give pro forma effect to the
$3.0 million payment made to the Company's Chief Executive Officer pursuant
to the Company's Transaction Bonus Plan. See 'Management--Transaction Bonus
Plan.'
26
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 29, 1996
(DOLLARS IN MILLIONS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
FLAVORS
COMPANY HOLDINGS PRO FORMA COMPANY
HISTORICAL HISTORICAL(a) ADJUSTMENTS PRO FORMA(e)(f)
---------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
Net sales................................................. $ 230.4 $ (77.7) $ 152.7
Cost of sales............................................. 131.9 (43.6) 88.3
---------- ------------- ----------- ---------------
Gross profit.............................................. 98.5 (34.1) -- 64.4
Selling, general and administrative expenses.............. 40.0 (6.5) 33.5
---------- ------------- ----------- ---------------
Operating income.......................................... 58.5 (27.6) -- 30.9
Interest expense.......................................... (19.3) 9.4 (9.9)
Interest, investment and dividend income.................. 7.1 (0.3) 6.8
Amortization of deferred charges and bank fees............ (1.5) 0.9 (0.6)
Equity in earnings from continuing operations and
preferred dividends of PCT.............................. 2.8 -- 2.7(b) 5.5
Gain on Cigar IPO......................................... 127.8 127.8
Other income (expense), net............................... (0.8) (0.1) (0.9)
---------- ------------- ----------- ---------------
Income from continuing operations before income taxes..... 174.6 (17.7) 2.7 159.6
Provision for income taxes................................ (59.1) 6.9 (0.2)(c) (52.4)
---------- ------------- ----------- ---------------
Income from continuing operations......................... $ 115.5 $ (10.8) $ 2.5 $ 107.2
---------- ------------- ----------- ---------------
---------- ------------- ----------- ---------------
Earnings per share from continuing operations............. $ 4.90 $ 4.61
Weighted average number of shares outstanding (in
thousands).............................................. 23,237 23,237
Ratio of earnings to fixed charges(d)..................... 9.2x 15.4x
</TABLE>
- ------------------
(a) Reflects the elimination of the historical statement of operations of
Flavors Holdings in connection with the Disposition.
(b) Reflects the increase in the Company's equity in earnings from continuing
operations of PCT attributable to the Disposition.
(c) Reflects the tax effect, based on the utilization of a dividend received
deduction, of the pro forma adjustments.
(d) Ratio of earnings to fixed charges is expressed as the ratio of earnings
from continuing operations before income taxes, plus fixed charges to fixed
charges. Fixed charges consist principally of interest on debt, amortization
of deferred charges and interest component of rental expense.
(e) Income from continuing operations assumes that the VSRs are valued at $1.50
per VSR (the estimated fair market value at the date of issuance) at the
beginning and end of each period presented. Subsequently, the VSRs will be
marked to the closing market price of the security at each financial
statement date. As a result, income in future periods may be affected by any
positive or negative mark to market adjustments.
(f) The Pro Forma Statement of Operations does not give pro forma effect to the
$3.0 million payment made to the Company's Chief Executive Officer pursuant
to the Company's Transaction Bonus Plan. See 'Management--Transaction Bonus
Plan.'
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
GENERAL
On June 15, 1995, as part of the Abex Transactions, C&F Merger, a wholly
owned subsidiary of Mafco Holdings, which then owned 100% of the outstanding
capital stock of Cigar Holdings and Flavors Holdings, merged with and into Abex,
with Abex being the surviving corporation in the Merger and being renamed Mafco
Consolidated Group Inc. The Merger was accounted for as a purchase of certain
assets and the assumption of certain liabilities of Abex, with C&F Merger
treated as the acquiror for accounting purposes. On March 3, 1993, Mafco
Holdings completed the Consolidated Cigar Acquisition. The Company's results of
operations and financial condition discussed below reflect for the periods (i)
from June 15, 1995, the consolidated results of Cigar Holdings and Flavors
Holdings and the assets and liabilities of Abex acquired in the Merger, (ii)
from March 3, 1993 to June 15, 1995, the combined results of Cigar Holdings and
Flavors Holdings and (iii) prior to March 3, 1993, the results of Flavors
Holdings or its predecessors.
In connection with the C&F Merger, the Company recorded the assets acquired
and liabilities assumed at their estimated fair market value, with the
difference recorded as a credit to additional paid in capital, as follows (in
millions):
<TABLE>
<S> <C>
Cash, net of transaction expenses of $6.7... $174.8
Other current assets......................... 12.9
Pension asset................................ 60.8
Other long term assets....................... 98.5
Accrued expense and other.................... 37.2
Abex VSR obligation.......................... 62.0
Other liabilities............................ 176.4
Stockholders' equity......................... 71.4
</TABLE>
The Abex VSRs were designed to help ensure that, within a stated time
period and subject to certain limitations, the combined market values of the
securities received in the C&F Merger by Abex's stockholders was at least $10
per share. The Abex VSRs were valued based on 20,667,142 Abex VSRs issued at the
maximum payment per Abex VSR of $3.00. The Abex VSRs expired in accordance with
their terms on September 19, 1995. As a result of the purchase of Abex VSRs by
the Company and the expiration of all the Abex VSRs, stockholders' equity
increased by $61.6 million.
On August 21, 1996, Cigar Holdings completed the Cigar IPO, as a result of
which the Company beneficially owns 80.2% of the outstanding shares of capital
stock of Cigar Holdings (representing approximately 97.6% of the combined voting
power), which owns 100% of the outstanding shares of capital stock of
Consolidated Cigar.
The Company's results of operations have been, and continue to be, affected
by certain trends in the tobacco products industry, including issues relating to
taxation and regulation, as well as by certain constraints on the Company's
ability to satisfy demand, particularly for its handmade premium products. See
'Business--Market Overview,' '--The Tobacco Industry' and '--Backorders.'
PRO FORMA RESULTS OF OPERATIONS
On November 25, 1996, the Company sold all the outstanding shares of
Flavors Common Stock to PCT International. The following discussion of pro forma
statement of operations data gives effect to the Flavors Dividend, the
Disposition and the Distribution assuming that such transactions had been
consummated on January 1, 1995. The Company's VSR obligation incurred in
connection with the Purchase Agreement will be accounted for at market value at
the date of issuance and subsequently marked to the closing market price of the
security at each financial statement date. As a result, income in future periods
may be affected by any positive or negative mark to market adjustments. For the
year ended December 31, 1994, the pro forma financial data reflects the results
of operations of Consolidated Cigar. The following discussion should be read in
conjunction with 'Pro Forma Financial Data.'
28
<PAGE>
Pro Forma Nine Month Period Ended September 29, 1996 Compared with the Pro
Forma Nine Month Period Ended October 1, 1995
Pro forma net sales in the first nine months of 1996 and 1995 were $152.7
million and $115.1 million, respectively, an increase of $37.6 million or 32.7%.
The increase in net sales was primarily due to higher sales of cigars. Cigar
sales increased primarily as a result of both a shift in sales mix to higher
priced cigars and price increases on certain cigar brands and, to a lesser
extent, an increase in cigar unit volume, particularly in the premium market.
Pro forma cost of sales were $88.3 million and $68.3 million in the first
nine months of 1996 and 1995, respectively, an increase of $20.0 million or
29.3%. The increase in cost of sales in 1996 was due primarily to the increase
in sales and increases in the costs of raw materials for cigars. As a percentage
of sales, cost of sales improved to 57.8% in 1996 from 59.3% in 1995 primarily
due to fixed manufacturing costs spread over increased production.
Pro forma SG&A expenses were $33.5 million and $30.4 million in the first
nine months of 1996 and 1995, respectively. This increase was primarily due to
increased compensation, marketing and selling expenses. A significant portion of
these marketing and selling expenses varies with sales volume. As a percentage
of net sales, SG&A expenses were 21.9% in the 1996 period and 26.4% in the 1995
period. The decrease was primarily due to SG&A expenses increasing at a lower
rate relative to the increase in net sales. SG&A expenses in the first nine
months of 1996 and 1995 include compensation, public company and other
incremental expenses incurred by the Company since the C&F Merger. The Company
expects marketing and selling expenses of the Company's operating business to
continue to increase if net sales continue to increase, and expects to continue
to incur compensation and public company costs in future periods.
Pro forma interest expense was $9.9 million and $10.1 million in the first
nine months of 1996 and 1995, respectively. The decrease was primarily due to a
lower amount of debt outstanding during 1996 as compared to 1995.
Pro forma interest, investment and dividend income was $6.8 million and
$2.5 million in the first nine months of 1996 and 1995, respectively. The
increase primarily reflects interest income on invested cash acquired in
connection with the C&F Merger and the Cigar IPO.
Pro forma equity in earnings from continuing operations of PCT represents
the Company's interest in the continuing operations of PCT Common Stock acquired
in July 1995, preferred dividends on the Company's investment in PCT Preferred
Stock and the results of operations of Flavors Holdings as a result of the
Disposition.
The pro forma provision for income taxes as a percentage of income from
continuing operations before income taxes was 32.8% and 15.3% in the first nine
months of 1996 and 1995, respectively. The increase in the effective rate is due
to an increase in income from U.S. operations which primarily relates to the
gain on the Cigar IPO subject to state and federal income taxes during 1996
partially offset by a tax benefit associated with the Company's operations in
Puerto Rico. In addition, the 1995 tax provision also reflects a tax benefit
associated with the utilization of Consolidated Cigar's net operating loss
carryforwards.
Pro Forma Year Ended December 31, 1995 Compared to Pro Forma Year Ended
December 31, 1994
Pro forma net sales were $157.9 million and $131.5 million in 1995 and
1994, respectively, an increase of $26.4 million or 20.1%. The increase in net
sales was primarily due to higher sales of cigars. Cigar sales increased
primarily as a result of an increase in cigar unit volume, particularly in the
premium market and, to a slightly lesser extent, a sales mix shift to higher
priced cigars and price increases on certain cigar brands.
Pro forma cost of sales were $94.0 million and $78.8 million in 1995 and
1994, respectively, an increase of $15.2 million or 19.3%. The increase in cost
of sales for 1995 was due primarily to the increase in sales and increases in
the costs of raw materials. As a percentage of sales, cost of sales decreased to
59.5% in 1995 from 59.9% in 1994, primarily due to fixed manufacturing costs
spread over increased net sales.
Pro forma SG&A expenses were $42.2 million and $29.4 million in 1995 and
1994, respectively, an increase of $12.8 million or 43.5%. As a percentage of
net sales, SG&A expenses increased to 26.7% in 1995 from 22.4% in 1994. The
increase primarily reflects compensation, public company and other incremental
SG&A expenses incurred by the Company since the C&F Merger and increased
marketing and selling expenses of the
29
<PAGE>
Company's operating business. A significant portion of these marketing and
selling expenses varies with sales volume. The Company expects marketing and
selling expenses of the Company's operating business to continue to increase if
net sales continue to increase, and expects to continue to incur compensation
and public company costs in future periods.
Pro forma interest expense, net was $13.7 million and $12.8 million in 1995
and 1994, respectively. The increase of $0.9 million was due to interest
accretion on certain liabilities assumed by the Company in the C&F Merger
partially offset by a lower amount of average debt outstanding in 1995.
Pro forma interest, investment and dividend income was $5.5 million and $0
in 1995 and 1994, respectively. The increase was primarily due to the investment
of assets acquired by the Company in connection with the Abex Transactions in
cash equivalents such as repurchase agreements, commercial paper, time deposits
and money market investments and dividend income on the PCT Preferred Stock. The
Company expects to continue to invest in cash equivalents and marketable
securities pending its use for general corporate purposes, including
acquisitions, and pursuant to its share repurchase program.
RESULTS OF OPERATIONS
The following table sets forth certain historical statement of operations
data (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTH PERIOD ENDED
-------------------------------------------------------- ------------------------------------
1993 1994 1995 OCTOBER 1, 1995 SEPTEMBER 29, 1996
---------------- ---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $202.6 100.0% $226.9 100.0% $261.1 100.0% $195.3 100.0% $230.4 100.0%
Cost of sales........ 125.0 61.6 136.0 59.9 154.0 59.0 115.3 59.0 131.9 57.2
Gross profit......... 77.6 38.4 90.9 40.1 107.1 41.0 80.0 41.0 98.5 42.8
Selling, general and
administrative
expenses........... 33.9 16.7 37.9 16.7 51.4 19.7 37.2 19.0 40.0 17.4
Operating income..... 43.7 21.7 53.0 23.4 55.7 21.3 42.8 22.0 58.5 25.4
</TABLE>
Nine Month Period Ended September 29, 1996 Compared with the Nine Month Period
Ended October 1, 1995
Net sales in the first nine months of 1996 and 1995 were $230.4 million and
$195.3 million, respectively, an increase of $35.1 million or 18.0%. The
increase in net sales was primarily due to higher sales of cigars. Cigar sales
increased primarily as a result of both a shift in sales mix to higher priced
cigars and price increases on certain cigar brands and, to a lesser extent, an
increase in cigar unit volume, particularly in the premium market.
Cost of sales were $131.9 million and $115.3 million in the first nine
months of 1996 and 1995, respectively, an increase of $16.6 million or 14.4%.
The increase in cost of sales in 1996 was due primarily to the increase in sales
and increases in the costs of raw materials for cigars. As a percentage of
sales, cost of sales improved to 57.2% in 1996 from 59.0% in 1995 primarily due
to fixed manufacturing costs spread over increased production and an insurance
recovery in 1996 related to damaged inventory of $0.5 million above cost.
SG&A expenses were $40.0 million and $37.2 million in the first nine months
of 1996 and 1995, respectively. This increase was primarily due to increased
compensation, marketing and selling expenses, partially offset by a bad debt
recovery. A significant portion of these marketing and selling expenses varies
with sales volume. As a percentage of net sales, SG&A expenses were 17.4% in the
1996 period and 19.0% in the 1995 period. The decrease was primarily due to SG&A
expenses increasing at a lower rate relative to the increase in net sales. SG&A
expenses in the first nine months of 1996 and 1995 include compensation, public
company and other incremental expenses incurred by the Company since the C&F
Merger. The Company expects marketing and selling expenses of the Company's
operating business to continue to increase if net sales continue to increase,
and expects to continue to incur compensation and public company costs in future
periods.
Interest expense was $19.3 million and $20.4 million in the first nine
months of 1996 and 1995, respectively. The decrease was primarily due to a lower
average amount of debt outstanding during 1996 as compared to 1995.
Interest, investment and dividend income was $7.1 million and $2.8 million
in the first nine months of 1996 and 1995, respectively. The increase primarily
reflects interest income on invested cash acquired in connection with the C&F
Merger and the Cigar IPO.
30
<PAGE>
Equity in earnings from continuing operations of PCT represents the
Company's interest in the continuing operations of PCT Common Stock acquired in
July 1995 and preferred dividends on the Company's investment in PCT Preferred
Stock.
The provision for income taxes as a percentage of income from continuing
operations before income taxes was 33.8% and 31.4% in the first nine months of
1996 and 1995, respectively. The increase in the effective rate is due to an
increase in income from U.S. operations which primarily relates to the gain on
the Cigar IPO subject to state and federal income taxes during 1996 partially
offset by a tax benefit associated with the Company's operations in Puerto Rico.
In addition, the 1995 tax provision also reflects a tax benefit associated with
the utilization of Consolidated Cigar's net operating loss carryforwards.
Equity in discontinued operations of PCT, net of income taxes which reflect
a dividend received deduction, represents the Company's interest in the
discontinued operations of PCT, including the gain on sale of PCT's aerospace
business in April 1996.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net sales were $261.1 million and $226.9 million in 1995 and 1994,
respectively, an increase of $34.2 million or 15.1%. The increase in net sales
reflected a $26.7 million or 20.3% increase in sales of cigar products due
primarily to an increase in cigar unit volume and a sales mix shift to higher
priced cigars and a $7.5 million or 7.9% increase in sales of flavorings due
primarily to increased U.S. and foreign shipment volume.
Cost of sales were $154.0 million and $136.0 million in 1995 and 1994,
respectively, an increase of $18.0 million or 13.2%. The increase in cost of
sales for 1995 was due primarily to the increase in sales. As a percentage of
sales, cost of sales decreased to 59.0% in 1995 from 59.9% in 1994, primarily
due to fixed manufacturing costs spread over increased unit volume and lower
materials costs.
SG&A expenses were $51.4 million and $37.9 million in 1995 and 1994,
respectively, an increase of $13.5 million or 35.6%. As a percentage of net
sales, SG&A expenses increased to 19.7% in 1995 from 16.7% in 1994. The increase
primarily reflects compensation, public company and other incremental expenses
incurred by the Company since the C&F Merger and increased marketing and selling
expenses of the Company's operating businesses. A significant portion of these
marketing and selling expenses varies with sales volume. The Company expects
marketing and selling expenses of the Company's operating business to continue
to increase if net sales continue to increase, and expects to continue to incur
compensation and public company costs in future periods.
Interest expense was $27.2 million and $27.5 million in 1995 and 1994,
respectively. The decrease of $0.3 million was due to a lower amount of debt
outstanding in 1995, partially offset by interest accretion on certain
liabilities assumed by the Company in the Merger.
Interest, investment and dividend income was $6.0 million and $0.2 million
in 1995 and 1994, respectively. The increase was primarily due to the investment
of assets acquired by the Company in connection with the Abex Transactions in
cash equivalents such as repurchase agreements, commercial paper, time deposits
and money market investments and dividend income on the PCT Preferred Stock. The
Company expects to continue to invest in cash equivalents and marketable
securities pending the use of its cash for general corporate purposes, including
acquisitions, and pursuant to its share repurchase program.
The provision for income taxes as a percentage of income before income
taxes and extraordinary item was 29.6% and 31.4% in 1995 and 1994, respectively.
Income tax expense in 1995 and 1994 reflects provisions for federal income
taxes, net of the tax benefit resulting from the utilization of net operating
loss carryforwards, along with state income and franchise taxes. In addition,
income tax expense includes a provision for foreign taxes, Puerto Rico tollgate
taxes and taxes on Puerto Rico source income.
Equity in discontinued operations of PCT, net of income taxes, represents
the Company's interest in the discontinued operations of PCT.
In 1995, because of the reasons described above, net income was $24.4
million, an increase of $10.7 million over 1994. In 1994, the Company recorded
an extraordinary loss, net of $1.7 million tax benefit, of $2.7 million as a
result of the June 1994 refinancing of certain indebtedness. Prepayment
premiums, original issue discounts and certain other capitalized costs of the
refinanced indebtedness were expensed as such extraordinary loss.
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Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Net sales were $226.9 million and $202.6 million in 1994 and 1993,
respectively, an increase of $24.3 million or 12.0%. The increase in net sales
reflected a $21.1 million or 19.1% increase in sales of cigar products due
primarily to the inclusion of Consolidated Cigar for a full year in 1994 as
compared to ten months in 1993. The Company also experienced increases in cigar
unit volume and a sales mix shift to higher priced cigars in 1994 compared to
1993. Sales of flavorings increased $3.2 million or 3.5% in 1994 due primarily
to increased U.S. and foreign shipment volume partially offset by lower average
selling prices.
Cost of sales were $136.0 million and $125.0 million in 1994 and 1993,
respectively, an increase of $11.0 million or 8.80%. The increase in cost of
sales for 1994 was due primarily to the inclusion of Consolidated Cigar for a
full year in 1994 and to a lesser extent to the increase in sales. As a
percentage of net sales, cost of sales decreased to 59.9% in 1994 from 61.6% in
1993 due primarily to a decrease of $3.0 million in the amortization of the
Consolidated Cigar Acquisition purchase price allocated to inventory.
SG&A expenses were $37.9 million and $33.9 million in 1994 and 1993,
respectively, an increase of $4.0 million or 11.8%. The increase was due
primarily to the inclusion of Consolidated Cigar for a full year in 1994
partially offset by lower bad debt expense of the Company in 1994. As a
percentage of net sales, SG&A expenses were constant at 16.7% in both 1994 and
1993.
Interest expense was $27.5 million and $26.5 million in 1994 and 1993,
respectively, an increase of $1.0 million or 3.8%. The increase was due
primarily to the inclusion of Consolidated Cigar for a full year in 1994
partially offset by lower interest rates as a result of certain refinanced
indebtedness.
The provision for income taxes as a percentage of income before income
taxes and extraordinary item was 31.4% and 35.7% in 1994 and 1993, respectively.
The decrease in the effective rate is due primarily to the realization of a
valuation allowance related to deferred tax assets. Income tax expense in 1994
and 1993 reflects provisions for federal income taxes, net of the tax benefit
resulting from the utilization of net operating loss carryforwards, along with
state income and franchise taxes. In addition, income tax expense includes a
provision for foreign taxes, Puerto Rico tollgate taxes as well as taxes on
Puerto Rico source income.
In 1994, for the reasons described above, net income was $13.7 million, an
increase of $3.7 million over 1993. In 1994, the Company recorded an
extraordinary loss, net of $1.7 million tax benefit, of $2.7 million as a result
of the June 1994 refinancing of certain indebtedness, as more fully described
above. Prepayment premiums, original issue discounts and certain other
capitalized costs of the refinanced indebtedness were expensed as such
extraordinary loss.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows from operating activities were $6.1 million, $32.8 million
and $12.3 million for 1995, 1994 and 1993, respectively, and ($188.7) million
and $18.3 million in the first nine months of 1996 and 1995, respectively. The
decrease of $207.0 million from the first nine months of 1995 to the first nine
months of 1996 reflects a net increase in trading securities partially offset by
higher net income, excluding the after tax effect of the gain on the Cigar IPO.
The decrease of $26.7 million from 1994 to 1995 primarily reflects an increase
in restricted deposits, the payment of liabilities assumed in connection with
the Abex Transactions and a smaller decrease in inventories partially offset by
increased net income. In connection with the Abex Transactions, the Company
assumed and agreed to indemnify PCT against, or manage on PCT's behalf, various
contingent and other liabilities. See 'Business--Contingent and Other
Liabilities Assumed in Connection with the Abex Transactions' for a discussion
of the environmental, tax, casualty and certain other liabilities assumed in
connection with the Abex Transactions. The increase in net cash flows from
operating activities of $20.5 million from 1993 to 1994 reflects increased net
income, lower inventory levels and increased accounts payable and accrued
expenses.
Cash flows from investing activities in 1995 consists primarily of cash
acquired in the Merger partially offset by cash used to finance the purchase of
PCT Common Stock from Libra. Net cash flow used in investing activities in 1993
related principally to the Consolidated Cigar Acquisition. Cash flows used in
investing in the first nine months of 1996 consist primarily of capital
expenditures. Capital expenditures were $3.3 million, $2.7 million and $2.3
million for the years ended December 31, 1995, 1994 and 1993, respectively, and
$5.8 million and $2.1 million for the first nine months of 1996 and 1995,
respectively. Capital expenditures in 1995, 1994 and 1993 relate primarily to
investments in manufacturing equipment and are part of the continual
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maintenance and upgrading of the Company's manufacturing facilities. Capital
expenditures of $5.8 million in 1996 primarily relate to investments in the
Company's manufacturing facilities to meet increased demand for the Company's
premium cigars. The Company is expanding its existing manufacturing facilities
in the Dominican Republic and Honduras and is constructing, as part of a joint
venture, new facilities in Jamaica. The Company currently expects that its
facility expansion projects in the Dominican Republic and Honduras and the
construction projects in Jamaica will be completed by the end of 1996. Capital
expenditures for the remainder of 1996 are expected to be $1.5 million,
including funding for the construction project.
Net cash flows from financing activities were $121.0 million and $(71.0)
million in the first nine months of 1996 and 1995, respectively. Cash flows
provided by financing activities in the first nine months of 1996 reflect the
proceeds from the Cigar IPO partially offset by net repayments of borrowings and
cash flows used for financing activities in the first nine months of 1995
reflect the purchase of Company common stock and VSRs, dividends paid to Mafco
Holdings, net repayments of borrowings and an increase in restricted deposits.
Cash flows used for financing activities in 1995 reflect the repurchase of
Company Common Stock for $29.9 million, net repayments of borrowings of $20.6
million and dividends of $14.0 million paid to Mafco Holdings immediately prior
to the Merger. Cash flows used for financing activities in 1994 primarily
reflect repayments of borrowings of $76.5 million and the issuance of long term
debt of $50.0 million. Cash flows used for financing activities in 1993
primarily reflect net borrowings and a capital contribution used to finance the
Consolidated Cigar Acquisition.
On February 5, 1996, the Company entered into a reimbursement agreement
with Chemical Bank and PCT, through Pneumo Abex, under which the Company has a
reimbursement obligation relating to letters of credit totaling $20.8 million
which have been issued to cover certain environmental liabilities not related to
PCT's former aerospace business. To secure its obligations under such agreement,
the Company pledged the PCT Preferred Stock and 5,939,400 shares of PCT Common
Stock that it owns. See 'Business--Contingent and Other Liabilities Assumed in
Connection with the Abex Transactions.'
Restricted cash of $16.6 million included in other assets at December 31,
1995 reflects segregated cash held for the benefit of certain parties to cover
obligations related to certain prior dispositions and certain environmental and
insurance matters.
In 1993 and 1994, Consolidated Cigar entered into two five-year interest
rate swap agreements in an aggregate notional amount of $85.0 million. Under the
terms of the agreements, Consolidated Cigar receives a fixed interest rate
averaging approximately 5.8% and pays a variable interest rate equal to the
six-month London interbank offered rate (LIBOR). Consolidated Cigar entered into
such agreements to take advantage of the differential between long-term and
short-term interest rates and effectively converted the interest rate on $85.0
million of fixed-rate indebtedness under the Senior Subordinated Notes to a
variable rate. Had Consolidated Cigar terminated these agreements, which the
Company considers to be held for other than trading purposes, on October 16,
1996, the Company would have realized a combined loss of approximately $1.0
million. Future positive or negative cash flows associated with these agreements
will depend upon the trend of short-term interest rates during the remaining
life of the agreements. In the event of non-performance of the counterparties at
anytime during the remaining lives of these agreements, which expire at December
1998 and January 1999, the Company could lose some or all of any future positive
cash flows. However, the Company does not anticipate non-performance by such
counterparties. The Company does not currently anticipate terminating these
agreements; however, the Company will from time to time continue to review its
financing alternatives with respect to its fixed and floating rate debt.
The Company intends to fund working capital requirements, capital
expenditures and debt service requirements for the foreseeable future through
cash flows from operations and borrowings under the Credit Agreement. The
Company is dependent on the earnings and cash flows of, and dividends and
distributions from, Consolidated Cigar to pay its expenses and meet its
obligation, to pay any cash dividends or distributions on the Company Common
Stock that may be authorized by the Board of Directors of the Company and make
any payments that may be required under the VSRs. There can be no assurance that
Consolidated Cigar will generate sufficient earnings and cash flows to pay
dividends or distribute funds to the Company to enable the Company to pay its
expenses and meet its obligations or that applicable state law and contractual
restrictions, including negative covenants contained in the debt instruments of
the Company's subsidiaries, including Consolidated Cigar, then in effect, will
permit such dividends or distributions. The terms of each of the Credit
Agreement and
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the Senior Subordinated Notes currently restrict Consolidated Cigar from paying
dividends or making distributions to the Company, each subject to certain
limited exceptions. See 'Risk Factors--Restrictions Imposed by the Terms of the
Company's Indebtedness; Consequences of Failure to Comply.'
The Credit Agreement consists of a $60.0 million reducing revolving credit
facility (the 'Revolving Credit Facility') and a $20.0 million working capital
facility (the 'Working Capital Facility'). The Revolving Credit Facility and the
Working Capital Facility have final maturities on April 3, 1999. The Revolving
Credit Facility is subject to quarterly commitment reductions of $2.5 million
during each year of the term of such facility. The Credit Agreement is secured
by first priority liens on all of the material assets of Consolidated Cigar and
its domestic subsidiaries and pledges of the capital stock of all of
Consolidated Cigar's subsidiaries (with certain exceptions for the capital stock
of foreign subsidiaries). The Credit Agreement is guaranteed by the Company, and
by all of the domestic subsidiaries of Consolidated Cigar. The guarantee by the
Company is secured by a pledge of all of the shares of common stock of
Consolidated Cigar owned by the Company. The Credit Agreement also contains
various restrictive covenants including, among other things, limitations on the
ability of Consolidated Cigar and its subsidiaries to incur debt, create liens,
pay dividends, sell assets and make investments, acquisitions and capital
expenditures. In addition, the Credit Agreement requires Consolidated Cigar to
maintain specified financial ratios and satisfy certain tests, including maximum
leverage ratios and minimum interest coverage ratios. The Credit Agreement also
contains customary events of default. Consolidated Cigar recently entered into
an amendment to the Credit Agreement, which, among other things, permits
Consolidated Cigar to pay the Cigar Dividend to the Company in the amount of
$5.6 million and to pay dividends and make distributions on terms substantially
similar to those contained in the Senior Subordinated Notes Indenture. See
'Description of Certain Indebtedness--Senior Subordinated Notes.' As of
September 28, 1996, there was approximately $16.4 million unused and available
under the Credit Agreement, after taking into account approximately $1.0 million
utilized to support letters of credit. See 'Description of Certain
Indebtedness--Credit Agreement.' The Senior Subordinated Notes Indenture
contains covenants that, among other things, limit the issuance of additional
debt and redeemable stock by Consolidated Cigar, the issuance of debt and
preferred stock by Consolidated Cigar's subsidiaries, the payment of dividends
on and redemption of capital stock of Consolidated Cigar and its subsidiaries
and the redemption of certain subordinated obligations of Consolidated Cigar,
the sale of assets and stock of Consolidated Cigar's subsidiaries, transactions
with affiliates and consolidations, mergers and transfers of all or
substantially all of Consolidated Cigar's assets. The Senior Subordinated Notes
Indenture also prohibits certain restrictions on distributions from subsidiaries
of Consolidated Cigar and contains customary events of default. See 'Description
of Certain Indebtedness--Senior Subordinated Notes.'
In the connection with the Cigar IPO, Cigar Holdings issued the Promissory
Note in an original principal amount of $70.0 million to the Company. The
Promissory Note is noninterest bearing, unsecured, subordinated to senior
indebtedness (as defined in the Promissory Note) and repayable in whole or in
part at any time or from time to time without premium or penalty. The Promissory
Note is payable in quarterly installments of $2.5 million, beginning March 31,
1997 with the final installment payable on December 31, 2003. See 'Description
of Certain Indebtedness--Promissory Note.'
On November 25, 1996, the Company sold to PCT International all of the
outstanding shares of Flavors Common Stock and 23,156,502 VSRs for an aggregate
consideration of $180 million, before estimated expenses of approximately $7.3
million. In addition, PCT will be required to make deferred cash payments to the
Company of $3.7 million on June 30, 1997 and $3.5 million on December 31, 1997.
The Company expects to use the net proceeds from the Disposition and the sale of
the VSRs for general corporate purposes, including acquisitions, although no
specific acquisition is currently contemplated by the Company, and pursuant to
the Company's share repurchase program.
INFLATION
The Company has historically been able to pass inflationary increases for
raw materials and other costs onto its customers through price increases and
anticipates that it will be able to do so in the future.
TAXATION AND REGULATION
Excise Taxes
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
In particular, there have been proposals by the federal government in the past
to reform health care
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through a national program to be funded principally through increases in federal
excise taxes on tobacco products. Enactment of significant increases in or new
federal, state or local excise taxes would result in decreased unit sales of
cigars and pipe tobacco, which would have a material adverse effect on the
Company's business. See 'Business--The Tobacco Industry--Excise Taxes.'
Possessions Tax Credit
Prior to December 31, 1993, income earned by the Company from its Puerto
Rico operations was subject to the provisions of Section 936 of the Code.
Section 936 of the Code allows a 'possessions tax credit' against United States
federal income tax for the amount of United States federal income tax
attributable to the Puerto Rico taxable earnings. As part of OBRA 93, the
possessions tax credit has been limited based upon a percentage of qualified
wages in Puerto Rico, plus certain amounts of depreciation. The Company believes
that it qualified for the possessions tax credit during 1995, 1994 and 1993. The
Company expects that it will continue to qualify for the possessions tax credit
for every year that such credit is available in such amounts to offset the
majority of any United States federal income tax related thereto, but
eligibility and the amounts of the credit will depend on the facts and
circumstances of the Company's Puerto Rico operations during each of the taxable
years subsequent to 1995. Failure to receive the Section 936 or possessions tax
credit attributable to the Company's Puerto Rico operations would have a
material adverse effect on the Company.
On August 20, 1996, the SBJPA was enacted into law. Under the SBJPA,
Section 936 of the Code, the 'possessions tax credit,' was repealed, subject to
special grandfather rules for which the Company would be eligible, provided that
the Company does not add a 'substantial new line of business.' Under the
grandfather rules, for the Company's taxable years beginning after December 31,
2001 and before January 1, 2006, the Company's business income from its Puerto
Rico operations eligible for the possessions tax credit would, in addition to
the Current Limitation, generally be limited to its average annual income from
its Puerto Rico operations, adjusted for inflation, computed during the
Company's five most recent taxable years ending before October 14, 1995 and
excluding the highest and lowest years. For taxable years after December 31,
2005, the possessions tax credit would be eliminated. The repeal of the
possessions tax credit could have a material adverse effect on the Company for
taxable years beginning after December 31, 2001 and before January 1, 2006 to
the extent that the Company's annual income from its Puerto Rico operations
exceeds its average annual income from its Puerto Rico operations (as computed
in the manner described in the preceding sentence), and for taxable years after
December 31, 2005. Although it does not currently have any definitive plans with
respect thereto, the Company expects to evaluate alternatives that may be
available to it in order to mitigate the effects of the SBJPA. See 'Risk
Factors--Substantial Effects of Failure to Receive Possessions Tax Credit.'
Puerto Rico Tax Exemption
Pursuant to a grant of industrial tax exemption which expires in 2002,
income earned by CIC from the manufacture of cigars in Puerto Rico enjoys a 90%
income tax exemption from Puerto Rican income taxes. The remaining 10% of such
income is taxed at a maximum surtax rate of 45%, resulting in an effective
income tax rate for such income of approximately 4.5% under current tax rates.
Funds repatriated to the Company are subject to a maximum Puerto Rican tollgate
tax of 10%. Legislation enacted in Puerto Rico in 1993 included a provision for
prepaying a portion of these tollgate taxes effective for the 1993 fiscal year
and subsequent periods. There can be no assurance that the Puerto Rico tax
exemption will not be limited or eliminated in the future. Any significant
limitation on or elimination of the Puerto Rico tax exemption would have a
material adverse effect on the Company. See Note 9 of the Notes to Consolidated
Financial Statements of the Company included elsewhere in this Prospectus.
Regulation
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at the federal, state and local levels. The
recent trend is toward increasing regulation of the tobacco industry. There can
be no assurance as to the ultimate content, timing or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business. See 'Business--The
Tobacco Industry--Regulation.'
SEASONALITY
The Company's business is generally non-seasonal. However, slight increases
in cigar unit volume are experienced prior to Father's Day and the Christmas
season.
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BUSINESS
GENERAL
The Company is a holding company with no business operations of its own.
After the Disposition, the Company's only material assets are (i) its ownership
of 80.2% of the outstanding shares of capital stock of Cigar Holdings
(representing approximately 97.6% of the combined voting power), which owns 100%
of the outstanding shares of capital stock of Consolidated Cigar (ii) its
ownership of 100% of the outstanding shares of PCT Preferred Stock and
approximately 29% of the outstanding shares of PCT Common Stock (together,
representing approximately 36% of the outstanding shares of PCT Common Stock on
a fully diluted basis), (iii) approximately $412.8 million in cash and
marketable securities at September 29, 1996, on a pro forma basis after giving
effect to the Transactions, $172.7 million of which represents the net proceeds
received by the Company in connection with the Disposition and the related sale
of the VSRs to PCT International, (iv) the Promissory Note and (v) a pension
plan asset with a book value of approximately $62.5 million at September 29,
1996. Through Consolidated Cigar, the Company manufactures and distributes
cigars and pipe tobacco products. In addition, in connection with the Abex
Transactions, the Company assumed and agreed to indemnify PCT against, or to
manage on PCT's behalf, various contingent and other liabilities. See
'--Contingent and Other Liabilities Assumed in Connection with the Abex
Transactions.'
The Company is the largest manufacturer and marketer of cigars sold in the
United States in terms of dollar sales, with a 1995 market share of
approximately 23% according to the Company's estimates. The Company markets its
cigar products under a number of well-known brand names at all price levels and
in all segments of the growing cigar market, including premium large cigars,
mass market large cigars and mass market little cigars. The Company attributes
its leading market position to the following competitive strengths: (i)
well-known brand names, many of which are the leading brands in their category;
(ii) broad range of product offerings within both the premium and mass market
segments of the United States cigar market; (iii) commitment to and reputation
for manufacturing quality cigars; (iv) marketing expertise and close attention
to customer service; (v) efficient manufacturing operations; and (vi) an
experienced management team. The Company is also a leading producer of pipe
tobacco and is the largest supplier of private label and branded generic pipe
tobacco to mass market retailers. In addition, the Company distributes a variety
of pipe and cigar smokers' accessories.
The Company's cigars and pipe tobacco products are marketed under a number
of well-known brand names. The Company's premium cigars include the H. UPMANN,
MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY and
MONTECRUZ brands. The Company's mass market large cigars include the ANTONIO Y
CLEOPATRA (also known as AYC), DUTCH MASTERS, EL PRODUCTO, MURIEL, BACKWOODS,
SUPER VALUE and SUPRE SWEETS brands. The Company's mass market little cigars
include the DUTCH TREATS, SUPER VALUE and SUPRE SWEETS brands. The Company's
pipe tobacco products include the MIXTURE NO. 79 and CHINA BLACK brands.
BUSINESS STRATEGY
The Company's business strategy includes the following initiatives:
Capitalize on Growth Opportunities in the Premium Cigar Segment
The Company intends to capitalize on the rapidly growing premium cigar
market by (i) increasing the Company's production capabilities through its
planned expansion of its existing facilities in the Dominican Republic and
Honduras and the construction of new facilities in Jamaica, (ii) improving the
market's awareness and recognition of its premium cigars through targeted
marketing programs and (iii) expanding its premium cigar product offerings
through the introduction of new super-premium cigars, such as H. UPMANN
CHAIRMAN'S RESERVE and PLAYBOY by DON DIEGO, and the extension of its existing
brands.
Increase Premium Cigar Production. To increase production to meet existing
and expected growth in demand for its premium cigars, the Company is (i) adding
workers for second shifts at its manufacturing facilities in the Dominican
Republic, (ii) actively hiring experienced, skilled rollers and bunchers, as
well as training new rollers and bunchers, (iii) expanding its manufacturing
facilities in the Dominican Republic and Honduras and building new manufacturing
facilities in Jamaica, (iv) evaluating joint venture opportunities in countries
where it
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may be advantageous to produce premium cigars and (v) continuing to improve
manufacturing efficiencies. The Company currently estimates that it will spend
approximately $4.0 million for expansion of existing facilities and construction
of new facilities as well as improvements in manufacturing efficiencies. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations.'
Improve Brand Awareness and Recognition. In order to further strengthen
and broaden the brand recognition of its premium cigars and to support new
product introductions, the Company is increasing its marketing and advertising
expenditures for its premium cigar products. This advertising is designed to
enhance the Company's image and to promote specific brands.
Expand Premium Cigar Brands. As part of its strategy to capitalize on the
significant growth in the premium cigar market and the increased demand for its
premium cigars, the Company plans to continue to introduce new super-premium
cigars. Recently, the Company introduced two super-premium cigars, H. UPMANN
CHAIRMAN'S RESERVE and PLAYBOY by DON DIEGO. In addition, the Company plans to
introduce, in December 1996, a limited edition, collectible 'Leroy Neiman
Selection' cigar box featuring a reproduction of an original painting by Mr.
Neiman. The Company intends to extend its premium cigar lines, including the
MONTECRISTO and SANTA DAMIANA brands, through the introduction of new sizes,
shapes, packaging and other new features. As a result of increased demand for
cigars by women, the Company plans to introduce into various of the Company's
brands cigar shapes designed specifically for women. The Company believes that
such introductions and extensions will enable it to increase sales by shifting
its premium cigar mix to more expensive cigars.
Expand Mass Market Cigar and Pipe Products Businesses
The Company will seek to expand further its mass market cigar business and
pipe tobacco products business by continuing to capitalize on its well-known
brand names and introducing new products that extend the Company's existing
product lines. The Company plans to expand its ANTONIO Y CLEOPATRA line by
introducing CHURCHILL MADURO, a full size machine made, natural wrapper cigar
with a band placed on each cigar resembling those on hand made cigars. In
addition, the Company intends to introduce new flavors, sizes, packaging and
other new features and improvements to its existing mass market cigar and pipe
tobacco products. Since 1989, the Company has introduced new cigar brands that
include DUTCH MASTERS COLLECTION, SUPRE SWEETS and RUSTLERS to the mass market
and extended its existing brands with new cigar products that included ANTONIO Y
CLEOPATRA MINIS, WHIFFS, CONNECTICUT SHADE WRAPPER and BACKWOODS SWEET AROMATIC.
The Company has also introduced new pipe tobacco products that include MURIEL
PIPE TOBACCO and BLACK'N NATURAL.
Broaden Mass Market Cigar Distribution Channels
As a result of its existing relationships with mass market retailers, the
Company is well-positioned to take advantage of the increase in consumer demand
for mass market cigars sold through that channel of distribution. The Company
distributes certain of its cigar and pipe tobacco products to, and develops new
private label brands for, mass market retailers, such as WONDER BLEND for Kmart
and other such products for Wal-Mart, Eckerd Drug stores, CVS stores, Thrifty
Drug Stores and numerous other retail chains. The Company intends to broaden its
existing relationships and actively develop new relationships with other mass
market retailers and is pursuing opportunities in other distribution channels,
including actively marketing its mass market cigars to convenience stores to
take advantage of the increase in consumer demand for mass market cigars at such
locations.
Improve Manufacturing Processes and Raw Material Procurement
The Company continually seeks ways to improve further the efficiency of its
manufacturing operations in order to ensure quality and realize cost savings. To
ensure the quality of its raw materials while also maximizing cost savings, the
Company will (i) continue to develop long-term relationships with tobacco
suppliers, (ii) expand its commercial and technical ties with local growers,
(iii) obtain its tobacco raw materials from a variety of suppliers and growers
and (iv) take advantage of its large purchasing requirements to negotiate
favorable terms from suppliers.
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Pursue Selectively Strategic Acquisitions
The Company intends to pursue selectively strategic acquisitions in the
cigar and pipe tobacco products industry to expand its market share and product
lines and benefit from synergies. However, the Company's ability to acquire
additional tobacco businesses and brands is limited by, among other things, a
dwindling number of potential acquisition candidates resulting from the
consolidation in the tobacco industry as well as other economic, regulatory and
industry factors. The Company also intends to pursue joint venture opportunities
to enhance its overall cigar and pipe tobacco businesses.
The Company will consider other strategic acquisitions to diversify its
business mix, including acquisitions of products and businesses that can utilize
the Company's existing manufacturing facilities, distribution channels and sales
and marketing organizations. The Company has not identified any specific
material acquisition or joint venture opportunities at this time and the
Company's ability to make acquisitions may be limited by the level and terms of
its indebtedness, regulatory constraints and other factors. The Company may use
the proceeds from the Disposition and the related sale of the VSRs to fund such
acquisitions.
MARKET OVERVIEW
In recent years, cigar smoking has gained popularity in the United States,
resulting in a significant increase in consumption and retail sales of cigars,
particularly for premium cigars. Management believes that this increase in cigar
consumption and retail sales is the result of a number of factors, including:
(i) the increase in the number of adults over the age of 50 (a demographic group
believed to smoke more cigars than any other demographic segment) and (ii) the
emergence of an expanding base of younger affluent adults who have recently
started smoking cigars and who tend to smoke premium cigars. The Company
believes the increase in cigar smoking is in large part attributable to a
positive and improving image of cigar smoking resulting from increased
publicity, including the success of Cigar Aficionado magazine, the increased
visibility of use by celebrities and the proliferation of 'Cigar Smokers'
dinners and other special events for cigar smokers.
Consumption of cigars is currently increasing following a decline in
consumption at a compound annual rate of 3.6% from 1964 to 1993. Consumption of
cigars increased to 4.0 billion units in 1995 from 3.4 billion units in 1993,
with substantial growth in premium cigars. Consumption of premium cigars
increased at a compound annual unit growth rate of 2.4% from 1976 to 1991, at a
compound annual unit growth rate of 8.9% from 1991 to 1994 and at a unit growth
rate of 30.6% from 1994 to 163.9 million units in 1995. Growth in the premium
segment has continued to accelerate in 1996. The mass market segment of the
industry has also experienced increased consumption with a compound annual unit
growth rate of 7.2% from 1993 to 3.8 billion units in 1995. Retail sales of
cigars, which generally declined from 1964 to 1987 and grew modestly from 1987
to 1993, experienced significant growth from 1993 to 1995 with retail sales of
cigars outpacing unit growth since 1991. This growth in retail sales of cigars
was primarily the result of a combination of increased prices and a shift in the
sales mix to more expensive cigars. Total retail sales have increased at a
compound annual growth rate of 9.3% from 1991 to $1.0 billion in 1995, while the
corresponding compound annual unit growth rate was only 3.6%. There can be no
assurance that unit consumption and retail sales of cigars will continue to
increase in the future. See 'Risk Factors--Declining Market for Cigars through
1993' and '--Extensive and Increasing Regulation of Tobacco Products.'
The following table illustrates the trends in unit consumption and retail
sales experienced by the premium and mass market segments of the U.S. cigar
industry from 1991 to 1995.
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U.S. CIGAR INDUSTRY(A)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------- ------- ------- ------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Unit Consumption:
Premium(b)....................................... 97.2 98.9 109.6 125.5 163.9
Mass market...................................... 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4
------- ------- ------- ------- --------
Total............................................ 3,530.5 3,518.1 3,423.4 3,718.1 3,970.3
Retail Sales....................................... $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0
</TABLE>
- ------------------
(a) Source: Cigar Association of America, Inc. ('CAA').
(b) CAA's premium cigar data includes cigars imported from seven leading
supplier countries and does not include any premium cigars produced in other
countries, including the United States. CAA includes such U.S. premium cigar
production, which approximated 5.0 million units in 1995, in mass market
cigar data.
PRODUCTS
Mass Market Cigars
Mass market cigars are machine made and generally have a retail price point
of $1.00 or less per cigar. Mass market cigars use less expensive tobacco than
premium cigars. The Company uses a variety of techniques and grades of tobacco
to produce mass market cigars which compete at all the price points in the mass
cigar market. Mass market cigars include large cigars (weighing three pounds per
1,000 cigars or more) and little cigars (weighing less than three pounds per
1,000 cigars).
Mass market large cigars generally consist of 'filler' tobacco that is
wrapped first with a 'binder' and then with a 'wrapper.' The more expensive mass
market large cigars combine natural leaf wrapper and man-made binder made from
tobacco ingredients instead of natural binder, with filler threshed into short,
uniform pieces. In less expensive mass market large cigars, man-made wrapper
made primarily from tobacco ingredients replaces natural tobacco leaf. The
Company adds flavors and/or plastic tips to certain of its popularly priced mass
market large cigars. The Company's major mass market brands in the middle price
range include ANTONIO Y CLEOPATRA, DUTCH MASTERS, EL PRODUCTO, BACKWOODS, SUPER
VALUE and SUPRE SWEETS. The Company's MURIEL brand is in the less expensive
range.
Little cigars consist of filler tobacco wrapped only by a wrapper with a
filter tip. Little cigars are made on a high-speed machine with man-made wrapper
made from tobacco ingredients and no binder. Little cigars are flavored and
produced with a filter. Generally, little cigars are the lowest priced segment
of the mass market category. The Company's little cigar brands include DUTCH
TREATS, SUPER VALUE and SUPRE SWEETS.
The Company manufactures its own cigar boxes and man-made wrapper, filler
and binder and little cigar filters.
Premium Cigars
Premium cigars are generally hand made and primarily sell at retail price
points above $1.00 per cigar. The Company's premium cigars are primarily
long-filler, large cigars that have high quality natural leaf wrappers and
binders. The Company uses tobaccos of the best grades for its premium cigars.
Such tobaccos are combined according to brand-specified formulas to create the
filler of each cigar. In order to make hand made cigars, binder tobacco is
hand-wrapped around filler to create the 'bunch' which is placed into a mold.
Then, 'wrapper' tobacco is hand-wrapped around the bunch, creating a premium
cigar. In the Company's premium cigars, the wrapper, binder and filler are
natural tobacco leaf.
The Company's premium cigars include the well-known H. UPMANN, MONTECRISTO,
DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY and MONTECRUZ
brands as well as other recognized brand names. The Company's premium cigars are
manufactured in its Dominican Republic and Honduras facilities, except for
TE-AMO, which is manufactured in Mexico and purchased from a third party.
39
<PAGE>
Pipe Tobacco and Accessories
In addition to its cigars, the Company manufactures pipe tobaccos for sale
under its own brand names, such as MIXTURE NO. 79 and CHINA BLACK, and for sale
in bulk to tobacconists, as well as private label brands for chain stores and
wholesale distributors. The Company also distributes smokers' accessories, such
as lighters, tobacco pouches, pipe cleaners and cigar cutters. Net sales
attributable to the distribution of such accessories was not material to the
Company's results of operations in fiscal 1995.
The Company uses tobaccos of various types, grades, countries of origin and
crop years for its pipe tobacco, which are moisturized with steam and then
blended according to specific formulas ('primary blends'). The primary blends
are 'cased' (sprayed or dipped) in liquids containing water, humectant, sugars,
licorice, cocoa, fruit juices or other flavorings in order to keep the tobacco
in pliable condition and to enhance its aroma and taste. The cased tobaccos are
cut and dried and then held in bins to allow the casing and moisture to be
distributed uniformly throughout the tobacco. Thereafter, the tobacco blends are
flavored with natural and artificial flavors, herbs or spices, and blends are
held for a short period of time prior to packaging into pouches, bags, cans or
other selling containers.
Specialty and Other Products
The Company's other products include various tobacco and non-tobacco
related products manufactured by the Company in order to utilize excess
manufacturing capacity at certain of its facilities and improve overall
efficiency. See 'Certain Relationships and Related Transactions--Specialty
Products Division.'
BACKORDERS
The increased demand for cigars, especially premium cigars, has caused the
Company's back orders of premium cigars to increase from 3.2 million cigars at
December 31, 1994 to 4.3 million cigars at December 31, 1995, and to further
increase to 12.0 million cigars at June 29, 1996. The Company's ability to
increase its production of premium cigars and decrease its backorders is
constrained by a shortage of experienced skilled laborers. Although the Company
is hiring and training new rollers and bunchers, the training process averages
up to one year and not all trainees are able to successfully complete the
Company's training program. The Company is also building additional plant
capacity to meet future growth in demand for its premium cigars. Although the
Company believes that these measures will enable it to increase its production
of premium cigars and that the backorders outstanding at June 29, 1996, which
approximated 12.0 million cigars, will be filled during the second half of 1996,
there can be no assurance that the Company will be able to meet any future level
of demand for its premium cigars. There can be no assurance, however, that
demand for the Company's premium cigars will continue to grow in the future.
The Company's ability to manufacture premium and mass market cigars may
also be constrained by the ability of tobacco growers and suppliers to meet the
Company's demands for its raw materials in a timely manner. Tobacco, as a crop
that is harvested annually, restricts the ability of tobacco growers to adjust
acreage grown in any given year to meet changes in market demands. In addition,
increases in acreage of tobacco grown requires significant capital, which
growers may be unable or unwilling to invest. If the rate of escalation in
consumption of cigars and other tobacco products continues, but the supply of
tobacco remains constant or increases at a lower rate than demand, the Company's
ability to increase its production of cigars, and thereby reduce its backorders,
could be inhibited.
SALES AND MARKETING
The Company sells its cigar and pipe tobacco products throughout the United
States to over 2,500 customers, consisting of wholesale distributors, direct
buying chains, including drug store chains and mass market retailers, and
tobacconists. The Company employs a full-time in-house sales organization to
develop and service its sales to wholesalers, distributors, direct buying chains
and tobacconists. The Company's sales force is organized into two sales units: a
mass market division and a premium division. The Company believes that the
organization of its sales force into two divisions positions it to maintain a
high degree of focus on each of its principal product categories. The mass
market sales force calls on distributors and retail and chain store accounts,
including Kmart, Wal-Mart, Eckerd Drug stores, CVS stores and Thrifty Drug
stores, across the United States.
40
<PAGE>
Approximately 89% of the Company's mass market cigar products are sold through
wholesale distributors while approximately 11% are sold to direct buying chains
or independent retailers that warehouse for themselves. The premium cigar sales
force calls directly on tobacconists and distributors. The Company's sales force
operates regionally and locally from home and car, maintaining close familiarity
with local customers. Most salesmen maintain a small stock of inventory which is
used primarily to replace local distributors' old or damaged products and to
display new product introductions or promotions.
The Company supplies cigar merchandising fixtures to retailers at no cost
and believes that it is the primary supplier of such fixtures to the United
States retail trade. These fixtures help to maintain an attractive product
display and to increase shelf space available for the Company's products.
The Company advertises its mass market cigar products primarily through
coupons and other promotions distributed at point of sale and through direct
mail. The Company advertises its premium cigar products in magazines, such as
Cigar Aficionado, Playboy and The New York Times Sunday Magazine, as well as in
newspapers and on radio. In order to strengthen and broaden further the brand
recognition of its premium cigars and to maximize the business opportunities
created by the resurgence in popularity of and increased demand for premium
cigars, the Company has increased its marketing and advertising expenditures in
connection with its existing premium cigar brands. The increased advertising and
marketing expenditures are being used to support new product introductions and
increase awareness and recognition of the Company's premium brands.
Sales of the Company's cigar products outside of the United States are
currently not material, although the Company has begun to strengthen its
presence in the international market for premium and mass market cigars,
particularly in Europe, the Middle East, Latin America and Asia, by increasing
management's focus on the Company's direct export business. The Company has
hired an experienced international marketing manager to concentrate on foreign
sales and promotions and currently has a total of 47 agents and distributors in
Europe, the Middle East, Latin America and Asia.
Philip Morris, a significant customer of Mafco Worldwide, accounted for
10%, 11% and 11% of the consolidated net sales of the Company during fiscal
1995, 1994 and 1993, respectively, when Mafco Worldwide was included in the
Company's consolidated results of operations. Philip Morris is no longer a
significant customer of the Company following consummation of the Disposition as
the business of Mafco Worldwide, a wholly-owned subsidiary of Flavors Holdings,
was transferred to PCT when the Flavors Common Stock was sold to PCT
International in the Disposition. See 'Background and the Disposition--The
Disposition' and 'Certain Information Relating to PCT.'
TRADEMARKS
Trademarks and brand name recognition are important to the Company's
business. The Company generally owns the trademarks under which its products are
sold. The Company has registered its trademarks in the United States and many
other countries and will continue to do so as new trademarks are developed or
acquired. The Company does not hold or own the right to use certain of its
well-known trademarks and brand names in certain foreign markets. The Company's
ability to expand into such markets by capitalizing on the strength of its brand
names in the United States may be limited by its right to use or acquire such
brand names in those foreign markets. Unless otherwise indicated, the Company
owns the trademarks listed below:
MASS MARKET CIGAR TRADEMARKS
Antonio y Cleopatra Headline
Backwoods La Corona
Ben Franklin Muriel
Dutch Masters Roi-Tan
Dutch Treats Super Value
El Producto Supre Sweets
Harvester Wonder Blend
41
<PAGE>
PREMIUM CIGAR TRADEMARKS
Cabanas Montecruz
Don Diego Por Larranaga(a)
Don Marcos Primo Del Rey
Don Miguel Santa Damiana
Flor de Canarias Santa Ynez
H. Upmann(a) Super Value
Henry Clay Te-Amo
Las Cabrillas Wonder Blend
Malaguena
Montecristo(a)
PIPE TOBACCO TRADEMARKS
China Black Super Value
Dutch Masters Three Star Royal
Kriswill Wonder Blend
Mixture No. 79
- ------------------
(a) Trademark is owned by Cuban Cigar Brands, N.V., a 51% owned subsidiary of
the Company.
While the Company does not believe that any single trademark is material to
the vitality of its business, it believes that its trademarks taken as a whole
are material to its business. Accordingly, the Company has taken, and will
continue to take, action to protect its interests in all such trademarks.
RAW MATERIALS
The Company has developed and is developing long-term relationships with
tobacco suppliers and is expanding its commercial and technical ties with local
growers to secure a variety of sources for raw materials, ensure the quality of
its raw materials and maximize cost savings.
The Company buys tobacco directly from a large number of suppliers in
Brazil, Cameroon, the Central African Republic, Costa Rica, Germany, Italy, the
Dominican Republic, Paraguay, the Philippines, Indonesia, the United States,
Ecuador, Honduras, Mexico and other countries and does not believe that it is
dependent on any single source for tobacco. The Company has recently experienced
shortages in certain types of its natural wrapper and premium cigar tobaccos due
to the increase in demand for high quality natural wrapped cigars. These
shortages have caused the price of natural wrapper and premium cigar tobaccos to
increase. To date, the shortages of tobacco have not adversely affected cigar
manufacturing or the Company's profitability, but could if the Company is unable
to purchase additional quantities of certain tobaccos in the future or is unable
to pass increases for such raw materials onto its customers. See 'Risk Factors--
Social, Political and Economic Risks Associated with Foreign Operations and
International Trade' and '--Backorders.'
In addition, the Company purchases packaging materials from multiple
suppliers predominantly in the United States. No single supplier accounts for
10% or more of the Company's raw materials.
COMPETITION
The Company is the largest manufacturer and marketer of cigars in the
United States in terms of dollar sales and believes that it is the only
participant in the cigar industry that is a major competitor in all
subcategories of cigars at all price levels. The other three significant
competitors in the cigar market in terms of market share, in order of size, are
General Cigar Co. Inc., a division of Culbro Corporation, Havatampa/Phillies
Cigar Corporation, a privately held corporation, and Swisher International, also
a privately held corporation. In addition, Tobacco Exporters International
Limited (a subsidiary of Rothmans International) is a significant competitor in
the little cigar market. The Company believes that its leading market position
in the cigar industry is due to its strong, well-known brand names, broad range
of product offerings within both the mass market and premium segments of the
United States cigar market, commitment to and reputation for manufacturing
quality
42
<PAGE>
cigars, marketing expertise, close attention to customer service, efficient
manufacturing operations and an experienced management team.
Through its Allied Tobacco Division in Richmond, Virginia, the Company
competes in all areas of the U.S. pipe tobacco business including branded,
private label and bulk tobacco. The Company believes it is the fourth largest
manufacturer in the U.S. of pipe tobacco, in terms of dollar sales, and its
largest competitors in order of size are Lane Limited, John Middleton Inc. and
UST Inc.
THE TOBACCO INDUSTRY
Regulation
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation in the United States at federal, state and local levels. Together
with changing public attitudes towards smoking, a constant expansion of smoking
regulations since the early 1970's has been a major cause of the overall decline
in consumption of tobacco products. Moreover, the trend is toward increasing
regulation of the tobacco industry.
Federal law has required health warnings on cigarettes since 1965 and has
recently required states, in order to receive full funding for federal substance
abuse block grants, to establish a minimum age of 18 years for the sale of
tobacco products, together with an appropriate enforcement program. In recent
years, a variety of bills relating to tobacco issues have been introduced in the
Congress of the United States, including bills that would have (i) prohibited
the advertising and promotion of all tobacco products and/or restricted or
eliminated the deductibility of such advertising expenses; (ii) increased
labeling requirements on tobacco products to include, among other things,
addiction warnings and lists of additives and toxins; (iii) modified federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; (iv) shifted regulatory control of
tobacco products and advertisements from the FTC to the FDA; (v) increased
tobacco excise taxes; and (vi) required tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Hearings have been held on certain of these proposals; however, to
date, none of such proposals have been passed by Congress. Future enactment of
such proposals or similar bills may have an adverse effect on the sales or
operations of the Company. In addition, various federal agencies, including the
FDA as discussed below, have recently proposed to regulate the tobacco industry.
In addition, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated 'smoking' areas. In a few states, legislation has been introduced,
but has not yet passed, which would require all little cigars sold in those
states to be 'fire-safe' (i.e., cigars which extinguish themselves if not
continuously smoked). Passage of this type of legislation could have a material
adverse effect on the Company's little cigar sales because of the technological
difficulties in complying with such legislation. The Company does not expect the
passage of any such legislation to have a material adverse effect on the
Company's business or results of operations taken as a whole. There is currently
an effort by the U.S. Consumer Product Safety Commission to establish such
standards for cigarettes. The enabling legislation, as originally proposed,
included little cigars; however, little cigars were deleted due to the lack of
information on fires caused by these products.
Although federal law has required health warnings on cigarettes since 1965,
there is no federal law requiring that cigars or pipe tobacco carry such
warnings. However, California requires 'clear and reasonable' warnings to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. Although similar
legislation has been introduced in other states, no action has been taken.
During 1988, the Company and 25 manufacturers of tobacco products entered
into a settlement of legal proceedings filed against them pursuant to
Proposition 65. Under the terms of the settlement, the Company and such other
defendants agreed to label retail packages or containers of cigars, pipe
tobaccos and other smoking tobaccos other than cigarettes manufactured or
imported for sale in California with a specified warning label. To guarantee
compliance with the California requirements, to eliminate errors in distribution
and to maintain the
43
<PAGE>
efficiencies of the manufacturing process, the Company and most of its
competitors have begun using the label on all of their tobacco products shipped
to customers in all states, except for a few premium cigar customers.
Massachusetts recently enacted legislation requiring manufacturers of
cigarettes, chewing tobacco and snuff to provide the state annually with a list
of the additives (in descending order of weight) and the nicotine yield ratings
of each brand they produce, which information will, subject to certain
conditions, be made publicly available.
The U.S. Environmental Protection Agency (the 'EPA') published a report in
January 1993 with respect to the respiratory health effects of passive smoking,
which concluded that widespread exposure to environmental tobacco smoke presents
a serious and substantial public health concern. In June 1993, Philip Morris
Companies Inc. and five other representatives of the tobacco manufacturing and
distribution industries filed suit against the EPA seeking a declaration that
the EPA does not have the statutory authority to regulate environmental tobacco
smoke, and that, in view of the available scientific evidence and the EPA's
failure to follow its own guidelines in making the determination, the EPA's
final risk assessment was arbitrary and capricious. The court ruled in May 1995
that plaintiffs have standing to pursue this action. Whatever the outcome of
this litigation, issuance of the report, which is based primarily on studies of
passive cigarette smokers, may lead to further legislation designed to protect
non-smokers.
In February 1994, the FDA, in a letter to an anti-smoking group, claimed
that it may be possible for the FDA to regulate cigarettes under the drug
provisions of the Food, Drug, and Cosmetic Act (the 'FDC Act'). The FDA's claim
is based upon allegations that manufacturers may intend that their products
contain nicotine to satisfy an alleged addiction on the part of some of their
customers. The letter indicated that regulation of cigarettes under the FDC Act
could ultimately result in the removal from the market of products containing
nicotine at levels that cause or satisfy addiction. In March 1994, the FDA began
investigating whether cigarettes should be regulated as a drug. In July 1995,
the FDA announced that it has concluded for the first time that nicotine is a
drug that should be regulated and proposed to regulate smokeless tobacco and
cigarettes. The FDA recently adopted final regulations relating to the
marketing, promotion and advertisement of smokeless tobacco and cigarettes.
Although the FDA's definition of cigarettes originally included little cigars,
little cigars were excluded from the final regulations. These regulations are
currently being challenged in the United States District Court for the Eastern
District of North Carolina and the United States District Court for the Southern
District of New York. While the Company is unable to predict the effect of these
regulations on its business, these and other regulations promulgated by the FDA
in the future could have a material adverse effect on the operations of the
Company.
Litigation
Historically, the cigar industry has not experienced material
health-related litigation and, to date, the Company has not been the subject of
any material health-related litigation. However, the cigarette industry has
experienced and is experiencing significant health-related litigation involving
tobacco and health issues.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. In 1992, the United States Supreme Court in
Cippollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts claims based on failure to warn
consumers about the health hazards of cigarette smoking, but does not preempt
claims based on express warranty, misrepresentation, fraud or conspiracy. To
date, individual cigarette smokers' claims against the cigarette industry have
been generally unsuccessful; however, on August 9, 1996, a Florida jury in
Carter v. Brown & Williamson Tobacco Corporation determined that a cigarette
manufacturer was negligent in the production and sale of its cigarettes and sold
a product that was unreasonably dangerous and defective, awarding the plaintiffs
a total of $750,000 in compensatory damages. The verdict is on appeal.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions (which have been filed mainly in the State of
Florida), and actions brought by individual states or localities to recover
Medicaid costs allegedly attributable to tobacco-related illnesses. The pending
actions allege a broad range of injuries resulting from the use of tobacco
products or exposure to tobacco smoke and seek various remedies, including
compensatory and, in some cases, punitive damages together with certain types of
equitable relief such as the establishment of medical monitoring funds and
restitution. The major tobacco companies are
44
<PAGE>
vigorously defending these actions, including by challenging the authority of
state attorneys general to bring Medicaid actions attributable to
tobacco-related illnesses and, in some states, bringing preemptive lawsuits to
enjoin the state attorneys general from instituting litigation.
In May 1996, the Fifth Circuit Court of Appeals in Castano v. American
Tobacco, et al. reversed a Louisiana district court's certification of a
nationwide class consisting essentially of nicotine dependent cigarette smokers.
Notwithstanding the dismissal, new class actions asserting claims similar to
those in Castano have recently been filed in certain states. To date, two
pending class actions against major cigarette manufacturers have been certified.
The first case is limited to Florida citizens allegedly injured by their
addiction to cigarettes; the other is limited to flight attendants allegedly
injured through exposure to secondhand smoke.
There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco or
suppliers to the tobacco industry could have a material adverse effect on the
Company's business.
Excise Taxes
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
From 1977 until December 31, 1990, cigars were subject to a federal excise
tax of 8.5% of wholesale list price, capped at $20.00 per thousand cigars.
Effective January 1, 1991, the federal excise tax rate on large cigars (weighing
more than three pounds per thousand cigars) increased to 10.625%, capped at
$25.00 per thousand cigars, and increased to 12.75%, capped at $30.00 per
thousand cigars, effective January 1, 1993. However, the base on which the
federal excise tax is calculated was lowered effective January 1, 1991 to the
manufacturer's selling price, net of the federal excise tax and certain other
exclusions. In addition, the federal excise tax on pipe tobacco increased from
$0.45 per pound to $0.5625 per pound effective January 1, 1991. The excise tax
on pipe tobacco increased effective January 1, 1993, to $0.675 per pound. The
federal excise tax on little cigars (weighing less than three pounds per
thousand cigars) increased from $0.75 per thousand cigars to $0.9375 per
thousand cigars effective January 1, 1991. The excise tax on little cigars
increased to $1.125 per thousand cigars effective January 1, 1993. The increase
in the federal excise tax rate in 1991 and again in 1993 did not have a material
adverse effect on the Company's product sales.
In the past, there have been various proposals by the federal government to
fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund the Clinton Administration's health care reform program. The
Company believes that the volume of cigars and pipe tobacco sold would have been
dramatically reduced if excise taxes were enacted as originally proposed as part
of the Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company. The
Company is unable to predict the likelihood of the passage or the enactment of
future increases in tobacco excise taxes.
Tobacco products are also subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. Since 1964, the number of states that tax cigars has risen from six to
forty-one. Since 1988, the following eleven states have enacted excise taxes on
cigars, where no prior tax had been in effect: California, Connecticut, New
Jersey, New York, North Carolina, Ohio, South Dakota, Rhode Island, Illinois,
Missouri and Michigan. State excise taxes generally range from 2% to 75% of the
wholesale purchase price. In addition, the following nine states have increased
existing taxes on large cigars since 1988: Arizona, Arkansas, Idaho, Iowa,
Maine, New York, North Dakota, Vermont and Washington. The following five states
tax little cigars at the same rates as cigarettes: California, Connecticut,
Iowa, Oregon and Tennessee. Except for Tennessee, all of these states have
increased their cigarette taxes since 1988.
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<PAGE>
State cigar excise taxes are not subject to caps similar to the federal
cigar excise tax. From time to time, the imposition of state and local taxes has
had some impact on sales regionally. The enactment of new state excise taxes and
the increase in existing state excise taxes are likely to have an adverse effect
on regional sales as cigar consumption generally declines, which in turn is
likely to have an adverse effect on the Company's results of operations. The
Company is unable to predict the materiality or likelihood of the enactment of
new state excise taxes or the increase in existing state excise taxes and,
therefore, unable to predict the extent of any adverse effect on the Company's
business or results of operations that may result from the imposition of such
taxes.
EMPLOYEES
Consolidated Cigar employs approximately 4,000 persons. The Company
believes that its relations with its employees are satisfactory. Union
contracts, expiring at various dates, cover salesmen in New York and hourly
employees in McAdoo, Pennsylvania and Richmond, Virginia. The McAdoo agreement
with the Teamsters Local 401 expires in December 1998 and the Richmond agreement
with the Warehouse Employees Local 322 expires in January 1999. The Company has
experienced no work stoppages in the last ten years.
PROPERTIES
As of June 29, 1996, the principal properties owned or leased by
Consolidated Cigar for use in its business included:
<TABLE>
<CAPTION>
APPROXIMATE
OWNED OR FLOOR SPACE
LOCATION PRINCIPAL USE LEASED (SQ. FT.)
- ------------------------------------------- ------------------------------------------- -------- -----------
<S> <C> <C> <C>
Cayey, Puerto Rico......................... Mass market cigar manufacturing Owned 280,000
Comerio, Puerto Rico....................... Tobacco processing Owned 151,000
Danli, Honduras............................ Premium cigar manufacturing Owned 25,000
Fort Lauderdale, Florida................... Administrative office Leased 19,000
La Romana, Dominican Republic.............. Premium cigar manufacturing Leased 133,000
Maypen, Jamaica............................ Premium cigar manufacturing Owned 25,000
McAdoo, Pennsylvania....................... Mass market cigar manufacturing and
distribution Owned 369,000
Richmond, Virginia......................... Pipe tobacco manufacturing and premium
cigar distribution Leased 90,000
</TABLE>
The Company believes that its existing and planned manufacturing facilities
and distribution centers are adequate for the current level of the Company's
operations. The Company believes that additional facilities, if necessary, would
be readily available on a timely basis on commercially reasonable terms. The
Company is expanding its existing manufacturing facilities in the Dominican
Republic and Honduras, is constructing, as part of a joint venture, new
facilities in Jamaica, and is improving manufacturing efficiencies in existing
facilities for a total expected cost of approximately $4 million. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
Further, the Company believes that the leased space that houses its
existing manufacturing and distribution facilities is not unique and could be
readily replaced, if necessary, at the end of the terms of its existing leases
on commercially reasonable terms. The Company's leases have expiration dates
ranging from 1999 to 2000, many of which are renewable at the option of the
Company.
All of the principal properties owned by the Company are subject to first
priority liens granted in favor of the lenders under the Credit Agreement. See
'Description of Certain Indebtedness--Credit Agreement.'
The Company has excess capacity in all of its cigar and pipe tobacco
plants. The Company's ability to take advantage of such excess capacity by
increasing shift operations and the production of premium and mass market cigars
may be limited by the availability of trained laborers and shortages in the
supply of tobacco. See '--Backorders.'
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
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<PAGE>
CONTINGENT AND OTHER LIABILITIES ASSUMED IN CONNECTION WITH
THE ABEX TRANSACTIONS
In connection with the Abex Transactions, the Company entered into a
transfer agreement (the 'Transfer Agreement'), which allocated assets and
liabilities, along with responsibility for various matters, between the Company
and PCT. Pursuant to the Transfer Agreement, the Company assumed and agreed to
indemnify PCT against, or to manage on PCT's behalf, all liabilities not
relating to Abex's then existing aerospace business, including various
contingent and other liabilities as set forth below. PCT assumed, and
indemnified the Company against, all liabilities of the aerospace business and
certain other liabilities. A discussion of the material liabilities for which
PCT has agreed to indemnify the Company is set forth below. Also, as part of the
Abex Transactions, the Company assumed responsibility for various other matters
relating to businesses formerly conducted by Abex or its predecessors.
Environmental Matters
Certain of Abex's former subsidiaries have been named as parties in several
governmental enforcement and private actions seeking cleanup costs and/or
damages for personal injury or property damage under the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
('CERCLA'), and related federal and state laws. In addition, certain of these
subsidiaries have been identified by governmental authorities as being
potentially responsible for cleanup costs and/or natural resource damages or
have received inquiries from governmental authorities regarding their possible
involvement with hazardous waste sites. One such site in Portsmouth, Virginia,
which was formerly operated by Abex and a portion of which is owned by the
Company, has been placed on the National Priorities List under CERCLA. The
potential costs related to such matters and the possible impact thereof on
future operations are uncertain due to, among other factors, the following:
uncertainty regarding the extent of prior pollution; the complexity of laws and
regulations and their interpretations; the varying costs and effectiveness of
alternative cleanup technologies and methods; and the questionable and varying
degrees of responsibility and/or involvement by Abex subsidiaries.
Under applicable state and federal law, including CERCLA, each potentially
responsible party ('PRP') can be held jointly and severally liable for all
cleanup and related costs at each site. For the reasons noted above, it is
impossible to predict the extent to which remediation will be required at a
particular site and the ultimate cost thereof. Based upon its present knowledge
of the sites at which Pneumo Abex has been named as a PRP, the Company estimates
that the total cost of investigation and remediation at all sites, to all
identified PRPs, could exceed $200 million. Based upon the Company's experience
and its knowledge of the relative contribution of the various parties at the
sites, Pneumo Abex's share of liability at most sites is expected to be minimal.
With respect to the Portsmouth site, Pneumo Abex has entered into a Consent
Decree in which the EPA has required that financial responsibility in the amount
of $20 million be established as evidence of Pneumo Abex's financial capability
of undertaking the remedial work. As discussed below, the Company is indemnified
by Whitman Corporation ('Whitman') for the costs of establishing and maintaining
letters of credit that establish such financial responsibility. Whitman also is
required to indemnify the Company for the cleanup costs at such site.
Pursuant to the Transfer Agreement, the Company agreed to indemnify PCT, to
the extent not paid by third party indemnitors or insurers, with respect to all
environmental matters associated with Abex's former operations other than the
operations relating to PCT's aerospace business which were recently sold to
Parker-Hannifin. The Company believes that existing insurance coverage is
sufficient to reimburse the Company for all material environmental expenditures.
Moreover, pursuant to a stock purchase agreement, dated April 28, 1988, as
amended, between Pneumo Abex and Whitman and related settlement agreement, dated
September 23, 1991, between Pneumo Abex and Whitman (collectively, the 'Whitman
Agreements'), Whitman is obligated to indemnify Pneumo Abex for costs, expenses
and liabilities relating to environmental and natural resource matters to the
extent attributable to the operation of the businesses acquired from Whitman
prior to their acquisition in 1988, subject to certain conditions and
limitations principally relating to compliance with notice, cooperation and
other procedural requirements. Generally, known and unknown liabilities arising
after the 1988 Whitman acquisition are the responsibility of PCT or the Company.
Nothing has come to the attention of the Company, however, that would indicate
that post-1988 activities may give rise to a material environmental liability
for the Company. Whitman is generally discharging the indemnified liabilities in
the ordinary course. Whitman is actively managing a significant number of
indemnified matters, including the potential cleanup of the Portsmouth, Virginia
site, and the Company's involvement varies and is limited for those matters
being managed
47
<PAGE>
by Whitman. The Company's obligations pursuant to the Transfer Agreement are
also limited by the presence of other third party indemnitors, including FMC
Corporation, Wagner Electric Corporation and BFGoodrich Company, each of which
purchased assets and businesses of Pneumo Abex and agreed to indemnify Pneumo
Abex for any liabilities arising out of their operations subsequent to the date
of closing each respective transaction. No claim has been made or is currently
contemplated under these indemnities.
In addition to the remedial action costs for the Portsmouth, Virginia site,
as to which Whitman has acknowledged its indemnification responsibilities, there
are approximately 30 tort claims pending against Pneumo Abex alleging exposure
to lead dust from the Portsmouth site. Whitman has agreed to fund 50% of the
defense costs and has reserved its rights on any obligation to indemnify Pneumo
Abex in the event of an adverse outcome. These cases are in the preliminary
stages of discovery. The Company does not believe that Pneumo Abex's activities
at the Portsmouth site resulted in any lead-based injury to the plaintiffs
because of, among other things, the low average lead levels of the plaintiffs
and the existence of alternate lead sources. The Company's belief is based on
the facts contained in the official record of the historical uses of and
activities at and around the Portsmouth site and the medical and personal
histories of the plaintiffs. The Company is defending these cases vigorously.
Based upon currently available information, including the public record and the
information described above, the Company believes that the resolution of these
matters will not have a material adverse effect on the Company's financial
condition.
Based upon the Company's experience to date (including the existence of the
indemnification arrangements referred to above), the cost of compliance with
environmental laws is not expected to have a material adverse effect on the
Company's earnings, liquidity or competitive position. However, future events,
such as changes in existing laws or enforcement policies, may give rise to
additional compliance and/or other costs which could have a material adverse
effect on the Company's financial condition or results of operations.
The Company has not recognized any liability in its financial statements
for environmental matters occurring prior to the 1988 Whitman acquisition which
are covered by Whitman's indemnification obligations under the Whitman
Agreements. Management of the Company considers these obligations to be
Whitman's and monitors the financial position of Whitman to determine the level
of uncertainty associated with Whitman's ability to satisfy its obligations.
Based upon Whitman's active management of indemnifiable matters, its discharging
of the related liabilities when required, and its financial position based upon
publicly filed financial statements, the Company believes that the likelihood of
Whitman failing to satisfy its obligations is remote.
Asbestos Matters
A predecessor of Pneumo Abex has been named as a defendant in personal
injury lawsuits claiming damages relating to asbestos-containing friction
products formerly manufactured by such predecessor. The predecessor, which
discontinued the manufacture and sale of asbestos-containing friction products
in the United States in 1987, has never been found liable in any such case. As
of September 30, 1996, Pneumo Abex or the predecessor had been named as a
defendant in approximately 50,000 pending claims, typically with 10 to 30 or
more co-defendants.
Pursuant to the Whitman Agreements, Whitman has retained ultimate
responsibility for all asbestos-related claims made through August 1998 and for
certain asbestos-related claims asserted thereafter. In connection with the sale
by Abex in December 1994 of its friction products division (the 'Friction
Products Sale'), a subsidiary of Cooper Industries, Inc. ('Cooper') assumed
responsibility for substantially all of the asbestos-related claims made after
August 1998 and therefore not subject to the Whitman indemnity. Pneumo Abex
maintained products liability insurance covering substantially all of the period
during which asbestos-containing products were manufactured and both the Company
and Whitman have the benefit of such insurance. Pursuant to court rulings and
interim agreements reached with certain insurance carriers, Pneumo Abex is being
reimbursed for approximately 90% of the aggregate defense and settlement costs
associated with such claims, and continues to seek recovery of the remaining
amount of unreimbursed costs from its carriers in an ongoing insurance coverage
litigation commenced by Pneumo Abex in 1982. As of September 30, 1996, the
Company had approximately $7.4 million in unreimbursed defense and settlement
costs pending receipt from the insurance carriers or Whitman.
48
<PAGE>
The Company is unable to predict the amount of future defense and
settlement costs associated with asbestos litigation, but consistent with Abex's
historical treatment, the Company has not recognized any liability in its
financial statements for asbestos-related claims as substantially all of these
costs are expected to be insured and, to the extent not insured entirely, are
covered by Whitman's indemnifications under the Whitman Agreements or by Cooper.
Although PCT retains ultimate responsibility and indemnifies the Company
for such matters under the Transfer Agreement, the Company undertakes
administrative and funding obligations with respect to such matters, including
as to such unreimbursed defense and settlement costs subject to certain
termination events as described below. PCT's obligation to make reimbursement
for the amounts so funded will be limited to amounts received by PCT under
related indemnification and insurance agreements. The Company's administrative
and funding obligations would be terminated in the case of a bankruptcy of
Pneumo Abex or PCT or, following an exhaustion of available insurance, either a
bankruptcy of Whitman or Cooper or the failure of Whitman or Cooper to make
required indemnification payments other than for reasons primarily caused by
actions or inactions taken by the Company.
Based upon the Company's experience to date (including the court rulings
and interim agreements relating to its insurers described above and the
existence of the indemnification arrangements with Whitman and Cooper), the
Company believes that aggregate past and future unreimbursed costs associated
with asbestos-related claims arising out of the former friction products
business, including future defense and settlement costs, will not have a
material adverse effect on the Company's financial condition or results of
operations. As discussed in '--Environmental Matters' above, the Company
monitors Whitman's financial position and believes that the likelihood of
Whitman failing to satisfy its obligations is remote. A substantial failure of
Pneumo Abex's insurance and the indemnification arrangements with Whitman or
Cooper, however, could have a material adverse effect on the Company.
Tax Matters
In connection with the Abex Transactions, the Company entered into a tax
sharing agreement with PCT, pursuant to which the Company has agreed to
indemnify PCT with respect to all taxes applicable to periods prior to June 15,
1995 except for foreign taxes related to PCT's aerospace business.
In connection with the July 16, 1992 distribution (the '1992 Distribution')
of Abex, the predecessor of the Company, to the stockholders of its prior
parent, The Henley Group, Inc. ('Henley'), Abex entered into a tax sharing
agreement with Henley in which Abex indemnified Henley for tax liabilities
resulting from certain adjustments to the tax liabilities of Abex entities and
for certain tax liabilities of a prior affiliated company, Wheelabrator
Technologies Inc. for the period from May 26, 1986 through December 31, 1988.
All federal tax liabilities related to this period were settled prior to 1995;
however, certain state tax liabilities of approximately $7 million, which is an
obligation of the Company, remained open as of December 31, 1995.
Abex had been included in the consolidated federal income tax return of
Henley for 1990 and 1991. The Internal Revenue Service has asserted deficiencies
against Henley for these periods of approximately $23 million, plus interest.
Koll Real Estate Group, Inc. ('Koll'), as the parent of Henley, has indicated
that it will vigorously contest the deficiencies through the administrative
appeals process as well as in court and that a final conclusion to this matter
could take several years. In any event, the adjustments creating these
deficiencies do not relate to Abex entities and are therefore not liabilities of
the Company as successor to Abex under the tax sharing agreement. However, if
Henley or Koll were unable to pay any deficiency remaining after the review
process, then the Internal Revenue Service, in accordance with Treasury
Regulation 1.1502-06, could seek payment from any of the other entities that
were included in the federal consolidated return of Henley for 1990 and 1991,
including the Company as successor to Abex.
While the Company expects that Koll will discharge its ultimate tax
obligations, the Company is aware that Koll has a history of operating losses
and retained deficits. Thus, there can be no assurance that Koll will have the
financial ability to discharge such obligations. In addition, Koll has recently
announced that it is soliciting consents from its debtholders for a financial
restructuring, but the Company is presently unable to determine the effect, if
any, of a financial restructuring on the ability of Koll to pay any remaining
deficiency.
49
<PAGE>
Management believes that reserves as of September 30, 1996 are adequate for
all indemnifications associated with these tax sharing agreements as well as any
potential liability asserted by the Internal Revenue Service in accordance with
Treasury Regulation 1.1502-06.
Other Matters
The Company assumed responsibility under the Transfer Agreement for various
other legal proceedings, claims and investigations related to various commercial
transactions and product liability matters. Most of these other matters are
covered by insurance, subject to deductibles and maximum limits, and/or by third
party indemnities. The Company does not believe, based on currently available
information, that the outcome of these other matters, irrespective of insurance
coverage and third party indemnities, will have a material adverse effect on its
financial position or results of operations.
In connection with the 1992 Distribution, Abex assumed and agreed to
indemnify Henley against certain liabilities related to the businesses of Henley
or its predecessors, including certain liabilities relating to self-insurance
programs. The Company believes that its balance sheet reflects adequate reserves
for these matters. In addition, Abex guaranteed certain contingent obligations
of Koll relating to a pension plan and environmental liabilities of Henley and
certain of its predecessors, and Koll agreed to indemnify Abex in respect
thereof. Koll has been discharging its responsibilities with respect to these
guaranteed obligations in the ordinary course, and the Company does not believe,
based on currently available information, including information filed with the
Securities and Exchange Commission and the EPA regarding such environmental
liabilities and information Koll has provided to the Company regarding the
pension plan, that the guaranteed obligations would have a material adverse
effect on its financial position or results of operations even if Koll's
financial circumstances, as described above in '--Tax Matters,' were to cause
Koll to stop discharging its responsibilities.
LEGAL PROCEEDINGS
The Company is a party to lawsuits incidental to its business. The Company
believes that the outcome of such pending legal proceedings in the aggregate
will not have a material adverse effect on the Company's consolidated financial
position. The Company carries general liability insurance but has no health
hazard policy, which, to the best of the Company's knowledge, is consistent with
industry practice. There can be no assurance, however, that the Company will not
experience material health-related litigation in the future.
In addition, various legal proceedings, claims and investigations are
pending against the Company related to commercial transactions, product
liability, safety and health matters and other environmental matters, involving
Abex's former subsidiaries or their predecessors, including those for which the
Company assumed responsibility pursuant to the Abex Transactions. See
'--Contingent and Other Liabilities Assumed in Connection with the Abex
Transactions.' Most of these matters are related to matters covered by
insurance, subject to deductibles and maximum limits, and by third party
indemnities. The Company does not believe, based on currently available
information, that the outcome of these matters will have material adverse effect
on its financial position or results of operations.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information (ages as of November 30,
1996) concerning the Directors and executive officers of the Company. All
Directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Ronald O. Perelman.............................. 53 Chairman of the Board of Directors and a
Director
Howard Gittis................................... 62 Vice Chairman and a Director
James R. Maher.................................. 47 President, Chief Executive Officer and a
Director
Irwin Engelman.................................. 62 Executive Vice President and Chief Financial
Officer
Barry F. Schwartz............................... 47 Executive Vice President and General Counsel
Theo W. Folz.................................... 53 President and Chief Executive Officer of Tobacco
Products Group and a Director
Gary R. Ellis................................... 43 Senior Vice President and Chief Financial
Officer of Tobacco Products Group
Philip E. Beekman............................... 65 Director
Jewel S. Lafontant-Mankarious................... 73 Director
Drew Lewis...................................... 65 Director
Robert Sargent Shriver III...................... 42 Director
</TABLE>
Mr. Perelman has been Chairman of the Board of the Company since June 1995.
Mr. Perelman has been Chairman of the Board and Chief Executive Officer of Mafco
Holdings and MacAndrews & Forbes Holdings Inc. (together with Mafco Holdings,
'MacAndrews & Forbes') and various of their affiliates since 1980. Mr. Perelman
also is Chairman of the Board of Andrews Group Incorporated ('Andrews Group'),
Cigar Holdings, Meridian Sports Incorporated ('Meridian Sports'), New World
Communications Group Incorporated ('New World'), PCT and Toy Biz, Inc. ('Toy
Biz') and is the Chairman of the Executive Committee of the Boards of Directors
of Marvel Entertainment Group, Inc. ('Marvel'), Revlon Consumer Products
Corporation ('Revlon Products') and Revlon, Inc. ('Revlon'). Mr. Perelman is a
Director of the following corporations which file reports pursuant to the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'): Andrews Group,
Cigar Holdings, The Coleman Company, Inc. ('Coleman'), Coleman Holdings Inc.,
Coleman Worldwide Corporation ('Coleman Worldwide'), Consolidated Cigar, First
Nationwide Bank, a Federal Savings Bank ('First Nationwide Bank'), First
Nationwide Holdings, Inc. ('First Nationwide'), First Nationwide (Parent)
Holdings Inc. ('First Nationwide Parent'), Mafco Consolidated, Marvel, Marvel
Holdings Inc. ('Marvel Holdings'), Marvel (Parent) Holdings Inc. ('Marvel
Parent'), Marvel III Holdings Inc. ('Marvel III'), Meridian Sports, New World,
New World Television, NWCG Holdings Corporation ('NWCG Holdings'), PCT, Pneumo
Abex, Revlon, Inc., Revlon Products, Revlon Worldwide Corporation ('Revlon
Worldwide') and Toy Biz.
Mr. Gittis has been Vice Chairman and a Director of the Company since June
1995. Mr. Gittis has been Vice Chairman and a Director of MacAndrews & Forbes
and various of its affiliates since 1985. Mr. Gittis is a Director of the
following corporations which file reports pursuant to the Exchange Act: Andrews
Group, Cigar Holdings, Consolidated Cigar, First Nationwide, First Nationwide
Bank, First Nationwide Parent, Jones Apparel Group, Inc., Loral Corporation, New
World, New World Television, NWCG Holdings, PCT, Pneumo Abex, Revlon Worldwide,
Revlon and Revlon Products and Rutherford-Moran Oil Corporation.
Mr. Maher has been President, Chief Executive Officer and a Director of the
Company since June 1995. Mr. Maher was Chairman of the Board of Laboratory
Corporation of America Holdings, a clinical laboratory
51
<PAGE>
company, from 1995 to April 1996 and was President and Chief Executive Officer
of National Health Laboratories Holdings Inc., a clinical laboratory company,
from 1992 to 1995. Mr. Maher was Vice Chairman of The First Boston Corporation,
an investment bank, from 1990 to 1992 and Managing Director of The First Boston
Corporation from 1982 to 1990. Mr. Maher is a Director of First Brands
Corporation, which files reports pursuant to the Exchange Act.
Mr. Engelman has been the Executive Vice President and Chief Financial
Officer of the Company since June 1995 and has been the Executive Vice President
and Chief Financial Officer of MacAndrews & Forbes and various of its affiliates
since February 1992. Mr. Engelman was Executive Vice President and Chief
Financial Officer of GAF Corporation, a specialty chemical and building
materials company, from 1990 to February 1992. Mr. Engelman was President and
Chief Operating Officer of Citytrust Bancorp Inc. from 1988 to 1990; Executive
Vice President of the Blackstone Group LP from 1987 to 1988; and Executive Vice
President of General Foods Corporation for more than five years prior to 1987.
Mr. Schwartz has been Executive Vice President and General Counsel of the
Company since June 1995. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates, including Cigar
Holdings, since 1993. Mr. Schwartz was Senior Vice President of MacAndrews &
Forbes from 1989 to 1993.
Mr. Folz has been President and Chief Executive Officer of the Tobacco
Products Group and a Director of the Company since June 1995. Mr. Folz has been
a Director and President and Chief Executive Officer of Cigar Holdings since
June 1996, Consolidated Cigar since August 1984 and Vice Chairman, Director and
Chief Executive Officer of Mafco Worldwide since January 1995.
Mr. Ellis has been Senior Vice President and Chief Financial Officer of the
Tobacco Products Group of the Company since June 1995. Mr. Ellis has been Senior
Vice President, Chief Financial Officer and Treasurer of Cigar Holdings since
June 1996 and Consolidated Cigar since November 1988.
Mr. Beekman has been a Director of the Company since June 1995. Mr. Beekman
has been President of Owl Hollow Enterprises, a consulting and investment
company, for more than the past five years. Prior to that time Mr. Beekman was
Chairman of the Board of Directors and Chief Executive Officer of Hook-SuperRx,
Inc. Mr. Beekman also is a Director of Fisher Scientific International Inc.
which files reports pursuant to the Exchange Act.
Ms. LaFontant-Mankarious has been a Director of the Company since June
1995. Ms. LaFontant-Mankarious has been a Partner in the law firm of Holleb &
Coff since 1993. From 1989 to 1993, Ms. LaFontant-Mankarious was a United States
Ambassador-at-Large. Ms. LaFontant-Mankarious also is a Director of Trans World
Airlines, Inc.
Mr. Lewis has been a Director of the Company since May 1996. Mr. Lewis has
been Chairman and Chief Executive Officer of Union Pacific Corporation, a
diversified holding company, since 1994 and, for more than five years prior to
such date, was President and Chief Executive Officer of Union Pacific
Corporation ('Union Pacific'). Mr. Lewis also is a Director of the following
corporations which file reports pursuant to the Exchange Act: American Express
Company, Ford Motor Company, FPL Group, Inc., Gannett Co., Inc., Lucent
Technologies Inc, Union Pacific and Union Pacific Resources Group.
Mr. Shriver has been a Director of the Company since 1995. Mr. Shriver has
been President of Special Olympic Productions, Inc. for more than the past five
years. Mr. Shriver also is a Director of MK Gold Company which files reports
pursuant to the Exchange Act.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has established an Executive Committee consisting of Messrs.
Perelman, Gittis and Maher, an Audit Committee consisting of Messrs. Beekman and
Shriver and a Compensation Committee consisting of Messrs. Gittis and Shriver
and Ms. LaFontant-Mankarious.
52
<PAGE>
The Executive Committee has all powers and rights necessary to exercise the
full authority of the Board of Directors in the management of the business and
affairs of the Company when necessary in between meetings of the Board of
Directors.
The Compensation Committee has the responsibility of reviewing the
performance of the executive officers of the Company and recommending to the
Board of Directors of the Company annual salary and bonus amounts for all
officers of the Company. The Compensation Committee shall consist of at least
two Directors who are 'outside directors' within the meaning of Section 162(m)
of the Code.
The Audit Committee has the responsibility of reviewing and supervising the
financial controls of the Company. The Audit Committee's responsibilities
include (i) making recommendations to the Board of Directors of the Company with
respect to the Company's financial statements and the appointment of independent
auditors, (ii) reviewing significant audit and accounting policies and practices
of the Company, (iii) meeting with the Company's independent public accountants
concerning, among other things, the scope of audits and reports and (iv)
reviewing the performance of overall accounting and financial controls of the
Company.
COMPENSATION OF DIRECTORS
Directors who do not receive compensation as officers or employees of the
Company or any of its affiliates will be paid an annual retainer fee of $25,000
and a fee of $1,000 for each meeting of the Board of Directors or any committee
thereof they attend, plus reasonable out-of-pocket expenses.
On July 22, 1996, the Company granted options to acquire 750,000 shares of
Company Common Stock to Mr. Perelman as compensation for services rendered and
to be rendered to the Company by Mr. Perelman in his capacity as Chairman of the
Board of Directors. Such options have an exercise price of $21.50 per share
(market price on the date of grant) and vest with respect to one third of the
shares subject to the options on the date of grant, and with respect to an
additional one third of such shares on each of July 22, 1997 and July 22, 1998.
The options expire on July 22, 2006.
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
paid or accrued for services rendered to the Company in all capacities during
the three years ended December 31, 1995 for the Chief Executive Officer and the
two other executive officers of the Company whose total annual salary and bonus
in the last fiscal year exceeded $100,000 (collectively, the 'Named Executive
Officers').
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
---------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
- ----------------------------------------------------- ---- --------- --------- ------------- ------------
<S> <C> <C> <C> <C> <C>
James R. Maher
President and Chief Executive Officer.............. 1995 500,000 1,000,000 750,000 1,843,750(a)
Theo W. Folz 1995 1,000,000 1,000,000 3,000(b)
President and Chief Executive Officer of 1994 675,000 400,000 3,000(b)
Consolidated Cigar................................. 1993 638,000 300,000 -- 4,717(b)
Gary R. Ellis 1995 200,000 200,000 3,000(b)
Senior Vice President and Chief Financial 1994 185,000 100,000 3,000(b)
Officer of Consolidated Cigar...................... 1993 175,000 75,000 -- 4,717(b)
</TABLE>
- ------------------
(a) Represents that portion of the special payment that has vested under Mr.
Maher's employment agreement with the Company, assuming that Mr. Maher
becomes entitled to the maximum amount payable under his employment
agreement. See '--Employment Agreements.'
(b) Represents the Company's contribution to the employee's account under
Consolidated Cigar's 401(k) plan.
53
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options under the Mafco Consolidated Group Inc. 1995 Stock Option Plan to the
Company's Chief Executive Officer in 1995. No option grants were made to the
other Named Executive Officers in 1995.
OPTION GRANTS IN LAST FISCAL YEAR(A)
<TABLE>
<CAPTION>
POTENTIAL RELIZABLE
VALUE AT
INDIVIDUAL GRANT ASSUMED ANNUAL RATE OF
------------------------------------------------------------------- STOCK PRICE APPRECIATION
NUMBER OF PERCENT OF TOTAL FOR
SECURITIES OPTIONS GRANTED EXERCISE OR OPTION TERM(B)
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION ------------------------
NAME OPTIONS GRANTED IN 1995 ($/SH) DATE 5%($) 10%($)
- --------------------- --------------- ------------------- ----------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
James R. Maher 750,000(c) 100% $17.375 June 30, 2005 $8,193,750 $20,771,250
</TABLE>
- ------------------
(a) No stock appreciation rights were granted by the Company in 1995.
(b) These amounts, based on assumed appreciation rates of 5% and 10% prescribed
by the rules of the Securities and Exchange Commission (the 'Commission'),
are not intended to forecast possible future appreciation, if any, of the
price of the Company Common Stock. These amounts assume a compounded
appreciation rate per year for 10 years from the grant price. For the 5%
column, the appreciated price would be $28.30 and for the 10% column, the
appreciated price would be $45.07. The Company did not use an alternative
formula for a grant date valuation as it is not aware of any formula which
will determine with reasonable accuracy a present value based on future
unknown or volatile factors. There can be no assurance that the amounts in
this table will be achieved.
(c) Such stock options vest one-third upon grant (December 1, 1995) and
one-third on each of July 1, 1996 and 1997.
In addition, on June 25, 1996, the Company granted to Mr. Folz options to
purchase 100,000 shares of Company Common Stock at an exercise price of $22.00
per share (market value on the date of grant). These options have a term of ten
years and vest 25% upon the date of grant and 25% on each of the first, second
and third anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information with respect to options exercised
by the Company's Chief Executive Officer during 1995 and the number and value of
securities underlying unexercised options held by the Company's Chief Executive
Officer on December 31, 1995. No options were held by the other Named Executive
Officers on December 31, 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(A)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James R. Maher -- -- 250,000 500,000 $ 156,250 $ 312,500
</TABLE>
- ------------------
(a) Amounts shown represent the market value of the underlying Company Common
Stock at year end calculated using the December 29, 1995 NYSE closing price
per share of Company Common Stock of $18.00 minus the exercise price of the
stock option. The actual value, if any, an executive may realize is
dependent upon the amount by which the market price of the Company Common
Stock exceeds the exercise price when the stock options are exercised. The
actual value realized may be greater or less than the value shown in the
table.
54
<PAGE>
PERFORMANCE BONUS PLAN
The Company has a performance bonus plan (the 'Performance Bonus Plan') for
senior executive officers of the Company. The Performance Bonus Plan provides
for the payment of cash compensation upon the achievement of predetermined
individual and corporate performance goals during the calendar year. The
Performance Bonus Plan is administered by the Compensation Committee. The
Compensation Committee has the full power to select the senior executive
officers for participation in the Performance Bonus Plan and to establish the
performance goals for each senior executive officer in the Performance Bonus
Plan. Compensation payable under the Performance Bonus Plan is intended to
qualify as 'performance based compensation' under Section 162(m) of the Code.
The payments under the Performance Bonus Plan to any one individual during any
calendar year may not exceed $500,000. See '--Employment Agreements.'
TRANSACTION BONUS PLAN
The Company has a performance bonus plan (the 'Transaction Bonus Plan') for
the Company's Chief Executive Officer. The Transaction Bonus Plan provides for
the payment of cash compensation to the Company's Chief Executive Officer for
achieving certain performance goals relating to the consummation of acquisitions
of businesses, divestitures of businesses or the value of any acquisitions
and/or divestitures consummated during the applicable performance period. The
Transaction Bonus Plan is administered by the Compensation Committee.
Compensation payable under the Transaction Bonus Plan is intended to qualify as
'performance based compensation' under Section 162(m) of the Code. The payments
under the Transaction Bonus Plan may not exceed an aggregate maximum of
$4,000,000. In connection with the Disposition, the Company's Chief Executive
Officer received a payment of approximately $3,000,000 under the Transaction
Bonus Plan. See '--Employment Agreements.'
CONSOLIDATED CIGAR PERFORMANCE BONUS PLAN
The Company has adopted the Consolidated Cigar Performance Bonus Plan.
Compensation payable under the Consolidated Cigar Performance Bonus Plan is
intended to qualify as 'performance based compensation' under Section 162(m) of
the Code. Senior executive officers of Cigar Holdings and Consolidated Cigar,
selected for participation in the Consolidated Cigar Performance Bonus Plan by
the Compensation Committee, will be entitled to participate in the Consolidated
Cigar Performance Bonus Plan. The performance goals under the Consolidated Cigar
Performance Bonus Plan will be based on achievement of EBITDA targets
established by the Compensation Committee with respect to each calendar year.
The payments under the Consolidated Cigar Performance Bonus Plan to any one
individual during any calendar year may not exceed $2,000,000. See '--Employment
Agreements.'
DEFINED BENEFIT PLAN
Domestic (United States) salaried employees of Consolidated Cigar are
eligible to participate in the Consolidated Cigar Domestic Salaried Employees'
Defined Benefit Plan, a defined benefit pension plan (the 'Plan'), which,
effective as of the end of 1995, was merged into a defined benefit pension plan
sponsored by a subsidiary of the Company. The merger of the Plan did not change
the level of pension benefits provided to Consolidated Cigar employees. Plan
benefits are a factor of service (up to a maximum of 33 years) with Consolidated
Cigar and Average Final Compensation (average monthly compensation during the 60
consecutive months in which compensation was highest in the 10 years prior to
termination of employment). Compensation includes total wages, overtime, bonuses
and 401(k) salary deferrals, and excludes fringe benefits and employer
contributions to other deferred compensation plans. Benefits in the Plan are
reduced by (i) any annuity purchased under the Gulf Western Consumer Products
Salaries Employees Retirement Plan (the 'Gulf & Western Plan') as of March 8,
1983 and (ii) the actuarial equivalent of any Consolidated Cigar-provided
benefits received under the Consolidated Cigar's 401(k) plan.
The Company established a benefit restoration plan effective January 1,
1994 (the 'BRP') which was designed to restore retirement benefits to those
employees whose eligible pension earnings were limited to $150,000 under
regulations recently enacted by the Internal Revenue Service. The BRP is not
funded and all other vesting and payment rules follow the Plan.
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<PAGE>
Beginning in 1996, the annual payment under the Plan and BRP, expressed as
a straight life annuity, before adjustment for social security beginning at age
65 and before reduction for the Gulf & Western Plan or the Company's 401(k)
plan, is as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 5 10 15 20 25 35
- ------------------------------------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000............................. $ 3,788 $ 7,575 $ 11,363 $ 15,150 $ 18,938 $ 25,000
75,000............................. 5,681 11,363 17,044 22,725 28,406 37,500
100,000............................. 7,575 15,150 22,725 30,300 37,875 50,000
125,000............................. 9,469 18,938 28,406 37,875 47,344 62,500
150,000............................. 11,363 22,725 34,088 45,450 56,813 75,000
175,000............................. 13,256 26,513 39,769 53,025 66,281 87,500
200,000............................. 15,150 30,300 45,450 60,600 75,750 100,000
225,000............................. 17,044 34,088 51,131 68,175 85,219 112,500
250,000............................. 18,938 37,875 56,813 75,750 94,688 125,000
300,000............................. 22,725 45,450 68,175 90,900 113,625 150,000
400,000............................. 30,300 60,600 90,900 121,200 151,500 200,000
450,000............................. 34,088 68,175 102,263 136,350 170,438 225,000
500,000............................. 37,875 75,750 113,625 151,500 189,375 250,000
</TABLE>
Benefits under the Plan are subject to the maximum limitations imposed by
federal law on pension benefits. The annual limitation in 1995 was $120,000 or
$10,000 per month, based on a maximum annual compensation of $150,000. The
maximum annual remuneration considered for purposes of the BRP was increased
from approximately $250,000 in 1995 to $500,000 in 1996.
As of December 31, 1995, the credited years of service were twelve years
for Mr. Folz, seven years for Mr. Ellis and no years for Mr. Maher.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the 'CEO Employment
Agreement') with Mr. Maher with respect to an employment term commencing on July
1, 1995 and ending on June 30, 1998. Under the CEO Employment Agreement, Mr.
Maher has agreed to serve as the Company's President and Chief Executive Officer
at a base salary of $1,000,000 per year. Mr. Maher received a one-time bonus of
$1,000,000 upon execution of the CEO Employment Agreement. In addition, during
the term of the CEO Employment Agreement Mr. Maher will earn a deferred bonus of
$1,500,000 per year, which will be paid upon the later of the expiration of the
term of the CEO Employment Agreement and the date Mr. Maher ceases to be a
'covered employee' under Section 162(m) of the Code. Mr. Maher also participates
in the Performance Bonus Plan and the Transaction Bonus Plan and is entitled to
receive certain stock options. The CEO Employment Agreement also grants Mr.
Maher the right to receive a special payment, which right vests one-third on
December 1, 1995, one-third on July 1, 1996 and one-third on July 1, 1997. The
special payment will be paid upon the later of the expiration of the term of the
CEO Employment Agreement and the date Mr. Maher ceases to be a 'covered
employee' under Section 162(m) of the Code. The amount of the special payment
will equal the product of (i) the difference between (A) the lower of (x)
$17.375 and (y) the price of a share of Company Common Stock on the date of
payment and (B) $10.00 and (ii) 750,000, up to a maximum of approximately $5.5
million. Mr. Maher also receives certain benefits, including the use of an
automobile, participation in the Company's retirement and welfare plans, life
insurance coverage equal to four times his base salary, health benefits coverage
with 100% reimbursement of the reasonable and customary expenses incurred by Mr.
Maher, his spouse and his dependents, and use of an aircraft, pursuant to the
CEO Employment Agreement. Upon the death, disability or termination of Mr. Maher
by the Company without cause (as defined in the CEO Employment Agreement),
termination by Mr. Maher for good reason (as defined in the CEO Employment
Agreement) or following a 'change in control' (as defined below), Mr. Maher will
receive: (i) a lump sum accelerated payment of the amount of the base salary,
deferred bonuses and performance bonuses otherwise payable during the remainder
of the term of the CEO Employment Agreement (these payments will not be less
than $3,000,000 in total); (ii) a payment of all transaction bonuses otherwise
payable during the remainder of the term of the CEO Employment Agreement; (iii)
a gross-up for any excise tax imposed on excess parachute payments under the
Code;
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<PAGE>
(iv) vesting of stock options and the special payment; and (v) continued welfare
benefits for Mr. Maher and his dependents for the remainder of the term of the
CEO Employment Agreement. Upon the termination of employment of Mr. Maher by the
Company for cause or by Mr. Maher otherwise than as described above, Mr. Maher
will receive: (i) no further base salary; (ii) a pro rata performance bonus for
the year of termination; (iii) in case of termination for cause only, a lump sum
accelerated payment of deferred bonuses for the remainder of the term of the CEO
Employment Agreement; and (iv) transaction bonuses for the remainder of the term
of the CEO Employment Agreement. Under the CEO Employment Agreement, a 'change
in control' of the Company means the failure of Ronald O. Perelman or his
affiliated entities to beneficially own 25% or more of the voting power of the
Company's voting securities, or some other person and its affiliates owning more
than 50% of the voting power of the Company's voting securities.
The Company also entered into an employment agreement (the 'Folz Employment
Agreement') with Mr. Folz with respect to an employment term commencing on July
1, 1995 and ending on December 31, 1998, unless sooner terminated by Mr. Folz's
death, disability, gross neglect or willful misconduct (in which case the
Company may terminate immediately upon written notice), or the Company's breach
of the Folz Employment Agreement. In the event of Mr. Folz's death or
disability, a pro rated performance bonus and 60% of his base compensation is to
be paid to Mr. Folz or his beneficiaries, as the case may be, for the longer of
the remaining term of the Folz Employment Agreement or twelve months. In the
event that the Company breaches the Folz Employment Agreement, Mr. Folz is
entitled to terminate his employment under the agreement; in that event, a
pro-rated performance bonus and the remaining base compensation specified in the
agreement is to be paid to Mr. Folz offset by any other compensation Mr. Folz
receives during this period, and Mr. Folz is entitled to group life, health and
pension plan coverage for the longer of the remaining term of the Folz
Employment Agreement or twelve months. Base salary for the year ended December
31, 1995 was $1,000,000 per annum pursuant to an arrangement (memorialized in
the Folz Employment Agreement) entered into prior to the Abex Transactions. In
addition, Mr. Folz participates in the Consolidated Cigar Performance Bonus
Plan. As of August 1, 1996, for the services to be rendered by Mr. Folz to Cigar
Holdings and Consolidated Cigar, Consolidated Cigar has assumed the obligations
of the Company under the Folz Employment Agreement with respect to a portion of
the base salary and employee benefits to be provided to Mr. Folz under the Folz
Employment Agreement and, simultaneously therewith, has entered into a new
employment agreement with Mr. Folz memorializing such assumption and expiring on
December 31, 1999. Consolidated Cigar has assumed 70% of the obligations of the
Company under the Folz Employment Agreement with respect to any payments or
benefits payable upon Mr. Folz's severance, death or disability. The base salary
which will be paid by Consolidated Cigar to Mr. Folz will be $770,000 for the
year ended December 31, 1996. In addition, Mr. Folz is eligible to participate
in the Consolidated Cigar Performance Bonus Plan. See '--Consolidated Cigar
Performance Bonus Plan.'
Consolidated Cigar entered into an employment agreement with Mr. Ellis with
respect to an employment term commencing July 1, 1995 and ending on December 31,
1998, unless sooner terminated by Mr. Ellis' death, disability (in which case
Consolidated Cigar may elect to terminate the employment agreement), gross
neglect or willful misconduct (in which case Consolidated Cigar may terminate
immediately upon written notice) or Mr. Ellis' willful and material failure to
perform his contractual obligations or by Consolidated Cigar's material breach
of the Ellis Employment Agreement. In the event that Consolidated Cigar breaches
the Ellis Employment Agreement, Mr. Ellis is entitled to terminate the
employment agreement; in that event full compensation and benefits are to be
paid to Mr. Ellis for the longer of the remaining term of the Ellis Employment
Agreement or twelve months, offset by any other compensation of Mr. Ellis
receives during this period. The Ellis Employment Agreement provides for an
initial annual base salary of $200,000 for Mr. Ellis. The Ellis Employment
Agreement also provides for a bonus expressed as a percentage of the Mr. Ellis'
base salary provided that Consolidated Cigar achieves certain levels of
operating performance.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995 Messrs. Gittis and Shriver and Ms. LaFontant-Mankarious served
as members of the Compensation Committee.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of November 30, 1996, the total number
of shares of Company Common Stock beneficially owned, and the percent so owned,
by each Director of the Company, by each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Company Common Stock, by
each Named Executive Officer and by all Directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED(A) OF CLASS
- -------------------------------------------------------------------------------- --------------------- ----------
<S> <C> <C>
Ronald O. Perelman(b) .......................................................... 20,027,752 85%
35 East 62nd Street
New York, New York 10021
James R. Maher(c)............................................................... 500,000 2%
Philip E. Beekman............................................................... 5,000 *
Howard Gittis................................................................... 5,000 *
Drew Lewis...................................................................... 2,000 *
Robert Sargent Shriver III...................................................... 3,250 *
Barry F. Schwartz............................................................... 3,000 *
Theo W. Folz(d)................................................................. 33,334 *
Gary R. Ellis................................................................... 1,000 *
All directors and executive officers as a group
(11 persons)(e)(f)............................................................ 20,580,336 86%
</TABLE>
- ------------------
* Less than 1%
(a) Shares of Company Common Stock that an individual or group has a right to
acquire within 60 days after October 31, 1996 pursuant to the exercise of
options, warrants or other rights are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person shown in the table.
(b) All but 250,000 of such shares of Company Common Stock are indirectly owned
by Mr. Perelman through Mafco Holdings. The remaining 250,000 shares
represent shares of Company Common Stock as to which Mr. Perelman has the
right to acquire beneficial ownership upon the exercise of stock options.
All of the shares owned by Mafco Holdings are, and shares of intermediate
holding companies may from time to time be, pledged by Mafco Holdings to
secure obligations.
(c) Represents shares of Company Common Stock as to which Mr. Maher has the
right to acquire beneficial ownership upon the exercise of stock options.
(d) Represents shares of Company Common Stock as to which Mr. Folz has the right
to acquire beneficial ownership upon the exercise of stock options.
(e) Includes 250,000, 500,000 and 33,334 shares of Company Common Stock as to
which Messrs. Perelman, Maher and Folz, respectively, have the right to
acquire beneficial ownership upon the exercise of stock options.
(f) Neither Ms. LaFontant-Mankarious, who is a Director of the Company, nor Mr.
Engelman, Executive Vice President and Chief Financial Officer of the
Company, beneficially owns any shares of Company Common Stock.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MAFCO HOLDINGS
Mafco Holdings currently indirectly owns approximately 85% of the
outstanding shares of Company Common Stock. Mafco Holdings is wholly owned by
Ronald O. Perelman. As a result of Mafco Holdings' stock ownership, the
Company's Board of Directors is, and is expected to continue to be, comprised
entirely of designees of Mafco Holdings, and Mafco Holdings is, and is expected
to continue to be, able to direct and control the policies of the Company and
its subsidiaries, including with respect to mergers, sales of assets and similar
transactions.
Mafco Holdings is a diversified holding company with interests in several
industries. Through its 83% ownership of Revlon, Mafco Holdings is engaged in
the cosmetics and skin care, fragrance and personal care products business.
Mafco Holdings owns 83% of Coleman, which is engaged in the manufacture and
marketing of recreational outdoor products, portable generators, power-washing
equipment, spas and hot tubs and 65% of Meridian Sports, a manufacturer and
marketer of specialized boats and water sports equipment. Marvel, a youth
entertainment company, is 80% owned by Mafco Holdings. Mafco Holdings is also
engaged in the television broadcast and programming production business through
its approximate 42% ownership of New World Communications, and, through its 85%
ownership of the Company, in the manufacture and distribution of cigars and pipe
tobacco. Mafco Holdings also is in the financial services business through its
80% ownership of First Nationwide. The principal executive offices of Mafco
Holdings are located at 35 East 62nd Street, New York, New York 10021.
Employees of affiliates of the Company provide services to the Company in
connection with insurance and legal services, benefit plan administration and
other services and the Company reimburses such affiliates for the allocated
share of the costs related to such employees. In 1995, the amount allocated to
the Company was $436,414, and for the nine months ended September 30, 1996 was
$484,915. The Company believes that the terms of such allocated services are at
least as favorable to the Company as would be available from unaffiliated third
parties.
Included in accrued expenses and other liabilities are payables to Mafco
Holdings and affiliates in the amount of $2.0 million and $544,000 at December
31, 1995 and 1994, respectively, which represent liabilities related to
allocated services, as discussed above, and tax sharing liabilities, as
described in '--Tax Sharing Agreement' below.
TAX SHARING AGREEMENT
The Company and certain of its domestic subsidiaries (including
Consolidated Cigar) (the 'Company Group') have been, for federal income tax
purposes, members of an affiliated group of corporations of which Mafco Holdings
was the common parent (the 'Mafco Holdings Group'). Accordingly, the Company
Group has been included in the consolidated federal income tax returns and, to
the extent permitted by applicable law, included in combined state or local
income tax returns filed on behalf of the old Mafco Holdings Group. Pursuant to
a tax sharing agreement (the 'Mafco Consolidated Tax Sharing Agreement') between
the Company and Mafco Holdings, the Company is required to pay to Mafco Holdings
with respect to each taxable year an amount equal to the consolidated federal
and state and local income taxes that would have been incurred by the Company
Group had it not been included in the consolidated federal and any combined
state or local income tax returns filed by the Mafco Holdings Group. Pursuant to
a tax sharing agreement (the 'Subsidiary Tax Sharing Agreement') between the
Company and Consolidated Cigar, Consolidated Cigar is required to pay to the
Company with respect to each taxable year an amount equal to the consolidated
federal and state and local income taxes that would have been incurred by
Consolidated Cigar had it not been included in the consolidated federal and any
combined state or local income tax returns filed by the Mafco Holdings Group.
Under existing federal income tax regulations the Company and Consolidated
Cigar are liable for the consolidated federal income taxes of the Mafco Holdings
Group for any taxable year in which they are a member of the Mafco Holdings
Group. Pursuant to the Mafco Consolidated Tax Sharing Agreement and the
Subsidiary Tax Sharing Agreement, Mafco Holdings has agreed to indemnify the
Company, and the Company has agreed to indemnify Consolidated Cigar and its
direct and indirect subsidiaries for any such federal income tax liability.
59
<PAGE>
PROMISSORY NOTE
In connection with the Cigar IPO, Cigar Holdings issued the Promissory Note
in an original principal amount of $70 million to the Company. The Promissory
Note is noninterest bearing, unsecured, subordinated to senior indebtedness (as
defined in the Promissory Note) and repayable in whole or in part at any time or
from time to time without premium or penalty. The Promissory Note is payable in
quarterly installments of $2.5 million beginning March 31, 1997 with the final
installment payable on December 31, 2003. See 'Description of Certain
Indebtedness.'
PURCHASE OF LICORICE EXTRACT
Consolidated Cigar purchases all of the licorice extract used as flavoring
and moistening agents in its manufacturing processes from Mafco Worldwide, which
following the Disposition became an indirect wholly owned subsidiary of PCT.
During the years ended December 31, 1993, 1994 and 1995, the Company purchased
approximately $210,000, $265,000 and $269,000 of licorice extract from Mafco
Worldwide. The Company believes that the licorice extract purchased from Mafco
Worldwide was purchased on terms no less favorable to the Company than those
obtainable in an arm's length transaction with an independent third party.
SPECIALTY PRODUCTS DIVISION
Consolidated Cigar's Specialty Products Division assembles lipstick
containers for Revlon Products, an 83% owned subsidiary of Mafco Holdings.
Revlon Products purchased lipstick containers from the Company for approximately
$481,000, $763,000 and $874,000 for the years ended December 31, 1993, 1994 and
1995, respectively. The Company believes that the terms of such arrangements
with Revlon Products were no less favorable to Consolidated Cigar than those
obtainable in an arm's length transaction with an independent third party.
LICENSE AGREEMENT
Pursuant to a license agreement, Mafco Holdings has licensed to Mafco
Worldwide on a royalty-free basis the right to use the name 'MacAndrews &
Forbes' until November 12, 1997.
OPTION GRANT
On July 22, 1996, the Company granted options to acquire 750,000 shares of
Company Common Stock to Mr. Perelman as compensation for services rendered and
to be rendered to the Company by Mr. Perelman in his capacity as Chairman of the
Board of Directors. Such options have an exercise price of $21.50 per share
(market price on the date of grant) and vest with respect to one third of the
shares subject to the options on the date of grant, and with respect to an
additional one third of such shares on each of July 22, 1997 and July 22, 1998.
The options expire on July 22, 2006.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to a Registration Rights Agreement, Mafco Consolidated Holdings
has the right to require the Company to use its best efforts to register under
the Securities Act and the securities or blue sky laws of any jurisdiction
designated by Mafco Consolidated Holdings all or a portion of the shares of
Company Common Stock acquired by Mafco Consolidated Holdings pursuant to the
Abex Transactions (the 'Registrable Shares'). The Company is not required to (i)
effect a demand registration more than once in any 12 month period, (ii) effect
more than two demand registrations with respect to the Registrable Shares or
(iii) file a registration statement during periods (not to exceed 60 days) when
(a) the Company is contemplating a public offering, (b) the Company is in
possession of certain material non-public information or (c) audited financial
statements are not available and their inclusion in a registration statement is
required. In addition, and subject to certain conditions described in the
Registration Rights Agreement, if at any time the Company proposes to register
under the Securities Act an offering of shares of Company Common Stock or any
other classes of equity securities, then Mafco Consolidated Holdings would have
the right to require the Company to use its best efforts to effect the
registration under the Securities Act and the securities or blue sky laws of any
jurisdiction designated by Mafco Consolidated Holdings of all or a portion of
the Registrable Shares as designated by Mafco Consolidated
60
<PAGE>
Holdings. The Company is responsible for all expenses relating to the
performance of, or compliance with, the Registration Rights Agreement, except
that Mafco Consolidated Holdings is responsible for underwriters' discounts and
selling commissions with respect to the Registrable Shares being sold.
Prior to the consummation of the Cigar IPO, the Company and Cigar Holdings
entered into a Registration Rights Agreement pursuant to which the Company and
certain transferees of the Class B Common Stock, par value $0.01 per share (the
'Class B Common Stock') of Cigar Holdings held by the Company (the 'Holders')
have the right to require Cigar Holdings to register (a 'Demand Registration')
all or part of the Class A Common Stock issuable upon conversion of the Class B
Common Stock owned by such Holders under the Securities Act); provided that
Cigar Holdings (i) will not be obligated to effect a Demand Registration within
180 days of the closing date of the Cigar IPO unless the managing underwriter in
the Cigar IPO has given its consent and (ii) may postpone giving effect to a
Demand Registration for up to a period of 30 days if Cigar Holdings believes
such registration might have a material adverse effect on any plan or proposal
by Cigar Holdings with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or Cigar Holdings is in possession
of material non-public information that, if publicly disclosed, could result in
a material disruption of a major corporate development or transaction then
pending or in progress or in other material adverse consequences to Cigar
Holdings. In addition, the Holders will have the right to participate in
registrations by Cigar Holdings of its Class A Common Stock (a 'Piggyback
Registration'). Cigar Holdings will pay any expenses incurred in connection with
any Demand Registration or Piggyback Registration, except for underwriting
discounts, commissions and certain expenses attributable to the shares of Class
A Common Stock sold by such Holders.
DESCRIPTION OF THE VALUE SUPPORT RIGHTS AND VSR NOTES
The VSRs were issued under the VSR Agreement, a copy of which is filed as
an exhibit to the Registration Statement, of which this Prospectus forms a part.
The following summaries of certain provisions of the VSR Agreement are complete
in all material respects. Where reference is made to particular provisions of
the VSR Agreement, such provisions, including the definitions of certain terms,
are incorporated by reference as a part of such summaries or terms, which are
qualified in their entirety by such reference. References to sections in the
following summaries are references to sections of the VSR Agreement. The
definitions of certain capitalized terms used in the following summary are set
forth below under '--Certain Definitions Used in the VSR Agreement.'
GENERAL
The VSRs are unsecured obligations of the Company and rank equally with all
other unsubordinated indebtedness of the Company. American Stock Transfer &
Trust Company will be the Trustee, Paying Agent and the Security Registrar under
the VSR Agreement.
The VSRs are issuable only in registered form. Payment of any amounts
pursuant to the VSRs shall be made only upon presentation thereof by the Holders
(as defined below) at the office or agency of the Company maintained for that
purpose in the Borough of Manhattan, The City of New York and at any other
office or agency maintained by the Company for such purpose. (Section 3.7). All
VSRs surrendered for payment shall be delivered to the Trustee and shall be
promptly cancelled by it. (Section 3.9). No service charge will be made for any
registration of transfer or exchange of VSRs, except that the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith. (Section 3.5). The VSRs may
be surrendered for registration of transfer or exchange at the office maintained
by the Company for that purpose in the Borough of Manhattan, The City of New
York.
The Company may deliver VSRs executed by the Company to the Trustee for
authentication, together with a Company Order (as defined below) for the
authentication and delivery of such VSRs. The Trustee, in accordance with such
Company Order, shall authenticate and deliver such VSRs as provided in the VSR
Agreement and not otherwise. (Section 3.3).
Upon any application or request by the Company to the Trustee to take any
action under any provision of the VSR Agreement, the Company shall furnish to
the Trustee an Officers' Certificate (as defined below) stating
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<PAGE>
that, in the opinion of the signer, all conditions precedent, if any, provided
for in the VSR Agreement relating to the proposed action have been complied with
and an Opinion of Counsel (as defined below) stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with. Every
certificate or opinion with respect to compliance with a condition or covenant
provided for in the VSR Agreement shall include: (i) a statement that each
individual signing such certificate or opinion has read such covenant or
condition and the definitions herein relating thereto; (ii) a brief statement as
to the nature and scope of the examination or investigation upon which the
statements or opinions contained in such certificate or opinions are based;
(iii) a statement that, in the opinion of each such individual, he or she has
made such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has been
complied with; and (iv) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with. (Section 1.2).
The VSR Agreement also provides that the Trustee may rely upon determinations by
the Company contained in an officer's certificate or by the Accounting Firm or
any Independent Financial Expert and shall have no responsibility to
independently determine such facts or amounts.
PAYMENT AT THE MATURITY DATE OR AN OPTIONAL CALL DATE
The VSR Agreement provides that, subject to adjustment as described in
'--Antidilution,' unless the right to receive any such amount previously has
been satisfied in connection with an Optional Call Date, a Total Disposition, an
Event of Default, or a Redemption Event (as such terms are defined herein), the
Company shall pay to each Holder on the Maturity Date (as defined below) for
each VSR held by such Holder, an amount, if any, as determined by an independent
'big six' accounting firm (other than the accounting firm or firms serving as
the principal auditors for the Company or PCT) selected by the Company (the
'Accounting Firm'), equal to the lesser of (x) the excess, if any, of the Base
Amount (as defined below) over the 30-Day Average Market Price (as defined
below) and (y) $3.25. Such determinations by the Accounting Firm absent manifest
error shall be final and binding on the Company and the Holders. (Section 3.1
(c)).
Upon an Optional Call Date, the Company may, in its sole discretion, pay to
the Holder thereof for each VSR represented thereby an amount, as determined by
the Accounting Firm, payable in cash equal to the lesser of (x) the excess, if
any, of the Base Amount over the 30-Day Average Market Price and (y) $3.25;
provided, however, such amount (the 'Optional Call Payment Amount') shall in no
event be less than $0.50 if such Optional Call Date is on or prior to January 1,
1998. Such determinations by the Accounting Firm absent manifest error shall be
final and binding on the Company and the Holders. Such payment shall be made on
any date (the 'Optional Call Payment Date') established by the Company, which in
no event shall be more than 30 days after the Optional Call Date, to holders of
record at the close of business on the tenth business day following such
Optional Call Date. In the event the Company exercises its optional right to
call the VSRs on an Optional Call Date, the Company will issue a press release
on such date announcing such event, the Optional Call Payment Amount and the
Optional Call Payment Date. As soon as practicable following such Optional Call
Date, the Company shall give the Holder and the Trustee thereof notice that the
Company has exercised its optional right to call the VSRs, the Optional Call
Payment Amount and the Optional Call Payment Date; provided, however, such
notice to the Holders may, at the option of the Company, occur simultaneously
with the payment of the Optional Call Payment Amount. (Section 3.1(d)).
During the 60-day period immediately preceding (and including) an Optional
Call Date on which the Company exercises its optional right to call the VSRs or
the Maturity Date, as the case may be, the Company shall not, and shall not
permit any of its subsidiaries or affiliates (including for such purpose any
director or officer of the Company and PCT) to, engage in any Prohibited
Activity.
PAYMENT UPON THE OCCURRENCE OF A TOTAL DISPOSITION
Upon the consummation of a Total Disposition (as defined below), the
Company shall pay to each Holder for each VSR held by such Holder an amount in
cash, if any, as determined by the Accounting Firm, equal to the lesser of (x)
the excess, if any, of the Base Amount over the Total Disposition Amount (as
defined below) and (y) $3.25. Such determinations by the Accounting Firm and any
Independent Financial Expert (as defined below) absent manifest error shall be
final and binding on the Company and the Holders. Such payment shall be made on
the Total Disposition Payment Date (as defined herein). (Section 3.1(e)). As
soon as practicable following a Total
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Disposition, the Company shall give each Holder and the Trustee notice of such
Total Disposition and the Total Disposition Payment Date. (Section 3.1(f)).
PAYMENT IN CASH OR VSR NOTES
To the extent the aggregate principal amount of the senior debt obligation
referred to below is at least $25,000,000, all amounts payable pursuant to the
VSRs on the Maturity Date (but not otherwise) may be paid, at the option of the
Company, either in cash or by the issuance, not later than the date on which the
cash amount would otherwise be payable, of VSR Notes, which will be senior debt
obligations of the Company that are not subordinated to any other debt
obligation of the Company, with a principal amount equal to the amount of the
payment due. In connection with such issuance, the Company may establish a
minimum principal amount per VSR Payment Note not to exceed $1,000 and may
require that VSR Notes will only be issued in specified increments not to exceed
$1,000 above such minimum principal amount. Cash would be paid in lieu of the
issuance of fractional VSR Notes and could be funded in whole or in part through
the aggregation of fractional VSR Notes and sale of such VSR Notes in the
market. Any VSR Notes issued by the Company in satisfaction of the Company's
obligations with respect to VSRs will (i) be issued pursuant to an indenture
that will be qualified under the TIA, (ii) have a maturity of up to three years
from the date of issuance, (iii) pursuant to Amendment No. 1 to the VSR
Agreement, have an interest rate and redemption provisions designed to result,
in the joint opinion of Morgan Stanley and the Plaintiffs' Advisor, in the VSR
Notes having a market value as of the date of issuance on a fully distributed
basis equal to 100% of their principal amount and (iv) be designed to receive an
initial rating of at least B+ from Moody's Investors Service or B1 from Standard
& Poor's. In the event Morgan Stanley and the Plaintiffs' Advisor are unable to
agree, a nationally recognized investment banking firm shall be chosen by such
firms; in such event, at the Company's option, either the opinion of such third
firm or the opinion of the Plaintiffs' Advisor shall be controlling. The Company
has agreed to cause any VSR Notes that may be issued to be registered under the
Securities Act and listed on a national securities exchange or quoted for
trading on the NASDAQ National Market.
OPTIONAL REDEMPTION
Upon the occurrence of a Redemption Event (as defined below), the VSRs may
be redeemed at the option of the Company in whole (but not in part) on or prior
to the consummation of such event or transaction at a redemption price (the
'Redemption Price'), payable in cash, equal to the lesser of (x) 115% of the
excess, if any, of the Base Amount determined as of the fifth Business Day (as
defined below) prior to the date notices of redemption are mailed to Holders
(the date of such mailing is referred to herein as the 'Redemption Notice Date')
over the 30-day Average Market Price determined as of the Redemption Notice Date
and (y) $3.25.
A 'Redemption Event' shall be deemed to have occurred if either (i) as a
result of an event beyond the reasonable control of the Company, the existence
of the VSRs would cause the Company to cease to be a member of the consolidated
group with respect to which the Company files consolidated federal income tax
returns and such situation would be avoided or cured by the redemption of the
VSRs or (ii) the VSRs would create any material financial or legal impediment to
the consummation of any bona fide significant corporate event or transaction (a
'Redemption Transaction') involving the Company, which transaction would, if
consummated, result in a Change of Control of the Company, and in connection
with which transaction the Company has entered into definitive documentation
which creates a binding obligation upon the Company to consummate such
transaction (subject to customary conditions to closing and fiduciary
obligations), in either of clauses (i) and (ii) as determined in good faith by
the Board as evidenced by an Officers' Certificate of the Company.
Notwithstanding the foregoing, VSRs may not be redeemed (i) if the Company
or (unless it shall have been the subject of a Change of Control) PCT or any of
their respective successors or Affiliates (including for such purpose any
director or officer of the Company and PCT) shall have engaged in any Prohibited
Activity during the 35-trading day period preceding the Redemption Notice Date
or (ii) in the case of a Redemption Event arising out of a Redemption
Transaction, unless such Redemption Transaction shall have been consummated on
or prior to the Redemption Payment Date. In the event the VSRs cannot be
redeemed as a result of the occurrence of either clause (i) or (ii) above, the
VSRs will remain outstanding and continue to be governed by the terms of the VSR
Agreement.
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Notice of redemption shall include the Redemption Price and if the
Redemption Event arises out of a Redemption Transaction, a statement to the
effect that such redemption is contingent upon the consummation of such
Redemption Transaction, and shall be mailed at least 15 days but not more than
60 days before the date (the 'Redemption Payment Date') payments are scheduled
to be made to each Holder of VSRs to be redeemed at its registered address. If
money sufficient to pay the Redemption Price of all VSRs to be redeemed is
deposited with the Paying Agent (as defined below) on or before the payment
date, on or after such date the VSRs shall terminate and become null and void
and the Holders thereof shall have no further rights with respect thereto other
than to receive the Redemption Price, which, in the case of a Redemption Event
arising out of a Redemption Transaction, shall be subject to the consummation of
such Redemption Transaction. If the Redemption Transaction is not consummated,
the VSRs would remain outstanding and continue to be governed by the terms of
the VSR Agreement. (Section 3.1(h)).
NO INTEREST
Notwithstanding any provision of the VSR Agreement or of the VSRs to the
contrary, other than in the case of interest on the Default Payment Amount (as
defined below), no interest shall accrue on any amounts payable on the VSRs to
the Holders. (Section 3.1(i)).
EVENTS OF DEFAULT
Unless all of the VSRs shall have already become due and payable, either
the Trustee or the Holders of not less than 25% of the VSRs then Outstanding by
notice in writing to the Company (and to the Trustee if given by the Holders)
may declare the VSRs to be due and payable immediately upon the occurrence of an
Event of Default (as defined below) that is continuing (i.e., has not been
cured) at the time of such declaration. In such event, the Default Amount shall
become immediately due and payable and, thereafter, shall bear interest at the
Default Interest Rate (as defined below) until payment is made to the Trustee.
'Event of Default,' with respect to the VSRs, means each of the following: (a)
default in the payment of all or any part of the amounts payable in respect of
any of the VSRs as and when the same shall become due and payable either at an
Optional Call Payment Date, the Maturity Date, the Total Disposition Payment
Date or Redemption Payment Date; (b) default in the performance, or breach, of
any covenant or warranty of the Company, which default or breach has not been
cured for a period of 90 days after written notice has been given to the Company
by the Trustee or to the Company and the Trustee by the Holders of at least 25%
of the Outstanding VSRs; or (c) certain events of bankruptcy, insolvency,
reorganization or other similar events in respect of the Company. (Section 8.1).
If at any time after such declaration of acceleration has been made, and
before any judgment or decree for the payment of the amounts due shall have been
obtained or entered, the Company shall pay or shall deposit with the Trustee a
sum sufficient to pay all amounts which shall have become due otherwise than by
acceleration (with interest upon such overdue amount at the Default Interest
Rate to the date of such payment or deposit) and such amount as shall be
sufficient to cover reasonable compensation to the Trustee, its agents,
attorneys and counsel, and all other expenses and liabilities incurred and all
advances made, by the Trustee except as a result of negligence or bad faith, and
if any and all Events of Default, other than the non-payment of the amounts
which have become due by acceleration, shall have been cured, waived or
otherwise remedied, then the Holders of a majority of all the VSRs then
Outstanding, by written notice to the Company and to the Trustee, may waive all
defaults with respect to the VSRs and rescind and annul such declaration and its
consequences. (Section 8.1).
REMEDIES OF THE TRUSTEE AND HOLDERS UPON AN EVENT OF DEFAULT
If the Company shall default in the payment of all or any part of the VSRs,
whether at an Optional Call Payment Date, the Maturity Date, the Total
Disposition Payment Date, the Default Payment Date, or upon acceleration or
otherwise, then upon demand of the Trustee, the Company will pay to the Trustee
for the benefit of the Holders of the VSRs the whole amount that then shall have
become due and payable on all VSRs (with interest from the date due and payable
to the date of such payment upon the overdue amount at the Default Interest
Rate). (Section 8.2).
If the Company shall fail to pay such amounts upon such demand, the
Trustee, in its own name and as trustee of an express trust, shall be entitled
and empowered to institute any action or proceedings at law or in
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equity for the collection of the sums so due and unpaid, and may prosecute any
such action or proceedings to judgment or final decree, and may enforce any such
judgment or final decree against the Company or other obligor upon the VSRs and
collect in the manner provided by law out of the property of the Company or
other obligor upon such VSRs, wherever situated, the moneys adjudged or decreed
to be payable. (Section 8.2).
In case an Event of Default has occurred, has not been waived and is
continuing, the Trustee may in its discretion proceed to protect and enforce the
rights vested in it by the VSR Agreement by such appropriate judicial
proceedings as the Trustee shall deem most effectual to protect and enforce any
of such rights, either at law or in equity or in bankruptcy or otherwise,
whether for the specific enforcement of any covenant or agreement contained in
the VSR Agreement or in aid of the exercise of any power granted in the VSR
Agreement or to enforce any other legal or equitable right vested in the Trustee
by the VSR Agreement or by law. (Section 8.4).
No Holder of any VSR shall have any right to institute any action or
proceeding at law or in equity or in bankruptcy or otherwise upon or under or
with respect to the VSR Agreement, or for the appointment of a trustee,
receiver, liquidator, custodian or other similar official or for any other
remedy thereunder, unless such Holder previously shall have given to the Trustee
written notice of default and of the continuance thereof, as hereinbefore
provided, and unless also the Holders of not less than 25% of the VSRs then
Outstanding shall have made written request upon the Trustee to institute such
action or proceedings in its own name as trustee thereunder and shall have
offered to the Trustee such reasonable indemnity as it may require against the
costs, expenses and liabilities to be incurred therein or thereby and the
Trustee for 60 days after its receipt of such notice, request and offer of
indemnity shall have failed to institute any such action or proceeding and no
direction inconsistent with such written request shall have been given to the
Trustee by the Holders of a majority of the VSRs. (Section 8.6).
Notwithstanding any other provision in the VSR Agreement and any provision
of the VSRs, the right of any Holder of any VSR to receive payment of the
amounts payable in respect thereof on or after the respective due dates
expressed therein, or to institute suit for the enforcement of any such payment
on or after such respective dates, shall not be impaired or affected without the
consent of such Holder. (Section 8.7).
No delay or omission of the Trustee or of any Holder to exercise any right
or power accruing upon any Event of Default occurring and continuing as
aforesaid shall impair any such right or power or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein; and, except as
described above, every power and remedy given by the VSR Agreement or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as shall be deemed expedient, by the Trustee or by the Holders. (Section 8.8).
The Holders of a majority of the VSRs at the time Outstanding shall have
the right to direct the time, method, and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee with respect to the VSRs; provided that such direction shall not
be otherwise than in accordance with law and the provisions of the VSR
Agreement; and provided further that, subject to certain provisions of the VSR
Agreement, the Trustee shall have the right to decline to follow any such
direction if the Trustee, being advised by counsel, shall determine that the
action or proceeding so directed may not lawfully be taken or if the Trustee in
good faith by its board of directors, the executive committee, or a trust
committee of directors or responsible officers of the Trustee shall determine
that the action or proceedings so directed would involve the Trustee in personal
liability or if the Trustee in good faith shall so determine that the actions or
forebearance specified in or pursuant to such direction would be unduly
prejudicial to the interests of Holders of the Securities not joining in the
giving of said direction, it being understood that, subject to certain
provisions of the VSR Agreement, the Trustee shall have no duty to ascertain
whether or not such actions or forebearance are unduly prejudicial to such
Holders. (Section 8.9).
The Trustee shall transmit to the Holders notice by mail of all defaults
which have occurred within 90 days after the occurrence thereof, unless such
defaults shall have been cured before the giving of such notice; provided that,
except in the case of default in the payment of the amounts payable in respect
of any of the VSRs, the Trustee shall be protected in withholding such notice if
and so long as the board of directors, the executive committee, or a trust
committee of directors or trustees and/or Responsible Officers (as defined
below) of the Trustee in good faith determines that the withholding of such
notice is in the interests of the Holders. (Section 8.11).
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PROHIBITED ACTIVITY AND MANIPULATIVE TRANSACTIONS
During the 60-day period immediately preceding (and including) an Optional
Call Date on which the Company exercises its optional right to call the VSRs or
the Maturity Date, as the case may be, the Company shall not, and shall not
permit any of its subsidiaries or Affiliates (including for such purpose any
director or officer of the Company and PCT) to engage in any Prohibited Activity
(as defined below). Moreover, neither the Company nor any of its Affiliates
shall take any action that is intended to manipulate the 30-Day Average Market
Price during the 60-day period immediately preceding (and including) an Optional
Call Date on which the Company exercises its optional right to call the
Securities or the Maturity Date, as the case may be.
The Company shall not, and shall not permit any of its subsidiaries or
Affiliates (including for such purpose any director or officer of the Company
and PCT) to acquire in open market transactions, private transactions or
otherwise, the Securities.
ANTIDILUTION
In the event PCT shall in any manner subdivide (by stock split, stock
dividend or otherwise) or combine (by reverse stock split or otherwise) the
number of outstanding shares of PCT Common Stock (an 'Adjustment Event'), the
Applicable Number with respect to shares of PCT Common Stock shall, from and
after the date of such Adjustment Event (subject to further adjustment in
accordance with this section), equal the Applicable Number with respect to the
shares of PCT Common Stock, in effect immediately prior to such Adjustment
Event, multiplied by a fraction, the numerator of which shall be the total
number of shares of PCT Common Stock outstanding immediately following such
Adjustment Event and the denominator of which shall be the total number of
shares of PCT Common Stock outstanding immediately prior to such Adjustment
Event. In the event that any securities received with respect to PCT Common
Stock shall in any manner be subdivided (by stock split, stock dividend or
otherwise) or combined (by reverse stock split or otherwise), appropriate
adjustments shall be made in a manner consistent with the principles set forth
in this section. Whenever such an adjustment is made, as provided above, the
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Trustee a copy of such certificate and (c) mail a brief summary
thereof to each Holder. The Trustee shall be fully protected in relying on any
such certificate and on any adjustment therein contained. Such adjustment absent
manifest error shall be final and binding on the Company and the Holders.
(Section 3.1(k)).
CERTAIN DEFINITIONS USED IN THE VSR AGREEMENT
'Affiliate' of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
'control' when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of Voting Securities (as defined below), by
contract or otherwise; and the terms 'controlling' and 'controlled' have
meanings correlative to the foregoing.
'Applicable Number,' initially shall be equal to one, subject to adjustment
as described under '--Antidilution' above.
'Authorized Newspaper' means The Wall Street Journal (Eastern Edition), or
if The Wall Street Journal (Eastern Edition) shall cease to be published, or, if
the publication or general circulation of The Wall Street Journal (Eastern
Edition) shall be suspended for whatever reason, such other English language
newspapers of general circulation in The City of New York, New York, as is
selected by the Company.
'Base Amount' means, as of any date of determination the excess (rounded to
the nearest $0.01) of (a) (x) $10.25, if the date of determination occurs on or
prior to January 1, 1998, or (y) $11.00, if the date of determination occurs
after January 1, 1998, over (b) the Distribution Amount (as defined below).
'Business Day' means any day (other than a Saturday or a Sunday) on which
banking institutions in The City of New York, New York are not authorized or
obligated by law or executive order to close and, if the VSRs are listed on a
national securities exchange, such exchange is open for trading.
'Change of Control' shall mean, with respect to any specified Person, the
occurrence of one or more of the following events: (i) a Person or entity or a
group of Persons or entities acting in concert as a partnership, limited
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partnership, syndicate or other group (within the meaning of Rule 13d-3 under
the Exchange Act) shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of shares representing 50% or more of the voting
power of the outstanding shares of voting stock of such specified Person; (ii)
such specified Person or any subsidiary of such specified Person shall merge or
consolidate with any other Person and after giving effect to such merger or
consolidation the holders of the voting stock of such specified Person
immediately prior thereto will own shares representing less than 50% of the
voting power of the voting stock of such specified Person or its ultimate
parent; (iii) a sale or other disposition of all or substantially all of the
assets of such specified Person; (iv) the issuance of shares of voting stock by
such specified Person which would result in the number of shares of voting stock
of such specified Person outstanding after such issuance being equal to or in
excess of 150% of the number of shares of voting stock of such specified Person
outstanding as of the Effective Date (subject to appropriate adjustment in the
event of a stock split, stock dividend, recapitalization or other similar event
applicable to shares of voting stock following the Effective Date); and (v) if
such specified person is PCT, individuals who would constitute a majority of the
nominees to be elected to the Board of Directors of PCT (the 'PCT Board') at any
meeting of stockholders or by written consent (without regard to any members of
the Board of Directors elected pursuant to the terms of any class or series of
preferred stock of PCT) shall be elected to the PCT Board where the election or
nomination for election by PCT's stockholders of such directors was not approved
by a vote of at least a majority of the directors in office immediately prior to
such election.
'Company Request' or 'Company Order' means a written request or order
signed in the name of the Company by the chairman of the Board of Directors or
the president or any vice president, the controller or assistant controller and
the treasurer or assistant treasurer or the secretary or any assistant
secretary, and delivered to the Trustee.
'Default Payment Amount' means, as of a Default Payment Date, an amount, if
any, determined by the Accounting Firm equal to the lesser of (i) the excess, if
any, of (x) the Base Amount determined as of such Default Payment Date over (y)
the 30-Day Average Market Price determined as of such Default Payment Date and
(ii) $3.25.
'Default Interest Rate' means 8.46% per annum.
'Default Payment Date' means the date upon which the VSRs become due and
payable as described in '--Events of Default.'
'Distribution Amount' means, as of any date of determination, the sum of
(i) the value of all cash dividends or other cash distributions declared and
paid with respect to the Applicable Number of shares of PCT Common Stock, (ii)
all cash received by a holder of PCT Common Stock with respect to the Applicable
Number of shares of PCT Common Stock, as consideration in a merger,
consolidation or other business combination, (iii) the fair market value, as
determined by the Independent Financial Expert, of all dividends or other
distributions consisting of property or assets (other than cash, the VSRs or
other securities, but including any rights, warrants, options to purchase
securities or other securities that expire prior to an Optional Call Date or the
Maturity Date, as the case may be (collectively, 'Designated Options')),
declared and paid with respect to the Applicable Number of shares of PCT Common
Stock and (iv) the fair market value, as determined by the Independent Financial
Expert, of all consideration consisting of property or assets (other than cash,
the VSRs, or other securities, but including Designated Options) received by a
holder of PCT Common Stock with respect to the Applicable Number of shares of
PCT Common Stock, as consideration in a merger, consolidation or other business
combination, in all such cases from the Effective Date to such date of
determination.
For the purposes of this definition, (x) the amount of dividends declared
and paid and the amount of consideration received with respect to the Applicable
Number of shares of PCT Common Stock shall include dividends declared and paid
and considerations received with respect to any securities paid as dividends or
received as consideration with respect to the Applicable Number of shares of PCT
Common Stock and (y) the fair market value of any Designated Option, as of any
date of determination, shall equal the excess, if any, of the average of the
Market Prices of the security underlying such Designated Option for the 30
consecutive trading days ended on the Business Day immediately prior to such
date of determination (or if the underlying security no longer exists, for the
30 consecutive trading days ended on the Business Day immediately prior to the
date of the transaction as a result of which such security ceased to exist) over
the exercise price therefor provided in such Designated Option; provided, that,
if on the date any such Designated Option expired, the Market Price of the
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security underlying such Designated Option was less than the exercise price
therefor provided in such Designated Option, the fair market value of such
Designated Option shall equal zero.
'Effective Date' means November 30, 1996.
'Holder' means a Person in whose name a VSR is registered in the Security
Register.
'Independent Financial Expert' means a nationally recognized investment
banking firm selected by the Company, that does not have a direct or indirect
ownership interest in the Company, or any of its Affiliates and that at the time
it is called upon to give independent financial advice to the Company, is not
(and none of whose directors, officers or Affiliates is) a director or officer
of the Company or any of its Affiliates; provided, that, notwithstanding the
foregoing, no such investment banking firm shall be disqualified from serving as
an Independent Financial Expert solely by reason of its ownership, in the
ordinary course of business, for its own account or for the account of any
customer of securities of the Company or any Affiliate of the Company.
'Market Price' means, as of any date of determination, for any security,
the last reported sale price as reported on the principal national securities
exchange on which such security is then listed, or, if (i) such security is not
listed on a national securities exchange or (ii) such security is listed on a
national securities exchange but the majority of the trading volume with respect
to such security is effected on the NASDAQ National Market, the last reported
sale price as reported on the NASDAQ National Market, or, if such security is
not listed on a national securities exchange and is not quoted on NASDAQ
National Market the average of the highest reported bid and lowest reported
asked quotation on the NASDAQ or, if such security is not listed on a national
securities exchange and is not quoted by the NASDAQ National Market or the
NASDAQ but is traded in the over-the-counter market, the fair market value as
determined by an Independent Financial Expert.
'Maturity Date' means January 1, 1999.
'NASDAQ' means the National Association of Securities Dealers, Inc.
Automated Quotation System.
'Officers' Certificate,' when used with respect to the Company, means a
certificate signed by the chairman of the Board of Directors or the president or
any vice president, the controller or assistant controller and the treasurer or
assistant treasurer or the secretary or any assistant secretary of the Company,
delivered to the Trustee.
'Opinion of Counsel' means a written opinion of counsel, who may be counsel
for the Company.
'Optional Call Date' means each April 1, July 1, October 1 and January 1
from and including April 1, 1997 to and including October 1, 1998.
'Outstanding' when used with respect to VSRs means, as of the date of
determination, all VSRs theretofore authenticated and delivered under the VSR
Agreement, except:
(a) VSRs theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(b) From and after the earliest of the Default Payment Date, the Total
Disposition Payment Date, an Optional Call Date or the Maturity Date, VSRs,
for the payment of which money in the necessary amount has been theretofore
deposited with the Trustee or any Paying Agent (other than the Company) in
trust, or set aside and segregated in trust by the Company (if the Company
shall act as its own Paying Agent) for the Holders of such VSRs; and
(c) VSRs in exchange for or in lieu of which other VSRs have been
authenticated and delivered pursuant to the VSR Agreement, other than any
such VSRs in respect of which there shall have been presented to the
Trustee proof satisfactory to it that such VSRs are held by a bona fide
purchaser in whose hands the VSRs are valid obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
Outstanding VSRs have given any request, demand, direction, consent or waiver
hereunder, VSRs owned by the Company or any Affiliate of the Company, whether
held as treasury stock or otherwise, shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, direction, consent or waiver, only
VSRs which the Trustee knows to be so owned shall be so disregarded.
'Paying Agent' means any Person authorized by the Company to pay the amount
payable, if any, on any VSRs on behalf of the Company, as described under
'--Payment at the Maturity Date or the Optional Call Date,' '--Payment Upon the
Occurrence of a Total Disposition,' '--Optional Redemption' and '--No Interest'
above.
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'Person' means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, limited liability company,
unincorporated organization or government or any agency or political subdivision
thereof.
'Prohibited Activity' means any acquisition or disposition in open market
transactions, private transactions or otherwise, of (i) any shares of PCT Common
Stock, (ii) any securities convertible into or exchangeable for shares of PCT
Common Stock or (iii) any securities which holders of PCT Common Stock have
received with respect to their shares of PCT Common Stock, whether as a dividend
or distribution or in connection with a merger, consolidation or otherwise
(other than, in each case, (w) shares of PCT Common Stock acquired on behalf of
a 401(k) plan established for PCT and its subsidiaries to satisfy participant
directions and related Company matching obligations, (x) shares issued or
acquired pursuant to employee stock options granted to directors, officers or
employees in the ordinary course of business prior to the first day of such
period, (y) sales or other dispositions of shares by directors or officers of
PCT or (z) acquisitions of up to an aggregate of 25,000 shares of PCT Common
Stock in the open market by directors or officers).
'Responsible Officer' when used with respect to the Trustee means any
officer assigned to the Corporate Trust Office and also means, with respect to
any particular corporate trust matter, any other officer of the Trustee to whom
such matter is referred because of his knowledge of and familiarity with the
particular subject.
'Security Register' shall mean the register kept at the Corporate Trust
Office of the Trustee in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of VSRs and of
transfers of VSRs.
'30-Day Average Market Price' means, as of any date of determination, the
average of the Market Price of the Applicable Number of shares of PCT Common
Stock for the 30 consecutive trading days ended on the Business Day immediately
prior to such date of determination. For purposes of this definition, the Market
Price of the Applicable Number of shares of PCT Common Stock shall (following
such receipt) include the Market Price of any securities (other than the VSRs)
which shall have been received by a holder of PCT Common Stock with respect to
the Applicable Number of shares of PCT Common Stock from the Effective Date to
the date of determination, whether as a dividend or other distribution or in
connection with a merger, consolidation or other business combination or a
reclassification of PCT Common Stock.
'Total Disposition' means (i) one or more mergers, consolidations or other
business combinations, involving PCT after giving effect to which no shares of
PCT Common Stock shall remain outstanding or registered under the Exchange Act,
(ii) a sale, transfer or other disposition in one or a series of transactions,
of all or substantially all of the assets of PCT, or (iii) a reclassification of
PCT Common Stock as the capital stock of any other Person (other than an
Affiliate of PCT).
'Total Disposition Amount' means, the fair market value, as determined by
an Independent Financial Expert, of (A) the consideration, if any, received with
respect to the Applicable Number of shares of PCT Common Stock, by the holder
thereof as a result of such Total Disposition, or (B) if an election of the type
of consideration to be received by the holders of PCT Common Stock is made, the
consideration selected by a majority of such stockholders (and assuming such
holder did not exercise any right of appraisal granted under law).
'Total Disposition Payment Date,' with respect to a Total Disposition,
means the date established by the Company for payment on the amount due on the
VSRs in respect of such Total Disposition, which in no event shall be more than
30 days after the date on which such Total Disposition was consummated.
'Voting Securities' means securities having ordinary voting power to elect
a majority of the directors irrespective of whether or not stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency.
CERTAIN SECURITIES LAW CONSIDERATIONS
Due to the lack of legal precedent, it is uncertain how the VSRs would be
treated under the 'short-swing' trading or other provisions of Section 16 of the
Exchange Act. Accordingly, any person who is a director or officer of PCT or a
beneficial owner of 10% or more of the outstanding shares of PCT Common Stock
(and any person who acquires 10% or more of the VSRs) should consult his or its
legal advisor in connection with any purchase or sale of a VSR.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Each of the following summaries of certain provisions of certain debt
instruments of the Company does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of such
debt instruments.
CREDIT AGREEMENT
The Credit Agreement entered into by Consolidated Cigar with The Chase
Manhattan Bank (the 'Bank') consists of the $60.0 million Revolving Credit
Facility and the $20.0 million Working Capital Facility. The Revolving Credit
Facility and the Working Capital Facility have final maturities in April 1999.
The Revolving Credit Facility is subject to quarterly commitment reductions of
$2.5 million during each year of the term of such facility. The Credit Agreement
is secured by first priority liens on all of the material assets of Consolidated
Cigar and its domestic subsidiaries and pledges of the capital stock of all of
Consolidated Cigar's subsidiaries (with certain exceptions for the capital stock
of foreign subsidiaries). The Credit Agreement is guaranteed by Cigar Holdings,
and by all of the domestic subsidiaries of Consolidated Cigar. The guarantee by
the Company is secured by a pledge of all of the shares of common stock of
Consolidated Cigar owned by Cigar Holdings.
As of June 29, 1996, there was approximately $11.8 million unused and
available under the Credit Agreement, after taking into account approximately
$1.0 million utilized to support letters of credit. Loans outstanding under the
Credit Agreement bear interest, at Consolidated Cigar's option, at either (i)
the Bank's base rate plus 1.0%; (ii) the Bank's 30, 60, 90 or 180 day LIBOR rate
plus 2.0% or (iii) with respect to loans to Consolidated Cigar's wholly owned
subsidiary CIC, and subject to availability, the Bank's '936 Rate' plus 2.0%.
The Credit Agreement contains various restrictive covenants including,
among other things, limitations on the ability of Consolidated Cigar and its
subsidiaries to incur debt, create liens, pay dividends, sell assets and make
investments, acquisitions and capital expenditures. In addition, the Credit
Agreement requires Consolidated Cigar to maintain specified financial ratios and
satisfy certain tests, including maximum leverage ratios and minimum interest
coverage ratios. The Credit Agreement also contains customary events of default,
including if Cigar Holdings were to own and control less than all of the issued
and outstanding capital stock of Consolidated Cigar or if a 'Change of Control'
(as defined in the Senior Subordinated Notes Indenture) were to occur.
Consolidated Cigar recently entered into an amendment to the Credit Agreement,
which, among other things, permitted Consolidated Cigar to pay a $5.6 million
dividend to the Company and to pay dividends and make distributions on terms
substantially similar to those contained in the Senior Subordinated Notes
Indenture.
SENIOR SUBORDINATED NOTES
In February 1993, Consolidated Cigar sold $90 million aggregate principal
amount of its Senior Subordinated Notes and as of June 29, 1996, $90 million
aggregate principal amount of Senior Subordinated Notes were outstanding. The
Senior Subordinated Notes bear interest at the rate of 10 1/2% per annum,
payable semi-annually on March 1 and September 1. The Senior Subordinated Notes
mature on March 1, 2003 and Consolidated Cigar is not required to make any
sinking fund payments with respect to the Senior Subordinated Notes. The Senior
Subordinated Notes are subordinate in right of payment to all senior debt of
Consolidated Cigar, including the liabilities of Consolidated Cigar under the
Credit Agreement, rank pari passu with all future senior subordinated debt of
Consolidated Cigar and rank senior to all future subordinated debt of
Consolidated Cigar.
The Senior Subordinated Notes are redeemable at the option of Consolidated
Cigar, on and after March 1, 1998, in whole or in part, at the following
redemption prices (expressed as percentages of the principal amount) for the 12
month period beginning each March 1: 1998--103.00%; 1999--101.50%; and 2000 and
thereafter-- 100%, plus, in each case, accrued and unpaid interest to the date
fixed for redemption. In addition, the Senior Subordinated Notes are redeemable
at any time upon a Change of Control at the redemption prices set forth in the
Senior Subordinated Notes Indenture.
A 'Change of Control' means (i) any person, other than Ronald O. Perelman
or any person controlled, directly or indirectly, by Mr. Perelman (the
'Permitted Holders'), is or becomes the beneficial owner, directly or
indirectly, of more than 35% of the total voting power of the voting stock of
Consolidated Cigar and the Permitted Holders beneficially own, directly or
indirectly, a lesser percentage of the total voting power of the
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voting stock of Consolidated Cigar than such other person or (ii) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of Consolidated Cigar (together with any new
directors whose election by such Board of Directors or whose nomination for
election by the stockholders of Consolidated Cigar was approved by a vote of
66 2/3% of the directors of Consolidated Cigar then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of Consolidated Cigar then in office.
The Senior Subordinated Notes Indenture contains certain covenants that,
among other things, limit the issuance of additional debt and redeemable stock
by Consolidated Cigar, the issuance of debt and preferred stock by Consolidated
Cigar's subsidiaries, the payment of dividends on and redemption of capital
stock of Consolidated Cigar and its subsidiaries and the redemption of certain
subordinated obligations of Consolidated Cigar, the sale of assets and stock of
Consolidated Cigar's subsidiaries, transactions with affiliates and
consolidations, mergers and transfers of all or substantially all of
Consolidated Cigar's assets. The Senior Subordinated Notes Indenture also
prohibits certain restrictions on distributions from subsidiaries of
Consolidated Cigar and contains customary events of default.
In addition, upon the occurrence of a Change of Control (as defined in the
Senior Subordinated Notes Indenture), each holder of the Senior Subordinated
Notes has the right, subject to the satisfaction of certain conditions relating
to Consolidated Cigar's bank indebtedness, to require Consolidated Cigar to
repurchase such holder's Senior Subordinated Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest to the date of purchase.
PROMISSORY NOTE
In connection with the Cigar IPO, Cigar Holdings issued the Promissory Note
in an original principal amount of $70 million to Mafco Consolidated Group. The
Promissory Note is noninterest bearing, unsecured, subordinated to senior
indebtedness (as defined in the Promissory Note) and repayable in whole or in
part at any time or from time to time without premium or penalty. The Promissory
Note is payable in quarterly installments of $2.5 million beginning March 31,
1997 with the final installment payable on December 31, 2003. The failure by
Cigar Holdings to make any payment on the Promissory Note when due and the
failure by Cigar Holdings to cure such non-payment during the 60-day period
following such due date would result in an event of default thereunder, and the
Company could declare all remaining amounts outstanding under the Promissory
Note to be immediately due and payable.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Skadden Arps, Slate, Meagher & Flom LLP, the following
are the material U.S. federal income tax consequences of the receipt, ownership,
lapse, settlement or sale or other taxable disposition of the VSRs. This opinion
is only addressed to PCT Common Stock holders who receive VSRs in the
Distribution (the 'Initial Holders') and who hold such VSRs, as well as PCT
Common Stock, as capital assets. Accordingly, this opinion may not be applicable
to persons in special tax situations, such as financial institutions, insurance
companies, tax-exempt organizations, dealers in securities or currencies,
persons whose functional currency is not the U.S. dollar, and this opinion does
not address any state, local or foreign tax consequences. This opinion is based
on current provisions of the Code, existing, temporary and proposed regulations
promulgated thereunder and administrative and judicial interpretations thereof,
all of which are subject to change, possibly with retroactive effect. Many of
the rules described below are intricate and complex. Each Initial Holder is
urged to consult its tax advisor with respect to the particular U.S. federal
income tax consequences to it and also any state, local or foreign tax
consequences.
The U.S. federal income tax consequences resulting from the ownership,
lapse, settlement, sale or other disposition of the VSRs received by an Initial
Holder depend upon how the VSRs are characterized for federal income tax
purposes. No court has addressed the proper U.S. federal income tax
characterization of VSRs, although the Internal Revenue Service (the 'Service')
has issued a revenue ruling (Revenue Ruling 88-31, 1988-1 C.B. 302) which held
that rights which are in some respects similar to the VSRs are to be treated as
cash settlement put options for U.S. federal income tax purposes. Based upon
such authority, the VSRs will be treated as cash settlement put options. Such
opinion is not binding upon a court or the Service and subsequent
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legislation, regulations, court decisions and revenue rulings could affect the
U.S. federal income tax treatment of the VSRs.
Receipt of the VSRs
The Distribution will be treated as a distribution with respect to PCT
Common Stock, in an amount equal to the fair market value of the VSRs on the
date of the Distribution. PCT has advised the Company that it does not expect to
have current or accumulated earnings and profits for the year ended December 31,
1996. Provided that this is the case, the Distribution will be applied against
and will reduce the recipient Initial Holder's basis in its PCT Common Stock
and, to the extent the Distribution exceeds the Initial Holder's basis in its
PCT Common Stock, will be treated as capital gain from the sale or exchange of
the Initial Holder's PCT Common Stock. There can be no assurance, however, that
PCT will not have earnings and profits for the year ended December 31, 1996. If
that were the case, the receipt of the Distribution would be taxable as ordinary
dividend income to the extent of an Initial Holder's pro rata share of PCT's
current and accumulated earnings and profits allocable to the Distribution of
the VSRs. Thereafter, the Distribution would be a tax-free return of capital
that would reduce the recipient Initial Holder's basis in its PCT Common Stock
and, to the extent the Distribution were to exceed the Initial Holder's basis in
the PCT Common Stock, would be treated as capital gain from the sale or exchange
of the Initial Holder's PCT Common Stock.
Corporate Initial Holders. Subject to applicable holding period
requirements and percentage limitations, the amount of the Distribution to a
corporate Initial Holder treated as a dividend will be eligible for the
dividends-received deduction available to domestic corporations. A corporate
Initial Holder will not be entitled to the dividends-received deduction in
respect of the amount of the Distribution treated as a dividend, to the extent
that the Distribution is with respect to shares of PCT Common Stock for which
such Initial Holder has not already established a holding period of at least 46
days during which such Initial Holder has not diminished its risk of loss with
respect to such share (the 'DRD Holding Period').
The following rules apply for determining the days that are counted toward
the DRD Holding Period. The day the share of stock is disposed of is included,
but the day the share is acquired and any day more than 45 days after the day
the share becomes ex-dividend are not included. Also excluded for this purpose
are days during which the holder of the share (i) has an option to sell, is
contractually obligated to sell, or has an open short sale of, stock or
securities substantially identical to such share, (ii) is the grantor of a call
option on stock or securities substantially identical to such share, or (iii)
has diminished risk of loss on such share by holding, or is obligated to make
payments related to dividends received on such share with respect to, a
position(s) in property that is 'substantially similar or related' to such
share. These rules are intricate, and Initial Holders are urged to consult their
tax advisor in this regard. Due to a lack of authority and the inherently
factual nature of the issue, counsel is unable to opine whether a VSR is a
position in property that is 'substantially similar or related' to a share of
PCT Common Stock for purposes of this latter rule. If the VSRs were deemed to be
such 'substantially related or similar' property, an Initial Holder that
receives a VSR in respect of a share of PCT Common Stock for which it has not
established the DRD Holding Period would not be entitled to include any days on
which it holds a VSR toward establishing the DRD Holding Period in respect of
such share. The receipt of a VSR on a share of PCT Common Stock for which the
DRD Holding Period has not been established will therefore render the Initial
Holder of that share ineligible for the dividends-received deduction in respect
of dividend income on that share, including dividend income arising from the
receipt of the VSR in respect of that share, until such time as the Initial
Holder establishes the DRD Holding Period in respect of such share.
In the event that the Distribution constitutes an 'extraordinary dividend'
within the meaning of Section 1059 of the Code, a corporate Initial Holder would
be required to reduce its tax basis for its shares of PCT Common Stock upon
which it received the Distribution by an amount equal to the portion of such
extraordinary dividend that is excluded from income pursuant to the
dividends-received deduction. If the amount of any such required reduction in
basis exceeds such corporate Initial Holder's tax basis for such shares, the
excess would be treated as gain from the sale or exchange of such shares. A
dividend with respect to a share of PCT Common Stock would be an extraordinary
dividend if such share has not been held by the Initial Holder for at least two
years before the dividend announcement date and the amount of dividends received
on that share having ex-dividend dates within an 85-day period equals or exceeds
10 percent, or the amount of dividends received on that share having ex-dividend
dates within a one-year period equals or exceeds 20 percent, of the higher of
the fair market value or the tax basis of that share. Thus, a corporate Initial
Holder that has not held its
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shares of PCT Common Stock as of the dividend announcement date for the
Distribution for at least two years (with application of the rules for
determining the days that are counted in such corporate Initial Holder's DRD
Holding Period, discussed above), should consider the application of this rule
to their particular circumstance.
In addition, Section 246A of the Code will reduce or eliminate the
dividends-received deduction in respect of dividends received on stock that is
debt financed.
Tax Basis and Holding Period of the VSRs
Initial Holders will have a tax basis in a VSR received pursuant to the
Distribution equal to the VSR's fair market value on the date of the
Distribution and, subject to the straddle rules described below, a holding
period in such VSR that begins on the day following the date of the
Distribution.
Settlement, Lapse or Sale of the VSRs
An Initial Holder will realize capital gain or loss upon the settlement,
lapse or sale of a VSR in an amount equal to the difference between the amount
realized (equal to the sum of the cash received and the fair market value of any
VSR Notes received), if any, and such Initial Holder's tax basis in the VSR.
Such capital gain or loss will be long term if the holding period for the VSR is
more than one year. Some or all of any loss realized upon the settlement, lapse
or sale of a VSR may be deferred, and an Initial Holder's holding period may be
tolled, under the straddle rules described below.
Settlement of VSRs with VSR Notes
To the extent an Initial Holder receives VSR Notes and/or cash in
settlement of the VSRs, such Initial Holder's amount realized will equal the sum
of the amount of cash received and the fair market value of the VSR Notes
received. In such a case, the Initial Holder will have a tax basis in the VSR
Notes equal to their fair market value on the day that they are received and a
holding period that begins the following day.
An Initial Holder who receives any VSR Notes in settlement of its VSRs will
recognize ordinary interest income upon payment or accrual of interest with
respect to the VSR Notes in accordance with the Initial Holder's method of
accounting. In addition, the VSR Notes will be treated as having been issued
with original issue discount ('OID') if the ratio of the VSR Notes' 'stated
redemption price at maturity' over their issue price exceeds a de minimis amount
equal to 1/4 of 1 percent of the VSR Notes' stated redemption price at maturity
multiplied by the number of complete years to their maturity. For these purposes
a VSR Note's (i) issue price is equal to the fair market value of the VSRs
exchanged therefor on the day of the settlement less any cash received in the
settlement; (ii) stated redemption price at maturity is equal to its face value
plus any payments to be made with respect to the VSR Notes that are not
'qualified stated interest' payments under the OID rules; and (iii) OID is equal
to the difference between its stated redemption price at maturity and its issue
price.
Because (i) the VSR Notes may be issued without qualified stated interest
(e.g., interest not currently payable but accruing) or (ii) the issue price of
the VSR Notes may be less than (by more than the permitted de minimis amount)
the face amount of the VSR Notes, neither of which is possible to determine
prior to the issuance of the VSR Notes it is possible the VSR Notes could be
issued with OID. The 'issue price' of the VSR Notes for federal income tax
purposes is not determined in a manner identical to the market value of the VSR
Notes as valued in the opinion of the Plaintiff's Advisor and Morgan Stanley as
described in 'Description of the Value Support Rights and VSR Notes--Payment in
Cash or VSR Notes.' If the VSR Notes are issued with OID, Initial Holders must
include such OID in gross income as ordinary interest income as it accrues under
an economic accrual method of accounting using semiannual compounding. Such
income must be included in income in advance of the receipt of the cash
representing that income.
If an Initial Holder sells a VSR Note, the Initial Holder will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale and such Initial Holder's adjusted tax basis in the VSR Note. An
Initial Holder's adjusted tax basis in a VSR Note is equal to its cost basis
increased by any OID previously included by such Initial Holder in gross income
with respect to such VSR Note. Any such gain or loss will be capital gain if the
Initial Holder held the VSR Note as a capital asset, except for gain
attributable to any OID that has not previously accrued. Moreover, any such
capital gain or loss will be long term capital gain or loss if such Initial
Holder held the VSR Note for more than one year.
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Straddle Rules
Section 1092 of the Code provides special rules concerning the recognition
of losses and the determination of holding periods with respect to positions
that are part of a 'straddle' (the 'straddle rules'). The term 'straddle' means
offsetting positions with respect to 'personal property.' The term 'position'
means an interest (including an option) in personal property. The term 'personal
property' generally includes stock only if such stock is part of a straddle
where one of the offsetting position is either (i) an option with respect to
such stock or substantially identical stock or securities, or (ii) a position
with respect to substantially similar or related property (other than stock)
(for example, a debt instrument). Positions are treated as 'offsetting' where
the risk of loss from holding one position is substantially diminished by reason
of holding the other position.
The holding of a VSR as a cash settlement put option and a share of PCT
Common Stock will be a straddle within the meaning of the straddle rules. Thus,
a loss realized in a taxable year by an Initial Holder upon the settlement,
lapse or sale of a VSR, or the sale of a share of PCT Common Stock, is permitted
to be recognized only to the extent that it exceeds the unrecognized gain (as of
the end of such year) with respect to the retained offsetting position or any
successor position thereto. The unrecognized portion of such loss would then be
deferred and would be treated as a loss incurred in a later taxable year, the
recognition of which may continue to be subject to the straddle rules.
The straddle rules will or will not also result in elimination or
suspension of the holding period for property that is part of a straddle as
follows. The following rules will apply to determine whether long term or short
term capital gain or loss is realized upon the sale of a share of PCT Common
Stock or upon the settlement, lapse or sale of a VSR. If an Initial Holder has a
long term holding period for a share of PCT Common Stock (i.e. a holding period
in excess of one year) at the time it receives a VSR in respect of such share,
then (i) the long term period for such share will be retained and (ii) the
holding period of the VSR received in the Distribution will begin only at the
time such VSR is no longer part of a straddle. In such a case, however, a
special rule provides that any capital loss recognized by the Initial Holder
upon a sale of the VSR will treated as long term, regardless of the Initial
Holder's holding period for the VSR.
If an Initial Holder does not have a long term holding period for a share
of PCT Common Stock at the time a VSR in respect of such share is received in
the Distribution, then the holding period for such share before the receipt of
the VSR is disregarded, and instead the holding period for such share and the
VSR received in the Distribution will begin at the time such VSR or share is no
longer part of a straddle. As a result of this rule, any capital gain or loss
recognized upon the sale of such share or the settlement, lapse or sale or other
taxable disposition of the VSR, which ever occurs first, will be short term, and
any capital gain or loss recognized upon the settlement, lapse or sale of the
second position will be long term or short term depending upon whether a long
term holding period has been acquired for the second position since the lapse,
settlement or sale of the first position.
In addition, Section 263(g) of the Code disallows a deduction for interest
and carrying charges allocable to a position that is a part of a straddle and
requires such amounts to be added to the tax basis of such position.
Backup Withholding
An Initial Holder may be subject to U.S. backup withholding and information
reporting requirements on (i) the portion, if any, of the VSRs that constitute a
dividend, (ii) consideration received upon the settlement, lapse or sale or
other disposition of a VSR, and (iii) payments of interest and principal on VSR
Notes, unless such Initial Holder (a) is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (b)
provides a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules.
Backup withholding is not an additional tax. Any amount paid as backup
withholding will be creditable against the Initial Holder's tax liability.
LEGAL MATTERS
Certain legal matters, including certain tax matters, will be passed upon
for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Skadden, Arps, Slate, Meagher & Flom LLP has from time to time represented, and
may continue to represent, Mafco Holdings and certain of its affiliates
(including the
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Company) in connection with certain legal matters. Joseph H. Flom, a partner in
the firm of Skadden, Arps, Slate, Meagher & Flom LLP, is a director of Revlon
Group Incorporated, a wholly owned subsidiary of Mafco Holdings.
EXPERTS
The consolidated financial statements and schedules of Mafco Consolidated
Group Inc. and subsidiaries at December 31, 1995 and 1994 and for each of the
three years in the period ended December 31, 1995, appearing in this Prospectus
and Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein which,
as to the year 1995, is based in part on the report of Arthur Andersen LLP,
independent public accountants. The financial statements referred to above are
included in reliance upon such reports and upon the authority of such firms as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company and PCT are subject to the informational requirements of the
Exchange Act. In accordance with the Exchange Act, the Company files proxy
statements, reports and other information with the Commission. This filed
material can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission: Midwest
Regional Office (Suite 1400, Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661) and Northeast Regional Office (7 World Trade Center, 13th Floor,
New York, New York 10048). Copies of such material can be obtained by mail from
the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, the Company Common
Stock and the PCT Common Stock listed on the NYSE and such material is available
for inspection at the offices of the NYSE, 20 Broad Street, New York, New York
10005. The Commission also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
The Company has filed a registration statement on Form S-1 containing this
Prospectus (as amended from time to time, the 'Registration Statement') with the
Commission under the Securities Act. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto,
certain portions of which have been omitted as permitted by the rules and
regulations of the Commission. Copies of the Registration Statement are
available from the Commission, upon payment of prescribed rates. For further
information, reference is made to the Registration Statement and the exhibits
filed therewith. Statements contained in this Prospectus or in any document
incorporated by reference in this Prospectus relating to the contents of any
contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified in all respects by such reference.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
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<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors............................................................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994............................................... F-3
Consolidated Statements of Earnings for the three years ended December 31, 1995, 1994 and 1993............. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the three years ended December 31, 1995, 1994
and 1993................................................................................................. F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994 and 1993........... F-6
Notes to Consolidated Financial Statements................................................................. F-7
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheet as of September 29, 1996.............................................. F-27
Unaudited Consolidated Statements of Earnings for the nine month periods ended September 29, 1996 and
October 1, 1995.......................................................................................... F-28
Unaudited Consolidated Statements of Cash Flows for the nine month periods ended September 29, 1996 and
October 1, 1995.......................................................................................... F-29
Notes to Unaudited Consolidated Financial Statements....................................................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mafco Consolidated Group Inc.
We have audited the accompanying consolidated balance sheets of Mafco
Consolidated Group Inc. and subsidiaries as of December 31, 1995 and 1994, and
the related consolidated statements of earnings, stockholders' equity (deficit)
and cash flows for each of the three years in the period ended December 31,
1995. 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. The financial statements of Power Control
Technologies Inc. (a corporation in which the Company has a 29% common equity
interest), have been audited by other auditors whose report has been furnished
to us; insofar as our opinion on the consolidated financial statements relates
to data included for Power Control Technologies Inc., it is based solely on
their report.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Mafco Consolidated
Group Inc. and subsidiaries at December 31, 1995 and 1994 and the consolidated
results of their earnings and their consolidated cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 9, 1996
F-2
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MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................... $ 93,417 $ 9,323
Notes and trade receivables, net........................................................ 25,211 21,699
Inventories............................................................................. 84,494 85,456
Prepaid expenses and other.............................................................. 25,610 3,894
-------- --------
Total current assets................................................................. 228,732 120,372
Property, plant and equipment, net........................................................ 46,052 47,983
Pension asset............................................................................. 57,245 --
Investment in PCT preferred and common stock.............................................. 55,547 --
Trademarks, net........................................................................... 32,021 32,887
Intangible assets related to businesses acquired, net..................................... 62,770 69,037
Other assets.............................................................................. 78,232 12,572
-------- --------
$560,599 $282,851
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt and short term borrowings............................. $ 10,960 $ 8,134
Accounts payable........................................................................ 9,595 9,945
Accrued expenses and other.............................................................. 55,515 19,366
-------- --------
Total current liabilities............................................................ 76,070 37,445
Long-term debt............................................................................ 218,678 242,057
Other liabilities......................................................................... 162,130 14,149
Stockholders' equity (deficit):
Common stock of Mafco Consolidated Group Inc., par value $.01 per share, 250,000,000
shares authorized, 24,722,190 issued and outstanding................................. 247 --
Common stock of Flavors Holdings, par value $1, 2,000 shares authorized, 1,000 shares
issued and outstanding............................................................... -- 1
Common stock of Cigar Parent, par value $1, 1,000 shares authorized, issued and
outstanding.......................................................................... -- 1
Additional paid-in-capital.............................................................. 167,105 43,290
Accumulated deficit..................................................................... (35,605) (55,018)
Currency translation adjustment......................................................... 1,877 926
Treasury stock at cost (1,484,850 shares)............................................... (29,903) --
-------- --------
Total stockholders' equity (deficit)................................................. 103,721 (10,800)
-------- --------
$560,599 $282,851
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales............................................................... $ 261,126 $ 226,879 $ 202,578
Cost of sales........................................................... 154,022 135,967 124,949
---------- ---------- ----------
Gross profit............................................................ 107,104 90,912 77,629
Selling, general and administrative expenses............................ 51,360 37,906 33,933
---------- ---------- ----------
Operating income........................................................ 55,744 53,006 43,696
Interest expense........................................................ (27,174) (27,547) (26,519)
Interest and investment income.......................................... 5,958 242 75
Amortization of deferred charges and bank fees.......................... (2,095) (2,044) (2,009)
Equity in loss from continuing operations and preferred dividends of
PCT................................................................... 727 -- --
Other income (expense), net............................................. (366) 156 244
---------- ---------- ----------
Income from continuing operations before income taxes and extraordinary
item.................................................................. 32,794 23,813 15,487
Provision for income taxes.............................................. (9,703) (7,478) (5,523)
---------- ---------- ----------
Income from continuing operations....................................... 23,091 16,335 9,964
Discontinued operations:
Equity in discontinued operations of PCT, net of
income taxes of $712............................................... 1,322 -- --
---------- ---------- ----------
Income from continuing operations....................................... 24,413 16,335 9,964
Extraordinary item, net of tax benefit of $1,698........................ -- (2,667) --
---------- ---------- ----------
Net income............................................................ $ 24,413 $ 13,668 $ 9,964
========== ========== ==========
Income (loss) per share:
Income from continuing operations..................................... $ 1.06 $ 0.82 $ 0.50
Discontinued operations............................................... 0.06 -- --
Extraordinary item.................................................... -- (0.13) --
---------- ---------- ----------
Net income......................................................... $ 1.12 $ 0.69 $ 0.50
========== ========== ==========
Weighted average common shares outstanding.............................. 21,794,117 19,777,752 19,777,752
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON COMMON
COMMON STOCK STOCK
STOCK OF MAFCO OF OF ADDITIONAL CURRENCY
CONSOLIDATED FLAVORS CIGAR PAID-IN ACCUMULATED TRANSLATION TREASURY
GROUP HOLDINGS PARENT CAPITAL DEFICIT ADJUSTMENT STOCK TOTAL
-------------- ------ ------ ---------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1992........................ $ -- $ 1 $-- $ 10,133 $ (78,338) $ 582 $ -- $(67,622)
Net income.................... 9,964 9,964
Currency translation
adjustment.................. (616) (616)
Other......................... (312) (312)
Net contributions............. 1 33,157 33,158
----- -- ------ ---------- ----------- ---------- -------- --------
Balance at December 31,
1993........................ -- 1 1 43,290 (68,686) (34) -- (25,428)
Net income.................... 13,668 13,668
Currency translation
adjustment.................. 960 960
----- -- ------ ---------- ----------- ---------- -------- --------
Balance at December 31,
1994........................ -- 1 1 43,290 (55,018) 926 -- (10,800)
Net income.................... 24,413 24,413
Currency translation
adjustment.................. 951 951
Dividends..................... (9,000) (5,000) (14,000)
Abex merger, net of
transaction costs........... 247 (1) (1) 71,197 71,442
Treasury stock................ (29,903) (29,903)
Retirement of value support
rights...................... 61,618 61,618
----- -- ------ ---------- ----------- ---------- -------- --------
Balance at December 31,
1995........................ $247 $ -- $-- $167,105 $ (35,605) $1,877 $(29,903) $103,721
===== == ====== ========== =========== ========== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................................................... $24,413 $13,668 $ 9,964
------- ------- --------
Adjustments to reconcile net income to net cash flows from operating activities:
Extraordinary item.............................................................. 4,365
Depreciation and amortization................................................... 10,483 10,407 13,043
Earnings of affiliates (greater)/less than distributions........................ (1,200) (260) 266
Increase in notes and trade receivable.......................................... (4,483) (1,952) (1,136)
Increase in restricted deposits................................................. (16,623)
Decrease (increase) in inventories.............................................. 1,449 5,503 (8,857)
(Decrease) increase in accounts payable......................................... (2,353) 912 (2,389)
(Decrease) increase in accrued expenses and other, net.......................... (5,582) 173 1,371
------- ------- --------
(18,309) 19,148 2,298
------- ------- --------
Net cash flows from operating activities........................................ 6,104 32,816 12,262
------- ------- --------
Cash flows from investing activities:
Cash acquired in Abex Merger, net of transaction costs.......................... 174,837
Acquisition of Cigar, net of cash acquired...................................... (179,056)
Capital expenditures............................................................ (3,318) (2,686) (2,273)
Purchase of PCT common stock.................................................... (33,653)
Proceeds from the sale of fixed assets and marketable securities................ 3,318 6,232 100
Other, net...................................................................... (7) (8) 198
------- ------- --------
Net cash flows from investing activities........................................ 141,177 3,538 (181,031)
------- ------- --------
Cash flows from financing activities:
Issuance of long-term debt...................................................... 50,000 156,619
Repayment of long-term debt..................................................... (5,725) (57,439) (5,055)
Repayment of revolving loans, net............................................... (14,872) (19,100) (9,419)
Purchase of Company Common Stock................................................ (29,903)
Prepayment premiums and expenses on repaid borrowings........................... (1,600)
Debt issuance costs paid........................................................ (2,344) (2,489)
Dividends paid.................................................................. (14,000)
Due to affiliates and other borrowings.......................................... 1,233 290 (824)
Net contribution from parent.................................................... 30,000
------- ------- --------
Net cash flows from financing activities........................................ (63,267) (30,193) 168,832
------- ------- --------
Effect of exchange rate changes on cash......................................... 80 64 (35)
------- ------- --------
Net increase in cash and cash equivalents....................................... 84,094 6,225 28
Cash and cash equivalents at beginning of period................................ 9,323 3,098 3,070
------- ------- --------
Cash and cash equivalents at end of period...................................... $93,417 $ 9,323 $ 3,098
======= ======= ========
Supplemental schedule of cash flow information
Interest paid................................................................. $28,278 $27,128 $ 26,099
Income taxes paid, net of refunds............................................. $ 6,789 $ 7,731 $ 1,056
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND BASIS OF PRESENTATION
On June 15, 1995, stockholders of Abex Inc. ('Abex') approved and adopted
an Agreement and Plan of Merger dated as of January 6, 1995 (as amended, the
'Merger Agreement') by and between Abex and Mafco Holdings Inc. ('Mafco
Holdings') and certain related agreements. Pursuant to the Merger Agreement and
related agreements, on June 15, 1995, the following occurred: (i) the transfer
(the 'Transfer'), to a subsidiary of Abex of substantially all of Abex's
consolidated assets and liabilities, other than those relating principally to
its Abex NWL Aerospace division and such division's overseas subsidiaries which
continue to be owned indirectly by Power Control Technologies Inc. ('PCT'), (ii)
the recapitalization of the capital stock of PCT into shares of common stock,
par value $.01 per share (the 'PCT Common Stock') and shares of Series A 8%
Convertible Redeemable Preferred Stock (the 'PCT Preferred Stock') with an
aggregate liquidation preference of $20.0 million and initially convertible into
2.5 million shares of PCT Common Stock (representing approximately 11% of the
shares of PCT Common Stock outstanding on a fully diluted basis, excluding
employee stock options), and (iii) the merger (the 'Merger') of Abex and C&F
Merger Inc. ('C&F'), a wholly owned subsidiary of Mafco Holdings which owned
indirectly 100% of the outstanding stock of Consolidated Cigar Corporation
('Consolidated Cigar'), and Mafco Worldwide Corporation ('Mafco Worldwide') with
Abex, which was renamed Mafco Consolidated Group Inc. ('MC Group' or the
'Company'), as the surviving corporation in the Merger. As a result of the
Merger, the Company acquired certain non-aerospace assets and assumed certain
liabilities of Abex as well as acquired an interest in the PCT Preferred Stock.
PCT, which became a separate publicly-traded company, continued to operate the
aerospace business.
Pursuant to the Merger, Abex's stockholders immediately prior to the
effective time of the Merger (the 'Effective Time'), other than stockholders who
perfected appraisal rights available under the Delaware General Corporation Law
in respect of their shares ('Dissenting Shares'), received for each share of
common stock, par value $.01 per share, of Abex (the 'Abex Common Stock') held,
in cancellation thereof, (a) one-quarter of one share of common stock of the
Company, par value $.01 per share (the 'MC Group Common Stock') and, where
applicable, cash in lieu of a fractional share of MC Group Common Stock, (b) one
share of PCT Common Stock, and (c) one value support right ('Abex VSR') issued
by MVR Inc. ('MVR'), a wholly-owned subsidiary of the Company, and guaranteed by
the Company. Shares of MC Group Common Stock were also issued upon cancellation
of restricted units of Abex (the 'Restricted Units') outstanding under Abex's
Restricted Unit Plan for Non-Employee Directors immediately prior to the
Effective Time, and shares of PCT Common Stock were also issued upon
cancellation of Restricted Units and stock appreciation rights of Abex (the
'SARs') outstanding under the 1992 Stock Plan for Executive Employees of Abex
and its Subsidiaries immediately prior to the Effective Time. On an aggregate
basis, disregarding any Dissenting Shares, Abex's stockholders and the holders
of Restricted Units and SAR's received 100% of the shares of PCT Common Stock
and Abex VSRs; Abex's stockholders and the holders of Restricted Units received
20% of the shares of MC Group Common Stock and Mafco Consolidated Holdings Inc.
('MCH'), a wholly owned subsidiary of Mafco Holdings, received 80% of the shares
of MC Group Common Stock, in each case the percentages reflecting the amount
outstanding immediately following completion of the Merger.
As part of the Merger Agreement, Mafco Worldwide paid a dividend of $9.0
million and Consolidated Cigar paid a dividend of $5.0 million which was
distributed to Mafco Holdings immediately before the Merger.
MC Group is a holding company owning directly or indirectly 100% of
Consolidated Cigar and Mafco Worldwide, all of the outstanding shares of PCT
Preferred Stock and a common equity interest in PCT. The Merger was accounted
for as a purchase of certain assets and the assumption of certain liabilities of
Abex, with C&F treated as the acquiror for accounting purposes. The assets
acquired and liabilities assumed by the MC Group were recorded at their
estimated fair market value, with the difference recorded as a credit to
additional paid-in capital. Beginning June 15, 1995, the date of the Merger, the
financial statements of the Company reflect the consolidated results of Flavors
Holdings, Cigar Parent and the assets and liabilities of Abex acquired in the
Merger. For all periods from March 3, 1993, the first date that Flavors Holdings
and Cigar Parent were under the common control of Mafco Holdings, to June 15,
1995, the financial statements reflect the combined results of
F-7
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. BACKGROUND AND BASIS OF PRESENTATION--(CONTINUED)
Flavors Holdings Inc. ('Flavors Holdings') and Consolidated Cigar (Parent)
Holdings Inc. ('Cigar Parent'). The results of Flavors Holdings or its
predecessor are reflected for earlier periods. In connection with the Merger,
the Company recorded the assets acquired and liabilities assumed at their
estimated fair market value, with the difference recorded as a credit to
additional paid in capital, as follows (in millions):
<TABLE>
<S> <C>
Cash, net of transaction expenses of $6.7...................................................... $174.8
Other current assets........................................................................... 12.9
Pension asset.................................................................................. 60.8
Other long term assets......................................................................... 98.5
Accrued expense and other...................................................................... 37.2
Abex VSR obligation............................................................................ 62.0
Other liabilities.............................................................................. 176.4
Stockholders' equity........................................................................... 71.4
</TABLE>
The Abex VSRs were designed to help ensure that, within a stated time
period and subject to certain limitations, the combined market values of the
securities received in the Merger by Abex's stockholders was at least $10 per
share. The Abex VSRs were valued based on 20,667,142 Abex VSRs issued at the
maximum payment per Abex VSR of $3.00. The Abex VSRs expired in accordance with
their terms on September 19, 1995. As a result of the purchase of Abex VSRs by
the Company and the expiration of all the Abex VSRs, stockholders' equity
increased by $61.6 million.
On December 11, 1992, Triple C, Mafco Holdings and its wholly owned
subsidiary Consolidated Cigar Holdings Inc. ('CCC Holdings'), entered into an
agreement and plan of merger (the 'Cigar Merger Agreement'), pursuant to which
CCC Holdings was merged into Triple C with Triple C being the surviving
corporation. CCC Holdings is a wholly owned subsidiary of Cigar Parent. Pursuant
to the merger which was consummated on March 3, 1993, Mafco Holdings acquired
all the outstanding shares of Triple C common stock and warrants to purchase
Triple C common stock (the '1993 Acquisition'), for an aggregate purchase price
of approximately $188.0 million, including fees and expenses. Immediately
following the 1993 Acquisition, Triple C merged into Consolidated Cigar with
Consolidated Cigar being the surviving corporation. As a result, Consolidated
Cigar became an indirect wholly owned subsidiary of Mafco Holdings.
The Company currently operates in the tobacco products business. Tobacco
products include cigars and pipe tobacco products manufactured and distributed
by Consolidated Cigar and licorice extract and other flavoring agents
manufactured and distributed by Mafco Worldwide.
The financial statements have been restated to reflect the Company's equity
in the discontinued operations of PCT. Certain financial statement items and
financial statement disclosures for prior years have been reclassified to be
comparable with the 1995 presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company
and its subsidiaries after elimination of all material intercompany accounts and
transactions. Investments of less than 50% but greater than 20% in affiliates
are accounted for on the equity method.
F-8
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Revenue Recognition:
Sales are recorded as products are shipped to customers. Allowances for
sales returns, customer incentive programs and promotions are recorded at the
time of sale.
Cash and Cash Equivalents:
Cash equivalents are considered to be all highly liquid investments with
original maturities of three months or less when purchased and exclude
restricted cash.
Restricted Cash:
Restricted cash of $16.6 million included in other assets at December 31,
1995 reflects segregated cash held for the benefit of certain parties to cover
obligations related to certain prior dispositions and certain environmental and
insurance matters.
Inventories:
Inventories, with the exception of leaf tobacco, are stated at the lower of
cost (using the first-in, first-out method) or market value. Leaf tobacco is
carried at the lower of average cost or market. In accordance with generally
recognized industry practice, all leaf tobacco inventory is classified as
current although portions of such inventory, because of the duration of the
aging process, ordinarily would not be utilized within one year.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of such assets ranging from
4 to 20 years. Leasehold improvements are amortized over their estimated useful
lives or the terms of the leases, whichever is shorter. Repairs and maintenance
are charged to operations as incurred, and expenditures for additions and
improvements are capitalized.
Trademarks:
Trademarks consist of registered and unregistered tradenames of cigars or
other tobacco brands which are being amortized on a straight-line basis over 40
years.
Intangible Assets Related to Businesses Acquired:
Intangible assets related to businesses acquired primarily represent the
excess of cost over fair value of net assets acquired in the 1993 Acquisition
which is being amortized on a straight-line basis over 40 years, consistent with
industry practice. Accumulated amortization of intangible assets related to
businesses acquired was $5.3 million and $3.6 million in 1995 and 1994,
respectively.
Impairment of Long-Lived Assets:
In March 1995, Statement of Financial Accounting Standards No. 121 ('SFAS
121'), 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of' was issued. SFAS 121 requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. SFAS 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. SFAS 121
is effective for financial statements for fiscal years beginning after December
15, 1995, and therefore the Company will adopt SFAS 121 in the first quarter of
1996. The Company does not believe the effect of the adoption will be material.
F-9
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Financial Instruments:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company's customers are geographically dispersed but are concentrated in the
tobacco industry. The Company historically has had no material losses on its
accounts receivable from customers in the tobacco industry in excess of
allowances provided. Probable bad debt losses have been provided for in the
allowance for doubtful accounts.
The Company entered into interest rate swap agreements to modify the
interest characteristics of certain of its outstanding debt from a fixed to a
floating rate basis. These agreements involve the receipt of fixed rate amounts
in exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related amount payable
to or receivable from counterparties is included in accrued expenses. To the
extent previous interest rate swap agreements have been terminated, the
resulting gain is being recognized over the remaining original life of the
terminated agreements. The fair values of the swap agreements are not recognized
in the financial statements.
The Company enters into forward exchange contracts to hedge certain
receivables and firm sales commitments denominated in foreign currencies. The
effects of movements in currency exchange rates on these instruments are
recognized when the related operating revenue is recognized. Realized gains and
losses on foreign currency contracts are included in the item to which it
relates and recognized in earnings when the future sales occur. At December 31,
1995 and 1994, the Company had forward exchange contracts, all having maturities
of less than one year, in the amount of $418,000 and $306,000, respectively. The
fair value of the Company's foreign exchange contracts are estimated based on
quoted market prices of comparable agreements, adjusted through interpolation
where necessary for maturity differences. The fair value of the Company's
foreign currency contracts approximate the carrying amounts at December 31, 1995
and 1994.
Foreign Currency Translation:
Assets and liabilities of foreign operations are translated into U.S.
dollars at the rates of exchange in effect at the balance sheet date. Income and
expense items are generally translated at the average exchange rates prevailing
during the period presented. Gains and losses resulting from foreign currency
transactions are included in the results of operations and those resulting from
translation of financial statements are recorded as a component of stockholders'
equity (deficit).
Earnings Per Share:
Earnings per share has been computed using the weighted average number of
common shares outstanding. For periods prior to the Merger, the weighted average
number of shares outstanding reflect the number of shares issued to CFPH in the
Merger. The dilutive effect of options outstanding under the Company's stock
option plan is not material.
Stock Based Compensation:
The Company may grant stock options and stock appreciation rights
representing a fixed number of shares to selected employees. The Company
accounts for such grants in accordance with APB Opinion No. 25 ('APB 25'),
'Accounting for Stock Issued to Employees', which requires compensation expense
for the Company's options to be recognized only if the market price of the
underlying stock exceeds the exercise price on the date of grant. Accordingly,
the Company has not recognized compensation expense for options granted in 1995.
F-10
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
During 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ('SFAS 123'), 'Accounting for Stock-Based Compensation,' which
establishes a fair value based method of accounting for compensation cost
related to stock option plans and other forms of stock based compensation plans
as an alternative to the intrinsic value based method of accounting defined
under APB 25. Companies that do not elect the new method of accounting for 1996
will be required to provide pro forma disclosures as if the fair value based
method had been applied for the current period and prior comparable period. The
Company intends to adopt SFAS 123 by providing the required pro forma
disclosures.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. The most
significant estimates included in the preparation of the financial statements
are related to actuarial assumptions used in the determination of the pension
asset and liability, postretirement benefit liability and the valuation of
deferred tax assets.
3. INVESTMENT IN PCT AND PURCHASE OF TREASURY STOCK
On July 17, 1995, pursuant to a securities purchase agreement dated as of
June 26, 1995, MC Group purchased from Libra Invest & Trade Ltd. ('Libra') for
approximately $63.9 million, including expenses, 5,939,400 shares of PCT Common
Stock, 5,939,400 Abex VSRs, and 1,484,850 shares of MC Group Common Stock (the
'Libra Purchase'). Of the total purchase price of approximately $63.9 million,
approximately $29.9 million was allocated to the purchase of 1,484,850 shares of
MC Group Common Stock and is classified as treasury stock. In connection with
such purchase, the Company entered into an agreement with PCT which, subject to
certain exceptions, will limit the Company's ability to dispose of its shares of
PCT Preferred Stock and PCT Common Stock for a period of three years. As a
result of this transaction, the Company's investment in PCT increased to
approximately 29% of PCT Common Stock (36% on a fully diluted basis). On July
25, 1995, the Company filed a registration statement on Form S-3 with the
Securities and Exchange Commission to register for sale 1,484,850 shares of its
common stock.
The Company accounts for its investment in PCT on the equity method. At
December 31, 1995, PCT had total assets, total liabilities, redeemable preferred
stock and stockholders' equity of $51.3 million, $8.8 million, $20.0 million and
$22.5 million, respectively. For the year ended December 31, 1995, PCT had a
loss from continuing operations, income from discontinued operations and net
income of $4.1 million, $16.9 million and $11.2 million, respectively. At
December 31, 1995, the market value of PCT Common Stock owned by the Company was
$47.5 million. The difference between the carrying amount of the investment in
PCT Common Stock and the amount of the Company's underlying equity in net assets
of PCT is $28.0 million, which is considered goodwill and is amortized over a
period of 30 years.
On January 15, 1996, PCT announced that it had agreed to sell its entire
operations, including substantially all its assets, to Parker Hannifin
Corporation, subject to approval of the stockholders of PCT and the satisfaction
of certain other conditions. The purchase price to be paid, which is subject to
adjustment depending on the level of the net assets at closing, is expected to
be approximately $200.5 million in cash (subject to adjustment) and the
assumption of certain liabilities related to PCT's aerospace business. If the
proposed sale is completed, the cash would be retained by PCT to permit its
investment over time in one or more operating businesses. The transaction is
expected to close in April 1996.
4. PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information gives effect to the Merger,
beginning January 1, 1994, and reflects an increase in administrative expenses;
the increase in estimated net pension income related to the
F-11
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PRO FORMA FINANCIAL INFORMATION--(CONTINUED)
overfunded pension plan and other post-retirement benefits expense related to
the other post-retirement benefit plans retained by the Company after the
Merger; interest accretion related to certain liabilities assumed by
MC Group in connection with the Merger; dividend income on the PCT Preferred
Stock; the tax effect of the pro forma adjustments; and the issuance of
approximately 24.7 million shares of MC Group Common Stock. The pro forma
financial information does not necessarily reflect the results of operations of
the Company and its subsidiaries that actually would have resulted had the
Merger and related transactions been consummated on January 1, 1994.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Net sales....................................................................... $261,126 $226,879
Income before extraordinary item................................................ 24,013 13,735
Net income...................................................................... 24,013 11,068
Income before extraordinary item per share...................................... 1.00 0.56
Net income per share............................................................ 1.00 0.45
</TABLE>
5. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials..................................................................... $59,742 $58,721
Work-in-progress.................................................................. 1,988 1,790
Finished goods.................................................................... 22,764 24,945
------- -------
$84,494 $85,456
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land............................................................................. $ 2,259 $ 2,232
Buildings........................................................................ 19,814 18,980
Machinery and equipment.......................................................... 47,888 45,691
Furniture and fixtures........................................................... 2,190 1,994
Leasehold improvements........................................................... 276 276
Construction-in-progress......................................................... 640 250
-------- --------
73,067 69,423
Accumulated depreciation......................................................... (27,015) (21,440)
-------- --------
$ 46,052 $ 47,983
======== ========
</TABLE>
Depreciation expense was $5.5 million, $5.5 million and $4.8 million for
the years ended December 31, 1995, 1994 and 1993, respectively.
F-12
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Employee benefits, severance and other compensation............................... $21,614 $ 7,207
Interest.......................................................................... 4,737 5,475
Taxes............................................................................. 219 1,557
Indemnification and other tax reserve (see Note 9)................................ 11,500 --
Other............................................................................. 17,445 5,127
------- -------
$55,515 $19,366
======= =======
</TABLE>
8. OTHER LIABILITIES
Other liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Casualty reserves (see Note 15).................................................. $ 11,583 --
Employee benefits and other compensation......................................... 72,916 --
Indemnification and other tax reserve (see Note 9)............................... 15,900 --
Other............................................................................ 61,731 $14,149
-------- -------
$162,130 $14,149
======== =======
</TABLE>
9. INCOME TAXES
Information pertaining to consolidated income before income taxes and
extraordinary item and the applicable provision for income taxes, excluding
amounts related to the extraordinary item, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income from continuing operations before income taxes:
Domestic............................................................... $13,437 $ 8,567 $ 4,677
Foreign (includes Puerto Rico)......................................... 19,357 15,246 10,810
------- ------- -------
$32,794 $23,813 $15,487
======= ======= =======
Provision (benefit) for income taxes:
Current:
Federal.............................................................. $ 2,827 $ 3,477 $ 3,624
State and local...................................................... 1,442 809 747
Foreign.............................................................. 1,941 2,036 1,321
------- ------- -------
6,210 6,322 5,692
Deferred:
Federal.............................................................. 2,794 963 (605)
State and local...................................................... 108 174 (92)
Foreign.............................................................. 591 19 528
------- ------- -------
$ 9,703 $ 7,478 $ 5,523
======= ======= =======
</TABLE>
F-13
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
The effective tax rate on consolidated income before income taxes and
extraordinary item varies from the current statutory federal income tax rate as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory rate.................................................................... 35.0% 35.0% 35.0%
Foreign income not subject to statutory tax rate.................................. (7.7) (7.4) (9.8)
U.S. loss without benefit......................................................... -- -- 4.4
Non-deductible amortization....................................................... 1.9 2.7 3.3
State and local taxes, net........................................................ 2.8 3.0 2.9
Realization of valuation allowance................................................ (1.7) (2.5) --
Other, net........................................................................ (0.7) 0.6 (0.1)
---- ---- ----
29.6% 31.4% 35.7%
==== ==== ====
</TABLE>
Deferred taxes result from temporary differences in the recognition of
income and expenses for financial and income tax reporting purposes and
differences between the fair value of assets acquired in business combinations
accounted for as purchases and their tax bases. The approximate effect of the
temporary differences that gave rise to deferred tax balances were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:..............................................................
Accounts receivable............................................................. $ 2,078 $ 1,827
Inventory....................................................................... 466 931
Prepaid and other............................................................... 2,914 478
Property, plant and equipment................................................... 933 1,237
Long term investments and other................................................. 4,277 --
Pension liability............................................................... 607 608
Accrued expenses................................................................ 7,116 1,144
Employee benefits and other compensation........................................ 25,108 --
Other long term liabilities..................................................... 5,384 1,033
Net operating loss carryforwards................................................ 4,900 1,119
------- -------
Total deferred tax asset..................................................... 53,783 8,377
Valuation allowance............................................................. -- (2,622)
------- -------
Total deferred tax asset net of valuation allowance.......................... 53,783 5,755
------- -------
Deferred tax liabilities..........................................................
Property, plant and equipment................................................... 3,474 3,682
Pension asset................................................................... 20,035 --
Unremitted foreign earnings..................................................... 2,179 1,452
Other........................................................................... 403 326
------- -------
Total deferred tax liability................................................. 26,091 5,460
------- -------
Net deferred tax asset....................................................... $27,692 $ 295
======= =======
</TABLE>
Of the total valuation allowance of $2.6 million at December 31, 1994,
approximately $2.0 million was accounted for as a reduction in goodwill during
1995, and $600,000 was recorded as a reduction of the provision.
As a result of the pension plan merger discussed in Note 10, a deferred tax
asset in the amount of $2.4 million which was related to the unfunded pension
liability at the date of the 1993 Acquisition was recorded with a resulting
reduction of goodwill.
F-14
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
As a result of the Merger, MC Group and its domestic subsidiaries (the
'Mafco Group') have, for federal income tax purposes, become members of an
affiliated group of corporations of which Mafco Holdings is the common parent
(the 'Holdings Group'). Accordingly, the Mafco Group will be included in the
consolidated federal income tax returns and, to the extent permitted by
applicable law, any combined state or local income tax returns filed on behalf
of the Holdings Group. Mafco Holdings and MC Group are parties to a tax sharing
agreement pursuant to which MC Group will pay to Mafco Holdings with respect to
each taxable year an amount equal to the consolidated federal and state and
local income taxes that would have been incurred by the Mafco Group had it not
been included in the consolidated federal and any combined state or local income
tax returns filed by the Holdings Group for such period. Prior to the Merger,
Consolidated Cigar and Mafco Worldwide were party to tax sharing agreements with
Mafco Holdings pursuant to which Consolidated Cigar and Mafco Worldwide were
required to pay to Mafco Holdings with respect to each taxable year an amount
equal to the consolidated federal and state and local income taxes that would
have been incurred by Consolidated Cigar and Mafco Worldwide had they not been
included in the consolidated federal and any combined state and local income tax
returns filed by Mafco Holdings. For all periods presented, federal and state
income taxes are provided as if the Company filed its own income tax returns.
The Company has not provided for taxes on undistributed foreign earnings of
approximately $7.7 million and $6.6 million at December 31, 1995 and 1994,
respectively, since the Company intends to permanently reinvest these earnings
in the future growth of the business. Determination of the amount of the
unrecognized deferred U.S. income tax liability is not practical because of the
complexities associated with its hypothetical calculation.
The Company's foreign income primarily consists of Puerto Rico income.
Pursuant to a grant of industrial tax exemption which expires in 2002, 90% of
the income earned from the manufacture of cigars in Puerto Rico is exempt from
Puerto Rico income taxes. The remaining 10% of such income is taxed at a maximum
surtax rate of 45%, resulting in an effective income tax rate of approximately
4.5%. The benefit to the Company amounted to approximately $5.1 million, $3.5
million and $3.1 million during 1995, 1994 and 1993.
Funds repatriated to the Company from its Puerto Rico subsidiary are
subject to a maximum Puerto Rico tollgate tax of 10%. Legislation enacted in
Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.
Income earned from Puerto Rico operations is generally exempt from federal
income tax. Section 936 of the Internal Revenue Code allows a 'possessions tax
credit' against U.S. income tax attributable to the Puerto Rico taxable
earnings. As part of the Omnibus Budget Reconciliation Act ('OBRA') of 1993, the
Internal Revenue Service has limited this exemption based upon a percentage of
qualified wages in Puerto Rico, plus certain amounts of depreciation. The
Company believes that it qualified for the possessions tax credit during 1995,
1994 and 1993. Failure to receive the 936 exemption or possessions tax credit
attributable to the Company's Puerto Rico operations, could have a material
adverse effect on the Company.
During 1995, proposed legislation was introduced before the U.S. Senate
House Committee on Ways and Means regarding tax reform and the possible repeal
of Section 936 of the Internal Revenue Code. The proposal, as outlined in
September 1995 called for the repeal for taxable years beginning after December
31, 1995, however, a credit would be granted for an additional 10 year phase in
period under a special grandfather rule. The credit would be limited to the
average annual income, adjusted for inflation, claimed over three of the last
five most recent years ended before September 13, 1995, excluding the highest
and lowest years. The Company does not believe the effect of the proposal to be
material for the phase in period.
The Company also manufactures in the Dominican Republic pursuant to a 100%
tax exemption which expires in 2010.
F-15
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES--(CONTINUED)
In connection with the Merger, MC Group entered into a tax sharing
agreement with its former subsidiary, PCT, pursuant to which MC Group will
indemnify PCT with respect to all taxes applicable to periods prior to June 15,
1995 except for foreign taxes related to PCT's aerospace business.
In connection with the July 16, 1992 distribution of Abex, the predecessor
of MC Group, from its prior parent, The Henley Group, Inc. ('Henley') , Abex
entered into a tax sharing agreement with Henley in which Abex indemnified
Henley for tax liabilities resulting from certain adjustments to the tax
liabilities of Abex entities and for certain tax liabilities of a prior
affiliated company, Wheelabrator Technologies, Inc. for the period May 26, 1986
through December 31, 1988. All federal tax liabilities related to this period
were settled prior to 1995; however, certain state tax liabilities of
approximately $7 million, which is an obligation of the Company, remain open as
of December 31, 1995.
Abex had been included in the consolidated federal income tax return of
Henley for 1990 and 1991. The Internal Revenue Service has asserted deficiencies
against Henley for these periods of approximately $23 million, plus interest.
The adjustments creating these deficiencies do not relate to Abex entities and
are therefore not liabilities of MC Group as successor to Abex under the tax
sharing agreement. However, if Henley, or its current parent, Koll Real Estate
Group, Inc. ('Koll'), were unable to pay the deficiencies, then the Internal
Revenue Service, in accordance with Treasury Regulation 1.1502-06, could seek
payment from MC Group as successor to Abex as well as from other entities that
were included in the federal consolidated return of Henley for 1990 and 1991.
Koll, as the parent of Henley, has indicated that they will vigorously contest
the deficiencies through the administrative appeals process as well as in court
and that a final conclusion to this matter could take several years.
Management believes that reserves as of December 31, 1995 are adequate for
all tax liabilities associated with these tax sharing agreements as well as any
potential liability asserted by the IRS in accordance with Treasury Regulation
1.1502-06.
10. PENSION PLANS
The Company maintains tax qualified defined benefit pension plans covering
substantially all hourly and salaried employees in the U.S. and Puerto Rico. In
addition, certain employees of Abex's former subsidiaries are covered under
various tax qualified MC Group retirement plans (the 'MC Group Retirement
Plan'). The fair value of the assets and liabilities of the former Abex plans
were recognized in the financial statements of the Company as of June 15, 1995
in connection with the Merger.
Plans covering salaried employees generally provide pension benefits based
on years of service and compensation. Plans covering hourly employees and union
members generally provide stated benefits for each year of service. Plan assets
consist primarily of equity, fixed income, and money market funds.
Effective December 31, 1995, Consolidated Cigar's tax qualified
non-contributory defined benefit pension plans (the 'Cigar Plans') covering
substantially all hourly and salaried employees in the U.S. and Puerto Rico were
merged with and into the MC Group Retirement Plan. The MC Group Retirement Plan
was the surviving plan with all the assets and liabilities of the Cigar Plans
becoming assets and liabilities of the surviving MC Group Retirement Plan.
In addition, certain employees of Abex's former subsidiaries are covered
under a non-qualified executive defined benefit plan (the 'Executive Defined
Benefit Plan') and a defined contribution plan (the 'Executive Defined
Contribution Plan'). Assets of these plans of $26.1 million at December 31, 1995
are held by a rabbi trust and are presented as other assets in the Company's
balance sheet as of December 31, 1995 because they will be available to general
creditors of the Company in the event of the Company's insolvency. The liability
related to the Executive Defined Contribution Plan was $2.6 million at December
31, 1995 and is included in other liabilities.
F-16
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. PENSION PLANS--(CONTINUED)
The Company also provides supplemental executive retirement plans for
certain officers which are unfunded.
The following table reconciles the funded status of the Company's
significant defined benefit pension plans:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994
-------------------------- --------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Accumulated benefit obligation includes vested benefits
of $127,847 and $28,527 in 1995 and $353 and $23,182 in
1994................................................... $ 128,935 $28,535 $ 396 $24,161
=========== =========== =========== ===========
Projected benefit obligation for service rendered to
date................................................... 135,180 28,684 $ 396 $30,510
Less: plan assets at fair value.......................... (195,579) -- (478) (19,264)
----------- ----------- ----------- -----------
Projected benefit obligation in excess of (less than)
plan assets............................................ (60,399) 28,684 (82) 11,246
Unrecognized transition asset (obligation)............... (182) -- 71 (282)
Unrecognized prior service benefit (cost)................ 1 (309) (28) 392
Unrecognized net (loss) gain............................. 5,264 (452) 11 (1,478)
Adjustment for minimum liability......................... -- -- -- 7
----------- ----------- ----------- -----------
Net pension (asset) liability.......................... $ (55,316) $27,923 $ (28) $ 9,885
=========== =========== =========== ===========
</TABLE>
Pension liabilities are included in accrued expenses and other liabilities.
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7 1/4%-7 1/2% in 1995 and
7%-8 1/4% in 1994. The rate of increase in future compensation levels reflected
in such determination was 4%-5% in 1995 and 1994. The expected long-term rate of
return on assets was 6 1/2%-9% for 1995 and 7%-8 1/4% for 1994. Unrecognized
items are being amortized over the estimated remaining service lives of active
employees. The Company's funding policy is to contribute annually an amount
necessary to satisfy the minimum funding standards pursuant to the Employee
Retirement Income Security Act.
Pension expense includes the following components for the years ended
December 31, 1995, 1994 and 1993 respectively:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the period.................. $ 800 $ 893 $ 722
Interest cost on projected benefit obligation................... 7,416 2,194 1,788
Actual return on plan assets.................................... (20,732) (827) (1,434)
Net amortization and deferrals.................................. 11,594 (685) 167
------- ------ ------
Net pension (income) expense.................................. $ (922) $1,575 $1,243
======= ====== ======
</TABLE>
In addition, the Company maintains certain 401(k) plans for which the
expense for matching contributions was $273,000, $280,000 and $247,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
F-17
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
MC Group, generally at its sole discretion, provides certain employees of
Abex and its former subsidiaries retiring on or after attaining age 55, who have
rendered at least 10 years of service and who have participated in Abex's
pension plans, with postretirement health care coverage. In 1993, Abex amended
its existing postretirement health care programs primarily to adjust certain
cost sharing provisions. MC Group funds the cost of this benefit on a
claims-paid basis and since the Merger on June 15, 1995, made payments totaling
$2.6 million. The liability related to these benefits was recognized as of June
15, 1995 in connection with the Merger. The plans have no assets.
The accumulated postretirement benefit obligation consists of the following
components at December 31, 1995:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees..................................................................... $ 41,800
Fully eligible active plan participants...................................... 1,300
--------------
Postretirement benefit liability............................................... $ 43,100
==============
</TABLE>
Unrecognized items at December 31, 1995 were not significant. Net periodic
postretirement benefit costs other than pensions attributable to interest on the
accumulated post-retirement benefit obligation was $1.7 million for the period
from June 15, 1995 to December 31, 1995. For measurement purposes, a 7.5% annual
rate of increase in the per capita cost of covered health care benefits was
assumed for 1996 and thereafter. An increase of 1% in the health care cost trend
rate will not have a significant effect on the amounts reported because of cost
sharing provisions. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.25%.
12. STOCK OPTION PLAN
Under the terms of the Company's 1995 stock option plan (the '1995 Stock
Option Plan'), which is subject to approval of the stockholders of the Company
at the next annual shareholders meeting, stock options and stock appreciation
rights may be granted to key employees of the Company. A maximum of 1,250,000
shares of MC Group common stock have been reserved for issuance under the 1995
Stock Option Plan. During 1995, 750,000 options to purchase shares of MC Group
common stock were granted at an exercise price of $17.375. At December 31, 1995,
none of the options granted were exercisable.
F-18
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Mafco Worldwide:
Senior Credit (a):
Tranche A Term Loans............................................. $ 14,000 $ 19,500
Tranche B Term Loans............................................. 19,800 20,000
11 7/8% Senior Subordinated Notes Due 2002 (b)...................... 84,510 84,466
Other................................................................. -- 25
Consolidated Cigar:
Bank Borrowings (c)................................................. 20,600 36,200
Senior Subordinated Notes (d)....................................... 90,000 90,000
-------- --------
228,910 250,191
Less: current portion............................................... (10,232) (8,134)
-------- --------
$218,678 $242,057
======== ========
</TABLE>
(a) The Mafco Worldwide Senior Credit was originally comprised of $30.0
million in Tranche A Loans, $20.0 million in Tranche B Loans, and $25.0 million
in Revolving Credit Loan commitments (the 'Revolving Credit Loans'). The Tranche
A Loans are repayable in 20 quarterly installments which started on September
30, 1994. The Tranche B Loans are repayable in seven annual installments; (a)
five installments of $200,000 each with the first due on June 30, 1995, and (b)
two installments of $9.5 million each due on June 30, 2000 and 2001. The
Revolving Credit Loans are payable in full by June 30, 1999. At December 31,
1995, the margin on the Tranche A loan was reduced on Base Rate Loans and to
2.25% on Eurodollar loans. At December 31, 1995 no amounts were borrowed under
the Revolving Credit Loans and approximately $2.5 million was reserved for
lender guarantees on outstanding letters of credit. The Mafco Worldwide Senior
Credit requires an additional payment based upon Mafco Worldwide's excess cash
flow as defined in the credit agreement. At December 31, 1995, this amount
equaled $4.0 million and is payable on March 31, 1996. The Mafco Worldwide
Senior Credit permits the Company to choose between various interest rate
options and to specify the interest rate period to which the interest rate
options are to apply, subject to certain parameters. The interest rate options
available are (i) the Base Rate Loans (as defined) plus a borrowing margin of
1 1/4% for the Tranche A Loans and Revolving Credit Loans and 1 3/4% for the
Tranche B Loans and (ii) Eurodollar Loans (as defined) plus a borrowing margin
of 2 1/2% for the Tranche A Loans and Revolving Credit Loans and 3% for the
Tranche B Loans. Upon achievement of specified financial ratios, the borrowing
margins will be reduced. At December 31, 1995, the margin on the Tranche A loan
was reduced to 1.0% on Base Rate Loans and to 2.25% on Eurodollar Loans. At
December 31, 1995, the interest rate was 7.94% on the Tranche A Loans and 8.69%
on the Tranche B Loans. The Mafco Worldwide Senior Credit also provides for a
commitment fee of 1/2% per annum on the unused Revolving Credit Loans.
Obligations under the Mafco Worldwide Senior Credit are secured by pledges of
substantially all of Mafco Worldwide's domestic assets and 66 2/3% of the
capital stock of Mafco Worldwide's wholly owned foreign subsidiaries. The Mafco
Worldwide Senior Credit contains various restrictive covenants which include,
among other things, limitations on indebtedness and liens, minimum interest
coverage and fixed charge coverage ratios, operating cash flow maintenance and
capital expenditure limits and restrictions on dividends.
(b) In November 1992, Mafco Worldwide completed a public offering in which
it sold $85.0 million aggregate principal amount of 11 7/8% Senior Subordinated
Notes due 2002 (the 'Mafco Worldwide Senior Subordinated Notes') at a price of
99.28% of face value. The Mafco Worldwide Senior Subordinated Notes mature on
November 15, 2002, and are not subject to redemption through the operation of a
sinking fund. The Mafco Worldwide Senior Subordinated Notes are subject to
redemption at any time after November 15, 1997, at the option of Mafco
Worldwide, in whole or in part, at redemption prices (expressed as percentages
of the
F-19
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT--(CONTINUED)
principal amount) for the 12 month period beginning each November 15:
1997-105.95%; 1998-103.96%; 1999-101.98% and 100% there after. Interest is
payable semiannually in May and November.
The Indenture relating to the Mafco Worldwide Senior Subordinated Notes
contains various restrictive covenants, which include restrictions on the
incurrence of additional debt, payments of dividends and transactions with
affiliates. In addition, upon the occurrence of a change in control whereby any
person (as defined in the Indenture) acquires directly or indirectly more than
35% of the total voting power of all classes of the voting stock of Mafco
Worldwide, each holder of the Mafco Worldwide Senior Subordinated Notes has the
right to require Mafco Worldwide, subject to certain restrictions in the Mafco
Worldwide Senior Credit, to repurchase the Mafco Worldwide Senior Subordinated
Notes at 101% of face value. The Mafco Worldwide Senior Subordinated Notes are
subordinate in right of payment to the existing Mafco Worldwide Senior Credit
and all future senior indebtedness of Mafco Worldwide.
(c) Represents borrowings under a credit agreement (the 'Cigar Credit
Agreement') with Chase dated February 23, 1993, providing for a $60.0 million
reducing revolving credit facility (the 'Cigar Revolving Credit Facility') and a
$20.0 million working capital facility (the 'Cigar Working Capital Facility').
The Cigar Revolving Credit Facility and the Cigar Working Capital Facility have
final maturities on April 3, 1999. The Cigar Revolving Credit Facility is
subject to quarterly commitment reductions of $2.5 million during each year of
the term of the facility. The Cigar Credit Agreement is secured by perfected
first priority liens on all of the material assets of Consolidated Cigar and its
domestic subsidiaries and perfected pledges of the stock of all of Consolidated
Cigar's subsidiaries (with certain exceptions for the stock of foreign
subsidiaries). The Cigar Credit Agreement is guaranteed by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by Cigar Parent is secured by
a pledge of all the outstanding stock of Consolidated Cigar.
The Cigar Credit Agreement establishes interest payments at the option of
Consolidated Cigar based upon the following rates:
<TABLE>
<S> <C> <C>
Base Rate Loans...................................................... Prime plus 1 3/4%
936 Loans............................................................ 936 Rate plus 2 3/4%
Eurodollar Funds..................................................... Eurodollar plus 2 3/4%
</TABLE>
Beginning with the fourth quarter of fiscal 1995, all the rates were
reduced by 1/4% in accordance with the Cigar Credit Agreement.
The average interest rate under the Cigar Credit Agreement was
approximately 8.9% at December 31, 1995. The Cigar Credit Agreement contains
various covenants which govern, among other things, the ability to incur
indebtedness, pay dividends, incur lease rental obligations, make capital
expenditures, use proceeds from asset sales, participate in mergers and other
activities. The Cigar Credit Agreement also requires Cigar to satisfy certain
financial covenants related to net worth, capital expenditures and various
ratios.
The maximum amounts of borrowings that are allowed under the Cigar Credit
Agreement at the end of 1995 through its maturity are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
- --------------------------------------------------------------------- --------------
<S> <C>
1995................................................................. $ 52,500
1996................................................................. 34,887
1997................................................................. 24,887
1998................................................................. 14,887
</TABLE>
Outstanding letters of credit of approximately $1.6 million reduced the
available borrowings under the Cigar Credit Agreement at December 31, 1995.
F-20
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LONG-TERM DEBT--(CONTINUED)
(d) Represents the $90.0 million in principal amount of 10 1/2% Senior
Subordinated Notes Due 2003 (the '10 1/2% Notes') issued in connection with
the 1993 Acquisition. The 10 1/2% Notes bear interest at the rate of
10 1/2% per annum, mature on March 1, 2003 and are redeemable at a premium
prior to maturity starting March 1, 1998. The 10 1/2% Notes are redeemable
at a premium in the event of a change of control. The indenture relating to
the 10 1/2% Notes limits, among other things, dividends and other
distributions, certain types of indebtedness, certain mergers,
consolidations and sales of assets.
The aggregate scheduled amounts of long-term debt maturities in the years
1996 through 2000 are $10.2 million, $6.2 million, $6.3 million, $15.1 million
and $9.5 million, respectively.
The Company entered into two five year interest rate swap agreements in an
aggregate notional amount of $85.0 million. Under the terms of the agreements,
the Company receives a fixed interest rate averaging 5 4/5% and pays a variable
interest rate equal to the six month LIBOR. The Company entered into such
agreements to take advantage of the differential between long-term and
short-term interest rates and effectively converted the interest rate on $85.0
million of fixed-rate indebtedness to a variable rate. From inception of the
agreements through January 1996 the Company has paid $800,000 in settlement,
which occurs at the end of each six month period of the agreements. Had the
Company terminated these agreements, which the Company considers to be held for
other than trading purposes, on December 31, 1995, a combined loss of
approximately $300,000 would have been realized. Future positive or negative
cash flows associated with these agreements will depend upon the trend of
short-term interest rates during the remaining life of the agreements. In the
event of non-performance of the counterparties at anytime during the remaining
lives of these agreements which expire at December 1998 and January 1999, the
Company could lose some or all of any future positive cash flows. However, the
Company does not anticipate non-performance by such counterparties.
The fair value of the Company's long-term debt at December 31, 1995 is
estimated based on the quoted market prices for the same issues or on the
current rates offered to the Company for debt of the same remaining maturities.
The estimated fair value of long-term debt was approximately $6.6 million
greater than the carrying value of $228.9 million. Because judgment is required
in interpreting market data to develop estimates of fair value, the estimates
are not necessarily indicative of the amounts that could be realized or would be
paid in a current market exchange. The effect of using different market
assumptions or estimation methodologies may be material to the estimated fair
value amounts.
14. RELATED PARTY TRANSACTIONS
Employees of affiliates of the Company provide services to the Company in
connection with insurance and legal services, benefit plan administration and
other services and the Company reimburses such affiliates for the allocated
share of the costs related to such employees. In 1995, the amount allocated to
the Company was $436,414. The Company believes that the terms of such allocated
services are at least as favorable to the Company as would be available from
unaffiliated third parties.
The Company performs certain services for a subsidiary of Mafco Holdings.
Revenues for such services were $874,000, $763,000 and $481,000 for the years
ended December 31, 1995, 1994 and 1993.
Included in accrued expenses and other liabilities are payables to Mafco
Holdings and affiliates in the amount of $2.0 million and $544,000 at December
31, 1995 and 1994, respectively.
15. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2001, amounted to $2.3
million, $2.3 million and $1.9 million for the years ended December 31, 1995,
1994 and 1993 respectively. Future minimum rental commitments, which include
obligations related to
F-21
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
former operations of Abex, for operating leases with noncancelable terms in
excess of one year from December 31, 1995, net of sublease payments of $15.3
million, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996................................................................. $ 2,866
1997................................................................. 2,865
1998................................................................. 2,714
1999................................................................. 2,468
2000 and thereafter.................................................. 4,217
--------------
$ 15,130
==============
</TABLE>
At December 31, 1995, the Company had obligations to purchase approximately
$17.8 million of raw materials.
The Company had outstanding letters of credit totaling $20.4 million and
$4.9 million at December 31, 1995 and 1994, respectively, of which $16.3 are
secured by restricted cash at December 31, 1995.
Under the Transfer Agreement between PCT and a subsidiary of MC Group, MC
Group will reimburse PCT for amounts spent in excess of $1.5 million during each
of the years 1995 (after June 15), 1996, 1997 and 1998 in connection with
certain public company costs. The amount spent for such costs by PCT in the 1995
period did not exceed $1.5 million; therefore, no reimbursement was made.
On February 5, 1996, MC Group entered into a reimbursement agreement with
Chemical Bank and PCT, through its wholly owned subsidiary Pneumo Abex
Corporation ('Pneumo Abex'). The agreement provides for letters of credit
totaling $20.8 million covering certain environmental issues, not related to the
aerospace business of PCT. In connection with such agreement, MC Group pledged
the PCT Preferred Stock and its ownership of 5,939,400 shares of PCT Common
Stock.
At March 25, 1996, 19,777,752 shares, or approximately 85% of the Company's
stock were pledged to secured indebtedness of a subsidiary of Mafco Holdings.
During 1995, the Company entered into a three year employment arrangement
with James R. Maher, the Company's Chief Executive Officer. Mr. Maher's
arrangement provides for, among other things, a bonus of up to $4.0 million to
be paid in connection with certain transactions and a special payment right of
up to approximately $5.5 million which is deferred and is dependent upon the
overall performance of the Company's Common Stock. At December 31, 1995, the
Company has accrued the earned and vested portion of the employment arrangement.
Certain of Abex's former subsidiaries have been named parties in several
government enforcement and private actions seeking cleanup costs and/or damages
for personal injury or property damage under the Federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
('CERCLA') and related federal and state laws. In addition, certain of these
subsidiaries have been identified by governmental authorities as being
potentially responsible for cleanup costs and/or natural resource damages or
have received inquiries from governmental authorities regarding their possible
involvement with hazardous waste sites. One such site in Portsmouth, Virginia,
which was formerly operated by Abex and a portion of which is owned by MC Group,
has been placed on the National Priorities List under CERCLA. The potential
costs related to such matters and the possible impact thereof on future
operations are uncertain due to, among other factors, the following: uncertainty
regarding the extent of prior pollution; the complexity of laws and regulations
and their interpretations; the varying costs and effectiveness of alternative
cleanup technologies and methods; and the questionable and varying degrees of
responsibility and/or involvement by Abex subsidiaries.
Under applicable state and federal law, including CERCLA, each potentially
responsible party ('PRP') can be held jointly and severally liable for all
cleanup and related costs at each site. For the reasons noted above, it is
F-22
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
impossible to predict the extent to which remediation will be required at a
particular site and the ultimate cost thereof. However, the aggregate cost of
cleanup and related expenses with respect to sites at which Abex and its
subsidiaries, together with numerous other third parties, have been named PRPs
could exceed $200 million, including approximately $20 million in remedial
action costs, as estimated by the EPA, in respect of the Portsmouth, Virginia
site.
As a result of the Transfer, MC Group will indemnify PCT with respect to
all environmental matters associated with Abex's former operations to the extent
not paid by third party indemnitors or insurers, other than the operations
relating to PCT's aerospace business as currently conducted. Pursuant to the
Stock Purchase Agreement, dated April 28, 1988, as amended, between Pneumo Abex
and Whitman Corporation ('Whitman') and the related Settlement Agreement, dated
September 23, 1991, between Pneumo Abex and Whitman (collectively, the 'Whitman
Agreements'), Whitman is obligated to indemnify Pneumo Abex for costs, expenses
and liabilities relating to environmental and natural resource matters to the
extent attributable to the operation of the businesses acquired from Whitman
prior to their acquisition in 1988, subject to certain conditions and
limitations principally relating to compliance with notice, cooperation and
other procedural requirements. Generally, known and unknown liabilities arising
after the 1988 Whitman acquisition that relate to PCT's current facilities will
be the responsibility of PCT. Whitman is generally discharging the related
liabilities in the ordinary course. In addition to the remedial action costs for
the Portsmouth, Virginia site, as to which Whitman has acknowledged its
indemnification responsibilities, Pneumo Abex is party to a number of cases
involving tort claims concerning such site alleging exposure to lead for which
Whitman has declined to accept responsibility. MC Group and Whitman are
currently sharing equally the defense costs for such cases, subject to a
reservation of their respective rights. Whitman is actively managing a
significant number of indemnified matters, including the potential cleanup of
the Portsmouth, Virginia site, and MC Group's involvement varies and is limited
for those matters being managed by Whitman.
Based upon MC Group's experience to date (including the existence of the
indemnification arrangements referred to above), the cost of compliance with
environmental laws is not expected to have a material adverse effect on MC
Group's earnings, liquidity or competitive position. However, future events,
such as changes in existing laws or enforcement policies, may give rise to
additional compliance and/or other costs which could have a material adverse
effect on MC Group's financial condition or results of operations.
MC Group has not recognized any liability in its financial statements for
environmental matters occurring prior to the 1988 Whitman acquisition which are
covered by Whitman's indemnification obligations under the Whitman Agreements.
Management of MC Group considers these obligations to be Whitman's and monitors
the financial position of Whitman to determine the level of uncertainty
associated with Whitman's ability to satisfy its obligations. Based upon
Whitman's active management of indemnifiable matters, its discharging of the
related liabilities when required, and its financial position based upon
publicly filed financial statements, MC Group believes that the likelihood of
Whitman failing to satisfy its obligations is remote.
A predecessor of Pneumo Abex, a wholly owned subsidiary of PCT, has been
named as a defendant in personal injury lawsuits claiming damages relating to
asbestos-containing friction products formerly manufactured by such predecessor.
The predecessor, which discontinued the manufacture and sale of asbestos-
containing friction products in the United States in 1987, has never been found
liable in any such case. As of January 31, 1996, Pneumo Abex or the predecessor
has been named as a defendant in approximately 38,000 pending claims, typically
with 10 to 30 or more co-defendants.
Pursuant to the Whitman Agreements, Whitman has retained ultimate
responsibility for all asbestos-related claims made through August 1998 and for
certain asbestos-related claims asserted thereafter. In connection with the sale
by Abex in December 1994 of its Friction Products Division (the 'Friction
Products Sale'), a subsidiary of Cooper Industries, Inc. ('Cooper') assumed
responsibility for substantially all of the asbestos-related claims made after
August 1998 and therefore no longer subject to the Whitman indemnity. Pneumo
Abex maintained
F-23
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
product liability insurance covering substantially all of the period during
which asbestos-containing products were manufactured and both the Company and
Whitman have the benefit of such insurance. Pursuant to court rulings and
interim agreements reached with certain insurance carriers, Pneumo Abex is being
reimbursed for approximately 90% of the aggregate defense and settlement costs
associated with such claims, and continues to seek recovery of the remaining
amount of unreimbursed costs from its carriers in an ongoing insurance coverage
litigation commenced by Abex in 1982. As of December 31, 1995, the Company has
approximately $4.6 million in unreimbursed costs pending receipt from the
insurance carriers or Whitman.
MC Group is unable to forecast with precision the amount of future defense
and settlement costs associated with asbestos litigation, but consistent with
Abex's historical treatment, MC Group has not recognized any liability in its
financial statements for asbestos-related claims as substantially all of these
costs are expected to be insured and, to the extent not insured entirely, are
covered by Whitman's indemnifications under the Whitman Agreements or by Cooper.
Although PCT retains ultimate responsibility and indemnifies MC Group for
such matters under the Transfer Agreement, a subsidiary of MC Group undertakes
administrative and funding obligations with respect to such matters, including
as to such unreimbursed costs subject to certain termination events as described
below. PCT's obligation to make reimbursement for the amounts so funded will be
limited to amounts received by PCT under related indemnification and insurance
arrangements. The Company's administrative and funding obligations would be
terminated in the case of a bankruptcy of Pneumo Abex or PCT or, following an
exhaustion of available insurance, either a bankruptcy of Whitman or Cooper or
Whitman or Cooper failing to make required indemnification payments other than
for reasons primarily caused by actions or inactions taken by MC Group.
Various legal proceedings, claims and investigations are pending against MC
Group and its subsidiaries related to commercial transactions, product
liability, safety and health matters and other matters relating to MC Group,
including those for which MC Group assumed responsibility under the Transfer
Agreement. Most of these legal proceedings are related to matters covered by
insurance, subject to deductibles and maximum limits, and by third party
indemnities. MC Group does not believe, based on currently available
information, that the outcome of these other matters, irrespective of insurance
coverage and third party indemnities, will have a material adverse effect on its
financial position or results of operations.
In connection with the 1992 distribution of Abex common stock to the Henley
stockholders (the 'Distribution'), Abex assumed certain liabilities of Henley
related to existing and former businesses and assets and liabilities of
predecessors for certain tax matters and a self-insurance program. Abex's
balance sheet reflects adequate reserves for these matters. The tax matters,
including the expected timing of payments, is discussed further in Note 9-Income
Taxes. The timing of payments under the self-insurance program is not known,
however, management believes that cash on hand and cash generated by operations
will be adequate to satisfy such obligations when required.
Abex and Koll agreed that, following the Distribution, each company would
be responsible for liabilities relating to its existing and certain previously
owned assets and businesses of Henley Group and certain of its predecessors and
will indemnify the other in respect thereof. Abex guaranteed certain contingent
obligations of Koll relating to a pension plan and environmental liabilities of
Henley Group and certain of its predecessors and Koll agreed to indemnify Abex
in respect thereof. MC Group's exposure with respect to these liabilities is in
the nature of a guarantee in favor of third parties of Koll's primary
obligations, which Koll has been and continues to discharge. MC Group has no
reason to believe its past dispute with Koll concerning Koll's tax sharing
obligation reflects either an inability on Koll's part to discharge its
obligation or a repudiation by Koll of responsibility for its environmental or
pension liabilities. MC Group believes that the likelihood of its being required
to perform on the guarantees is remote.
F-24
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SIGNIFICANT CUSTOMER
Philip Morris accounted for approximately 10%, 11% and 11% of the Company's
consolidated net sales during the years ended December 31, 1995, 1994 and 1993,
respectively.
17. GEOGRAPHIC INFORMATION
Information related to the Company's geographic areas are presented below
with the following definitions:
Operating profit, as indicated below, represents net sales less operating
expenses, amortization of identifiable goodwill, foreign currency transaction
income (loss) and other income (expense).
Identifiable assets are those used by each geographic area. Corporate
assets are principally cash, restricted cash, deferred charges and the assets
acquired in connection with the Merger and Libra Purchase.
GEOGRAPHIC AREAS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net Sales (a)
Domestic--U.S.................................................... $217,394 $187,513 $166,145
--Export................................................. 26,032 25,425 23,747
Foreign.......................................................... 17,700 13,941 12,686
-------- -------- --------
$261,126 $226,879 $202,578
======== ======== ========
Operating Profit:
Domestic......................................................... $ 63,536 $ 50,656 $ 41,826
Foreign (b)...................................................... 3,476 2,506 2,114
Corporate........................................................ (9,427) -- --
-------- -------- --------
57,585 53,162 43,940
Net expense and financing charges.................................. (24,791) (29,349) (28,453)
-------- -------- --------
Income from continuing operations before income taxes............ $ 32,794 $ 23,813 $ 15,487
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Identifiable assets:
Domestic (c)........................................................ $237,303 $246,952
Foreign............................................................. 18,919 17,934
Corporate........................................................... 304,377 17,965
-------- --------
$560,599 $282,851
======== ========
</TABLE>
- ------------------
(a) The Company had no intercompany sales from their U.S. businesses to their
foreign businesses in 1995 and 1994, while in 1993 they had sales of $84.
Sales from their foreign businesses to their U.S. businesses were $23,084,
$17,473 and $15,097 for the years ended December 31, 1995, 1994 and 1993,
respectively. Such amounts are excluded from the above table.
(b) Includes foreign currency transaction gain of $40, $215 and $17 in 1995,
1994 and 1993, respectively.
(c) Includes assets located in foreign countries of $14,071, $15,133 and $15,186
at December 31, 1995, 1994 and 1993, respectively.
F-25
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial information for
the quarterly periods in 1995 and 1994:
<TABLE>
<CAPTION>
1995
----------------------------------------
FIRST SECOND THIRD FOUR
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................................... $58,353 $68,236 $68,679 $65,858
Gross profit................................................ 23,804 28,210 27,984 27,106
Net income.................................................. 4,556 7,885 4,604 7,368
Net income per share........................................ $ 0.23 $ 0.38 $ 0.20 $ 0.32
</TABLE>
<TABLE>
<CAPTION>
1994
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C>
Net sales................................................... $49,532 $57,794 $60,089 $59,464
Gross profit................................................ 19,512 22,927 24,064 24,409
Net income.................................................. 2,074 1,672 5,934 3,988
Net income per share........................................ $ 0.10 $ 0.08 $ 0.30 $ 0.20
</TABLE>
F-26
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 29,
1996
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 19,248
Trading securities............................................................................... 225,362
Notes and trade receivables, net................................................................. 31,299
Inventories...................................................................................... 91,013
Prepaid expenses and other....................................................................... 23,770
-------------
Total current assets.......................................................................... 390,692
Property, plant and equipment, net................................................................. 47,955
Pension asset...................................................................................... 62,475
Investment in PCT preferred and common stock....................................................... 73,481
Trademarks, net.................................................................................... 31,372
Intangible assets related to businesses acquired, net.............................................. 61,498
Other assets....................................................................................... 62,250
-------------
$ 729,723
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and short term borrowings...................................... $ 11,200
Accounts payable................................................................................. 14,678
Accrued expenses and other....................................................................... 63,805
-------------
Total current liabilities..................................................................... 89,683
Long-term debt..................................................................................... 209,915
Deferred income taxes.............................................................................. 43,462
Other liabilities.................................................................................. 152,875
Commitments and contingencies......................................................................
Stockholders' equity:
Common stock of Mafco Consolidated Group Inc., par value $.01 per share, 250,000,000 shares
authorized, 24,722,190 shares issued.......................................................... 247
Additional paid-in-capital....................................................................... 167,105
Retained earnings (accumulated deficit).......................................................... 94,998
Currency translation adjustment.................................................................. 1,341
Treasury stock at cost (1,484,850 shares)........................................................ (29,903)
-------------
Total stockholders' equity.................................................................... 233,788
-------------
$ 729,723
=============
</TABLE>
See notes to consolidated financial statements.
F-27
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
--------------------------------------
SEPTEMBER 29, 1996 OCTOBER 1, 1995
------------------ ----------------
<S> <C> <C>
Net sales................................................................... $230,380 $195,268
Cost of sales............................................................... 131,868 115,270
------------------ ----------------
Gross profit................................................................ 98,512 79,998
Selling, general and administrative expenses................................ 40,018 37,184
------------------ ----------------
Operating income............................................................ 58,494 42,814
Interest expense............................................................ (19,255) (20,373)
Interest, investment and dividend income.................................... 7,057 2,809
Amortization of deferred charges and bank fees.............................. (1,516) (1,548)
Equity in earnings from continuing operations and preferred dividends of
PCT....................................................................... 2,773 418
Gain on Cigar IPO........................................................... 127,809 --
Other expense, net.......................................................... (759) (241)
------------------ ----------------
Income from continuing operations before income taxes....................... 174,603 23,879
Provision for income taxes.................................................. (59,052) (7,494)
------------------ ----------------
Income from continuing operations........................................... 115,551 16,385
Discontinued operations:
Equity in discontinued operations of PCT, net of income taxes............. 15,052 660
------------------ ----------------
Net income................................................................ $130,603 $ 17,045
================== ================
Income per share:
Continuing operations..................................................... $ 4.97 $ 0.77
Discontinued operations................................................... 0.65 0.03
------------------ ----------------
$ 5.62 $ 0.80
================== ================
Weighted average common shares outstanding.................................. 23,237 21,315
</TABLE>
See notes to consolidated financial statements.
F-28
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIODS ENDED
-----------------------------
SEPTEMBER 29, OCTOBER 1,
1996 1995
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 130,603 $ 17,045
------------- ----------
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization................................................ 7,736 7,868
Gain on Cigar IPO............................................................ (127,809) --
Equity in earnings of affiliates in excess of distributions.................. (17,934) (272)
Deferred income.............................................................. (153) (154)
Changes in assets and liabilities:
Net increase in trading securities........................................... (225,172) --
Increase in notes and trade receivables...................................... (5,132) (5,547)
(Increase) decrease in inventories........................................... (6,862) 1,039
Increase (decrease) in accounts payable...................................... 5,139 (692)
(Increase) decrease in deferred taxes and other, net......................... 50,838 (1,018)
------------- ----------
(319,349) 1,224
------------- ----------
Net cash flows (used in) provided by operating activities........................... (188,746) 18,269
------------- ----------
Cash flows from investing activities:
Capital expenditures.............................................................. (5,844) (2,059)
Cash acquired in Abex Merger, net of costs........................................ -- 176,505
Purchase of PCT common stock...................................................... -- (33,653)
Other, net........................................................................ (498) 1,855
------------- ----------
Net cash flows (used in) provided by investing activities........................... (6,342) 142,648
------------- ----------
Cash flows from financing activities:
Proceeds from borrowings.......................................................... -- 231
Repayment of borrowings........................................................... (8,535) (10,123)
Purchase of Company common stock and Abex VSRs.................................... -- (30,254)
Net proceeds from Cigar IPO....................................................... 127,809 --
Dividends paid.................................................................... -- (14,000)
Due to affiliates and other borrowings............................................ (459) (386)
Decrease (increase) in restricted deposits........................................ 2,187 (16,467)
------------- ----------
Net cash flows provided by (used in) financing activities........................... 121,002 (70,999)
------------- ----------
Effect of exchange rate changes on cash............................................. (83) 76
------------- ----------
Net (decrease) increase in cash and cash equivalents................................ (74,169) 89,994
Cash and cash equivalents at beginning of period.................................... 93,417 9,323
------------- ----------
Cash and cash equivalents at end of period.......................................... $ 19,248 $ 99,317
============= ==========
Supplemental schedule of cash flow information:
Interest paid..................................................................... $ 19,020 $ 20,853
Income taxes paid, net of refunds................................................. $ 3,827 $ 5,153
</TABLE>
See notes to consolidated financial statements
F-29
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Mafco
Consolidated Group Inc. ('MC Group' or the 'Company') have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. The statements
should be read in conjunction with the consolidated financial statements
included in the Company's annual report on Form 10-K for the year ended December
31, 1995. All terms used but not defined elsewhere herein have the meanings
ascribed to them in the Company's annual report on Form 10-K. The results of
operations for the nine month period ended October 1, 1995 have been restated to
reflect the discontinued operations of PCT (see Note 3). Certain
reclassifications have been made to conform to the current period's
presentation. The results of operations for the nine month periods are not
necessarily indicative of the results for the entire year.
The Company recognizes gains and losses on sales of subsidiary stock in the
statement of operations.
2. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 29, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
Raw materials and supplies...................................... $65,630 $ 59,742
Work-in-process................................................. 2,681 1,988
Finished goods.................................................. 22,702 22,764
------------- ------------
$91,013 $ 84,494
============= ============
</TABLE>
3. SALE OF PCT OPERATIONS
On April 15, 1996, Power Control Technologies Inc. ('PCT') received the
necessary approval from its stockholders and consummated the sale of its entire
operations, including substantially all its assets, to Parker-Hannifin
Corporation, for aggregate cash consideration of $201,100, before transaction
costs.
Equity in discontinued operations of PCT, net of income taxes, represents
the Company's interest in the discontinued operations of PCT, including the gain
on sale of PCT's aerospace business.
4. INITIAL PUBLIC OFFERING AND PROMISSORY NOTE
On August 21, 1996, MC Group's wholly owned subsidiary, Consolidated Cigar
Holdings Inc. ('Cigar Holdings') completed an initial public offering (the
'Cigar IPO') in which it issued and sold 6,075,000 shares of its Class A Common
Stock for $23.00 per share. The proceeds, net of underwriter's discount and
related fees and expenses, of $127,809, were paid as a dividend to MC Group and
resulted in a gain to the Company of $83,076, net of income taxes of $44,733.
All of the proceeds received from the sale of stock in the Cigar IPO were
treated as gain as the net book value of Cigar Holdings was a deficit at the
time of the Cigar IPO and no allocation of the deficit was made to minority
interest. Minority interest in the earnings of Cigar Holdings subsequent to the
Cigar IPO was not recorded as the book value of Cigar Holdings remained negative
after including Cigar Holdings' net earnings subsequent to the Cigar IPO. The
net proceeds from the Cigar IPO as well as other funds of the Company were
invested in marketable securities, which include U.S. Treasury and agency
securities, mortgage-back securities, corporate debt securities and other debt
securities. These securities are classified as trading securities.
Simultaneously with the Cigar IPO, each of Cigar Holdings' then outstanding
shares of common stock were converted into 24,600 shares of the newly created
Class B Common Stock which totaled 24,600,000 shares. In
F-30
<PAGE>
addition, Cigar Holdings issued a non-interest bearing promissory note (the
'Cigar Note') in an original principal amount of $70,000 to MC Group. The Cigar
Note is payable in quarterly installments of $2,500, beginning March 31, 1997
with the final installment payable on December 31, 2003.
5. SALE OF FLAVORS HOLDINGS TO PCT
On October 23, 1996, MC Group entered into a Stock and VSR Purchase
Agreement (the 'Purchase Agreement'), dated as of October 23, 1996, with PCT and
PCT International Holdings Inc., a Delaware corporation and wholly owned
subsidiary of PCT ('Purchaser'), pursuant to which Purchaser has agreed to
purchase from MC Group, and MC Group has agreed to sell and issue to Purchaser,
all the issued and outstanding shares (the 'Shares') of capital stock of Flavors
Holdings Inc., a Delaware corporation and wholly owned subsidiary of MC Group
('Flavors'), and 23,156,502 Value Support Rights (each a 'VSR' and collectively,
the 'VSRs') to be issued pursuant to the Value Support Rights Agreement (the
'VSR Agreement') to be entered into between MC Group and American Stock Transfer
& Trust Company, as trustee. Flavors, through its wholly owned subsidiary Mafco
Worldwide Corporation, operates MC Group's licorice extract and other flavoring
agents manufacturing and distributing business. The agreement was unanimously
approved by the Boards of Directors of MC Group and PCT and, in the case of PCT,
upon the recommendation of a Special Committee of directors who are not officers
or employees of PCT or its affiliates including MC Group, formed to consider the
transaction. The transaction is expected to close in the fourth quarter of 1996
and is expected to result in a gain to the Company.
In consideration for the Shares and VSRs, Purchaser has agreed to pay MC
Group cash in the amount of $180,000, before estimated transaction costs of
$7,300. In addition, Purchaser shall pay MC Group deferred cash payments of
$3,700 on June 30, 1997 and $3,500 on December 31, 1997.
It is anticipated that the VSRs will be distributed to all holders of PCT
Common Stock and PCT Preferred Stock promptly following the effectiveness of a
registration statement to be filed by MC Group with the Securities and Exchange
Commission. Each VSR, subject to certain limitations, entitles its holder to
receive a payment, if any, of up to $3.25 per VSR if the 30-Day Average Market
Price (as defined in the VSR Agreement) of PCT Common Stock is below $11.00 per
share on January 1, 1999; provided, however, MC Group has an optional right to
call the VSRs each April 1, July 1, October 1 and January 1 from and including
April 1, 1997 to and including October 1, 1998 (each, an 'Optional Call Date').
If MC Group calls the VSRs on or before January 1, 1998, holders will be
entitled to receive a payment of at least $0.50 and up to $3.25 per VSR if the
30-Day Average Market Price is below $10.25 per share as of such Optional Call
Date. If MC Group calls the VSRs after January 1, 1998, each VSR will entitle
its holder to a payment, if any, of up to $3.25 per VSR if the 30-Day Average
Market Price is below $11.00 per share on such Optional Call Date.
The Company's VSR obligation incurred in connection with the Purchase
Agreement will be accounted for at market value at the date of issuance and
subsequently marked to the closing market price of the security at each
financial statement date. As a result, income in future periods may be affected
by any positive or negative mark to market adjustments.
F-31
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 2
Risk Factors................................... 10
Background and the Disposition................. 16
The Distribution............................... 19
Certain Information Relating to PCT............ 20
Selected Historical Financial Data............. 22
Pro Forma Financial Data....................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 28
Business....................................... 36
Management..................................... 51
Security Ownership of Certain Beneficial Owners
and Management............................... 58
Certain Relationships and Related
Transactions................................. 59
Description of the Value Support Rights and VSR
Notes........................................ 61
Description of Certain Indebtedness............ 70
Certain United States Federal Income Tax
Consequences................................. 71
Legal Matters.................................. 74
Experts........................................ 75
Available Information.......................... 75
Index to Consolidated Financial
Statements................................... F-1
</TABLE>
===============================================================================
===============================================================================
23,156,502
VALUE SUPPORT RIGHTS
MAFCO CONSOLIDATED GROUP INC.
------------------------
PROSPECTUS
------------------------
DECEMBER 26, 1996
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the VSRs
are estimated as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................................... $ 22,805.65
New York Stock Exchange.................................................................. 55,000.00
Blue Sky Fees............................................................................ 1,000.00
Printing and Engraving Expenses.......................................................... 14,250.00
Legal Fees and Expenses.................................................................. 250,000.00
Accounting Fees and Expenses............................................................. 150,000.00
Transfer Agent and Registrar Fees........................................................ 35,000.00
Miscellaneous............................................................................ 6,194.35
-----------
Total............................................................................... $534,250.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant is empowered by Section 145 of the General Corporation Law
of the State of Delaware (the 'DGCL'), subject to the procedures and limitations
therein, to indemnify any person against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with any threatened, pending or completed action,
suit or proceeding in which such person is made a party by reason of such person
being or having been a director, officer, employee or agent of the Registrant.
The statute provides that indemnification pursuant to its provisions is not
exclusive of other rights of indemnification to which a person may be entitled
under any by-law, agreement, vote of stockholders or disinterested directors, or
otherwise. The Amended and Restated By-laws of the Registrant provide for
indemnification by the Registrant of its directors and officers to the fullest
extent permitted by the DGCL.
The foregoing statements are subject to the detailed provisions of the
DGCL, the Registrant's Amended and Restated Certificate of Incorporation and the
Registrant's Amended and Restated By-laws.
Article XI of the Registrant's Amended and Restated By-laws allow the
Registrant to maintain director and officer liability insurance on behalf of any
person who is or was a director or officer of the Registrant or such person who
serves or served as a director, officer, agent or employee, at another
corporation, partnership or other enterprise at the request of the Registrant.
Pursuant to Section 102(b)(7) of the DGCL and Article Thirteenth of the
Amended and Restated Certificate of Incorporation of the Registrant provides
that no director of the Registrant shall be personally liable to the Registrant
or its stockholders for monetary damages for any breach of his fiduciary duty as
a director; provided, however, that such clause shall not apply to any liability
of a director (1) for any breach of his duty of loyalty to the Registrant or its
stockholders, (2) for acts or omissions that are not in good faith or involve
intentional misconduct or a knowing violation of the law, (3) under Section 174
of the DGCL, or (4) for any transaction from which the director derived an
improper personal benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Other than the sale of the VSRs to PCT International pursuant to the
Purchase Agreement, there have been no sales of unregistered securities by the
Registrant within the past three years. The sale of the VSRs to PCT
International was made in reliance on the exemption from registration provided
by Section 4(2) of the Securities Act for transactions not involving a public
offering.
II-1
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
**2.1 -- Stock and VSR Purchase Agreement, dated as of October 23, 1996 (the 'Purchase Agreement'), by and
among the Registrant, Power Control Technologies Inc. and PCT International Holdings Inc. The
Registrant agrees to furnish supplementally a copy of any omitted schedule to the Commission upon
request.
3.1 (a) -- Restated Certificate of Incorporation of the Registrant (incorporated by reference from Exhibit
4.1 to the Registrant's Current Report on Form 8-K dated June 30, 1995).
3.1 (b) -- Amendment to Restated Certificate of Incorporation of the Registrant (incorporated by reference
from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
3.2 -- By-Laws of the Registrant (incorporated by reference from Exhibit 4.2 to the Registrant's Current
Report on Form 8-K dated June 30, 1995).
4.1 (a) -- Value Support Rights Agreement, dated as of November 25, 1996, between the Registrant and American
Stock Transfer & Trust Company (incorporated by reference from Exhibit 4.1 to Form 8-K of the
Registrant filed on November 27, 1996).
*4.1 (b) -- Amendment No. 1 to the Value Support Rights Agreement, dated as of December 20, 1996, between the
Registrant and American Stock Transfer & Trust Company.
***4.2 -- Draft form of Indenture for the VSR Notes.
*5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to legality regarding the Value Support
Rights.
*8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
10.1 -- Credit Agreement between Consolidated Cigar Corporation and The Chase Manhattan Bank, N.A., dated
as of February 23, 1993 (incorporated by reference from Exhibit 10.2 to Amendment No. 2 of
Consolidated Cigar Corporation's Registration Statement on Form S-1 (Registration No. 33-56902)).
10.2 (a) -- Amendment No. 1 to the Credit Agreement, dated as of March 2, 1993 (incorporated by reference from
Exhibit 10.2(a) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.2 (b) -- Amendment No. 2 to the Credit Agreement, dated as of March 12, 1993 (incorporated by reference
from Exhibit 10.2(b) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.2 (c) -- Amendment No. 3 to the Credit Agreement, dated as of March 17, 1993 (incorporated by reference
from Exhibit 10.2(c) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993).
10.2 (d) -- Amendment No. 4 to the Credit Agreement, dated as of April 5, 1993 (incorporated by reference from
Exhibit 10.2(d) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.2 (e) -- Amendment No. 5 to the Credit Agreement, dated as of June 15, 1993 (incorporated by reference from
Exhibit 10.2(e) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1993).
10.2 (f) -- Amendment No. 6 to the Credit Agreement, dated as of September 12, 1994 (incorporated by reference
from Exhibit 10.2(f) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994).
10.2 (g) -- Amendment No. 7 to the Credit Agreement, dated as of May 31, 1995 (incorporated by reference from
Exhibit 10.2(g) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.2 (h) -- Amendment No. 8 to the Credit Agreement, dated as of October 18, 1995 (incorporated by reference
from Exhibit 10.2(h) to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.2 (i) -- Amendment No. 9 to the Credit Agreement, dated as of March 13, 1996 (incorporated by reference
from Exhibit 10.2(i) of Amendment No. 1 of Consolidated Cigar Holdings Inc.'s Registration
Statement on Form S-1 (Registration No. 333-6819)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.2 (j) -- Amendment No. 10 to the Credit Agreement, dated as of July 31, 1996 (incorporated by reference
from Exhibit 10.3 of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration Statement
on Form S-1 (Registration No. 333-6819)).
10.3 -- Indenture by and between Consolidated Cigar Corporation and Continental Bank, National
Association, as Trustee, relating to the Senior Subordinated Notes due 2003 (incorporated by
reference from Exhibit 10.2(j) of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s
Registration Statement on Form S-1 (Registration No. 333-6819)).
10.4 (a) -- Guarantee and Security Agreement, dated as of March 3, 1993, between the Registrant and The Chase
Manhattan Bank, N.A. (incorporated by reference from Exhibit 10.16(a) of Amendment No. 2 of
Consolidated Cigar Holdings Inc.'s Registration Statement on Form S-1 (Registration No.
333-6819)).
10.4 (b) -- First Amendment to Guarantee and Security Agreement, dated as of July 31, 1996 (incorporated by
reference from Exhibit 10.16(b) of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s
Registration Statement on Form S-1 (Registration No. 333-6819)).
***10.5 -- Promissory Note issued by Consolidated Cigar Holdings Inc. to the Registrant.
10.6 (a) -- Employment Agreement effective July 1, 1995 between the Registrant and James R. Maher
(incorporated by reference from Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.6 (b) -- Amendment dated March 15, 1996 to the Employment Agreement effective July 1, 1995 between the
Registrant and James R. Maher (incorporated by reference from Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
10.7 (a) -- Employment Agreement, dated as of July 1, 1995 between the Registrant and Theo W. Folz
(incorporated by reference from Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.7 (b) -- First Amendment, dated February 29, 1996, to the Employment Agreement, dated July 1, 1995, between
the Registrant and Theo W. Folz (incorporated by reference from Exhibit 10.35 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.7 (c) -- Second Amendment, dated August 1, 1996, to the Employment Agreement, dated July 1, 1995, between
the Registrant and Theo W. Folz (incorporated by reference from Exhibit 10.4(c) of Amendment No. 2
of Consolidated Cigar Holdings Inc.'s Registration Statement on Form S-1 (Registration No.
333-6819)).
10.8 -- Executive Employment Agreement, dated as of August 1, 1996, between Consolidated Cigar Corporation
and Theo W. Folz (incorporated by reference from Exhibit 10.17 of Amendment No. 2 of Consolidated
Cigar Holdings Inc.'s Registration Statement on Form S-1 (Registration No. 333-6819)).
***10.9 -- Employment Agreement, dated as of August 15, 1996, between Consolidated Cigar Corporation and Gary
R. Ellis.
10.10 -- Mafco Consolidated Group Inc. 1995 Stock Option Plan (incorporated by reference from Exhibit 10.2
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
10.11 -- Performance Bonus Plan (included within and incorporated by reference to the Employment Agreement
effective July 1, 1995 between the Registrant and James R. Maher filed as Exhibit 10.33 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.12 -- Chief Executive Officer Transaction Bonus Plan (included within and incorporated by reference to
the Employment Agreement effective July 1, 1995 between the Registrant and James R. Maher filed as
Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December
31, 1995).
10.13 -- Tobacco Products Group Performance Bonus Plan (incorporated by reference from Exhibit 10.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996).
10.14 -- Consolidated Cigar Holdings Inc. 1996 Stock Plan (incorporated by reference from Exhibit 10.12 of
Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration Statement on Form S-1
(Registration No. 333-6819)).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.15 -- Pension Plan Merger Agreement into Abex Retirement Plan (incorporated by reference from Exhibit
10.1 to Consolidated Cigar Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.16 -- Agreement and Plan of Merger dated as of January 6, 1995, as amended, between the Registrant and
Mafco Holdings Inc. (incorporated by reference from Exhibit 2.1 to the Registrant's Current Report
on Form 8-K dated June 30, 1995).
10.17 -- Separation Agreement, dated as of June 15, 1995, by and between Fisher Scientific International
Inc. and C&F Merger Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Current
Report on Form 8-K dated June 30, 1995).
10.18 -- Transfer Agreement dated as of June 15, 1995 among Power Control Technologies Inc., MCG
Intermediate Holdings Inc., Pneumo Abex Corporation and PCT International Holdings Inc.
(incorporated by reference from Exhibit 10.2 to the Registrant's Current Report on Form 8-K dated
June 30, 1995).
10.19 -- Securities Purchase Agreement, dated as of June 26, 1995 between Libra Invest and Trade Ltd. and
the Registrant (incorporated by reference from Exhibit 10.3 to the Registrant's Current Report on
Form 8-K dated June 30, 1995).
10.20 -- Letter Agreement dated as of June 26, 1995 between the Registrant and Power Control Technologies
Inc. (incorporated by reference from Exhibit 10.4 to the Registrant's Current Report on Form 8-K
dated June 30, 1995).
10.21 -- Letter Agreement, dated as of February 5, 1996, between the Registrant and Power Control
Technologies Inc. (incorporated by reference to Exhibit 6 to Amendment No. 2 to the Schedule 13D
dated February 8, 1996 filed by Mafco Holdings Inc., Mafco Consolidated Holdings Inc. and the
Registrant in connection with Power Control Technologies Inc.'s capital stock).
***10.22 -- Registration Rights Agreement, dated as of August 21, 1996, between the Registrant and
Consolidated Cigar Holdings Inc.
10.23 -- Registration Rights Agreement dated as of June 15, 1995 between the Registrant and Abex Inc.
(incorporated by reference from Exhibit 2 to the Registrant's Schedule 13D dated June 26, 1995).
10.24 -- Registration Rights Agreement, dated as of June 15, 1995, between the Registrant and Mafco
Consolidated Holdings Inc. (incorporated by reference to Exhibit 2 to the Schedule 13D dated June
26, 1995 filed by Mafco Holdings Inc. and Mafco Consolidated Holdings Inc. in connection with the
Registrant's capital stock).
10.25 -- Tax Sharing Agreement between Abex Inc. and Power Control Technologies Inc. dated June 15, 1995
(incorporated by reference from Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.26 -- Tax Sharing Agreement entered into as of June 15, 1995 by Mafco Holdings Inc. and the Registrant
(incorporated by reference from Exhibit 10.6 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.27 -- Amended and Restated Tax Sharing Agreement entered into as of June 15, 1995 by and among Mafco
Holdings Inc., the Registrant, Consolidated Cigar Holdings Inc. and Consolidated Cigar Corporation
and its subsidiaries (incorporated by reference from Exhibit 10.7(a) to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.28 -- Second Amended and Restated Tax Allocation Agreement entered into as of June 15, 1995 by and among
Mafco Holdings Inc., the Registrant, Flavors (Parent) Holdings Inc., Flavors Holdings Inc. and
Mafco Worldwide Corporation and its subsidiaries (incorporated by reference from Exhibit 10.8 to
the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995).
10.29 -- Stock Purchase Agreement, dated April 28, 1988, between Pneumo Abex Corporation and Whitman
Corporation (incorporated by reference to Exhibit 2.1 to Pneumo Abex's Registration Statement on
Form S-1 (Registration No. 33-22725)), as amended by an Amendment, dated as of August 29, 1988,
and a Second Amendment and related Settlement Agreement, dated September 23, 1991 (incorporated by
reference to Exhibit 10.04 to Abex Inc.'s Annual Report on Form 10-K for the year ended December
31, 1992).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.30 -- Asset Purchase Agreement, dated as of May 15, 1993, between Pneumo Abex Corporation and The BF
Goodrich Company (incorporated by reference to Exhibit 2.1 to Abex Inc.'s Current Report on Form
8-K dated June 10, 1993).
10.31 -- Asset Purchase Agreement, dated November 21, 1994, by and between Pneumo Abex Corporation and
Wagner Electric Corporation (incorporated by reference to Exhibit 1 to Abex Inc.'s Current Report
on Form 8-K dated November 21, 1994).
10.32 -- Lease Agreement, dated as of June 15, 1995, between Liberty Lane Real Estate, Inc. and Fisher
Scientific International Inc. (incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995).
10.33 -- Option Agreement, dated as of June 15, 1995, between Liberty Lane Real Estate, Inc. and Fisher
Scientific (incorporated by reference to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1995).
10.34 -- Mortgage and Security Agreement, dated as of June 15, 1995, between Liberty Lane Real Estate, Inc.
and Fisher Scientific International Inc. (incorporated by reference to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1995).
10.35 -- Agreement and Plan of Merger, dated as of March 26, 1992, by and among Koll Real Estate Group,
Inc. (formerly Henley Properties, Inc.), HP Merger Co. and The Henley Group, Inc. (incorporated by
reference to Exhibit 2.01 to Abex Inc.'s Registration Statement on Form S-1 (Registration No.
33-48521)).
10.36 -- Transition Agreement, dated as of July 16, 1992, among Abex Inc., The Henley Group, Inc. and Koll
Real Estate Group, Inc. (incorporated by reference to Exhibit 10.02 to Abex Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1992).
10.37 -- Amendment No. 1 to the Transition Agreement, dated as of April 1, 1993 between Abex Inc. and Koll
Real Estate Group, Inc. (incorporated by reference to Exhibit 10.18 to Abex Inc.'s Registration
Statement on Form S-4, Commission File No. 33-92188).
10.38 -- Tax Sharing Agreement, dated as of June 10, 1992, between Abex Inc. and The Henley Group
(incorporated by reference to Exhibit 10.03 to Abex Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1992).
10.39 -- Letter Agreement, dated as of July 15, 1992, between Abex Inc. and the Pension Benefit Guaranty
Corporation (incorporated by reference to Exhibit 10.16 to Abex Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1992).
10.40 -- Letter Agreement, dated as of July 15, 1992, made by The Henley Group in favor of PBGC
(incorporated by reference to Exhibit 10.17 to Abex Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1992).
10.41 -- Pension Agreement, dated as of July 16, 1992, among Koll Real Estate Group, Inc., The Henley
Group, Inc. and Abex Inc. (incorporated by reference to Exhibit 10.18 to Abex Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1992).
10.42 -- Conditional Guarantee, dated as of July 9, 1992, among Abex Inc., The Henley Group, Inc., Koll
Real Estate Group, Inc. and Allied-Signal Inc. (incorporated by reference to Exhibit 10.19 to Abex
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
10.43 -- Reimbursement Agreement, dated as of July 16, 1992, among The Henley Group, Inc., Koll Real Estate
Group, Inc. and Abex Inc. (incorporated by reference to Exhibit 10.20 to Abex Inc.'s Annual Report
on Form 10-K for the year ended December 31, 1992).
10.44 -- Tax Sharing Agreement, dated as of December 31, 1988, between Wheelabrator Technologies Inc. and
Koll Real Estate Group, Inc. (incorporated by reference to Exhibit 10.02 to Amendment No. 3 on
Form 8 to Koll Real Estate Group, Inc.'s Registration Statement on Form 10 (Registration No.
0-17189)).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.45 -- Modification Agreement, dated as of August 24, 1989, among Wheelabrator Technologies Inc., Resco
Holdings Inc., The Henley Group, Inc. Waste Management of North America, Inc. and a subsidiary of
The Henley Group, Inc. (incorporated by reference to Exhibit 10.32 to The Henley Group, Inc.'s
Registration Statement on Form 10, Registration No. 0-18004), as amended by the Assignment,
Assumption and Release Agreement, dated as of December 18, 1989 (incorporated by reference to
Exhibit 10.69 to Wheelabrator Technologies Inc.'s Registration Statement on Form S-4 (Registration
No. 33-36118), as amended by Termination and Amendment Agreement, dated as of December 31, 1991,
among The Henley Group, Inc., Koll Real Estate Group, Inc., Wheelabrator Technologies Inc., and
Resco Holdings Inc., (incorporated by reference to Exhibit 10.39 to The Henley Group Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1991 (Registration No. 0-18004)).
10.46 -- Environmental Expenditures Agreement, dated as of July 28, 1989, among Koll Real Estate Group,
Inc., Wheelabrator Technologies Inc., New Hampshire Oak, Inc. and Fisher Scientific Group Inc.
(incorporated by reference to Exhibit 10(a) to Henley Properties' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1989 (Registration No. 0-17189)), as amended by Assignment and
Assumption Agreement, dated as of January 1, 1990, among Koll Real Estate Group, Inc., The Henley
Group, Inc., New Hampshire Oak Inc., Fisher Scientific Group Inc., Wheelabrator Technologies Inc.,
and Henley Holdings, Inc. (incorporated by reference to Exhibit 10.34 to The Henley Group, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1989 (Registration No. 0-18004)).
10.47 -- Restated Environmental Matters Agreement, dated as of July 28, 1989, among Allied-Signal, Inc.,
Koll Real Estate Group, Inc., Wheelabrator Technologies Inc., New Hampshire Oak Inc. and Fisher
Scientific Group Inc. (incorporated by reference to Exhibit 10(b) to Henley Properties' Quarterly
Report on Form 10-Q for the quarter ended June 30, 1989 (Registration No. 0-17189)), amended by
the Assignment, Assumption and Indemnification Agreement, dated as of December 21, 1989, among The
Henley Group, Inc., Henley Properties, New Hampshire Oak Inc., Fisher Scientific Group Inc.,
Wheelabrator Technologies Inc. and Allied-Signal Inc. (incorporated by reference to Exhibit 10.35
to The Henley Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989
(Registration No. 0-18004)).
10.48 -- Tax Sharing Agreement, dated as of February 26, 1986, between Allied-Signal Inc. and Wheelabrator
Technologies Inc., (incorporated by reference to Exhibit 10E to WTI's Registration Statement on
Form 10 (Registration No. 0-114246)).
10.49 -- Guarantee Agreement, dated as of June 10, 1993, between Abex Inc. and BF Goodrich Company
(incorporated by reference to Exhibit 2.2 to Abex Inc.'s Current Report on Form 8-K dated June 10,
1993).
10.50 -- Mutual Guaranty Agreement, dated as of December 30, 1994, between Abex Inc. and Cooper Industries
Inc. (incorporated by reference to Exhibit 10.29 to Abex Inc.'s Registration Statement on Form S-4
(Registration No. 33-92188)).
**12 -- Computation of Ratio of Earnings to Fixed Charges.
**21 -- List of Subsidiaries
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in the opinions filed as Exhibits
5.1 and 8.1 hereto).
**24 -- Powers of Attorney.
***25.1 -- Form T-1 with respect to the eligibility of American Stock Transfer & Trust Company, as Trustee
under the VSR Agreement.
*99.1 -- Report of Independent Public Accountants of Arthur Andersen LLP
</TABLE>
- ------------------
* Filed herewith.
** Filed on October 31, 1996.
*** Filed on December 10, 1996.
II-6
<PAGE>
(b) Financial Statement Schedules:
Schedule I--Condensed Financial Information of Registrant
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes, that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, 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.
(c) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
State of New York, on December 26, 1996.
MAFCO CONSOLIDATED GROUP INC.
By: /s/ GLENN P. DICKES
----------------------------------
Glenn P. Dickes
Vice President
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------------------- ------------------
<S> <C> <C>
* Chairman of the Board of Directors December 26, 1996
- ------------------------------------------
Ronald O. Perelman
* Vice Chairman and Director December 26, 1996
- ------------------------------------------
Howard Gittis
* President, Chief Executive Officer and December 26, 1996
- ------------------------------------------ Director (Principal Executive Officer)
James R. Maher
* Executive Vice President and Chief December 26, 1996
- ------------------------------------------ Financial Officer (Principal Financial
Irwin Engelman Officer)
* Vice President and Controller December 26, 1996
- ------------------------------------------ (Principal Accounting Officer)
Laurence Winoker
* Director December 26, 1996
- ------------------------------------------
Philip E. Beekman
* Director December 26, 1996
- ------------------------------------------
Theo W. Folz
* Director December 26, 1996
- ------------------------------------------
Jewel S. LaFontant-Mankarious
* Director December 26, 1996
- ------------------------------------------
Drew Lewis
* Director December 26, 1996
- ------------------------------------------
Robert Sargent Shriver III
</TABLE>
* Joram C. Salig, by signing his name hereto, does hereby execute this Amendment
to the Registration Statement on behalf of the directors and officers of the
Registrant indicated above by asterisks, pursuant to powers of attorney duly
executed by such directors and officers and filed as exhibits to the
Registration Statement.
By: /s/ JORAM C. SALIG
----------------------------------
Joram C. Salig
Attorney-in-Fact
II-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Mafco Consolidated Group Inc.
We have audited the consolidated financial statements of Mafco Consolidated
Group Inc. and subsidiaries as of December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995 and have issued our report
thereon dated February 9, 1996 (included elsewhere in this Registration
Statement). Our audits also included the financial statement schedules listed in
Item 16(b) of this Registration Statement. These schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
We did not audit the financial statements of Power Control Technologies Inc. (a
corporation in which the Company has a 29% common equity interest). We have been
furnished with the report of other auditors with respect to Power Control
Technologies Inc.
In our opinion, based on our audits and the report of other auditors, the
financial statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information set forth therein.
ERNST & YOUNG LLP
New York, New York
February 9, 1996
S-1
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS (PARENT ONLY)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Investment in PCT preferred and common stock................................................. $ 55,547 --
Investment in subsidiaries including cumulative income and net of distributions.............. 110,863 $(10,800)
-------- --------
$166,410 $(10,800)
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Loans from subsidiary........................................................................ $ 62,689 --
Common stock of Mafco Consolidated Group Inc., par value $.01 per share, 250,000,000 shares
authorized, 24,722,190 issued and outstanding.............................................. 247 --
Common stock of Flavors Holdings, par value $1, 2,000 shares authorized, 1,000 shares issued
and outstanding............................................................................ -- 1
Common stock of Cigar Parent, par value $1, 1,000 shares authorized, issued and
outstanding................................................................................ -- 1
Paid-in-capital.............................................................................. 167,105 43,290
Accumulated deficit.......................................................................... (35,605) (55,018)
Currency translation adjustment.............................................................. 1,877 926
Treasury stock at cost....................................................................... (29,903) --
-------- --------
Total stockholders' equity (deficit)....................................................... 103,721 (10,800)
-------- --------
$166,410 $(10,800)
======== ========
</TABLE>
S-2
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF EARNINGS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------- ------- ------
<S> <C> <C> <C>
Dividend income................................................................... $ 867 $ -- $ --
Equity in earnings of subsidiaries................................................ 21,652 13,668 9,964
Equity in earnings of PCT......................................................... 1,894
------- ------- ------
Net income...................................................................... $24,413 $13,668 $9,964
======= ======= ======
</TABLE>
S-3
<PAGE>
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS (PARENT ONLY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................................. $24,413 $13,668 $ 9,964
------- ------- -------
Adjustments to reconcile net income to net cash flows from operating activities:
Earnings of affiliates greater than distributions................................... (9,546) (13,668) (9,964)
------- ------- -------
(9,546) (13,668) (9,964)
------- ------- -------
Net cash flows from operating activities................................................. 14,867 -- --
------- ------- -------
Cash flows from investing activities:
Purchase of PCT Common Stock........................................................... (33,653) -- --
------- ------- -------
Net cash flows from investing activities............................................... (33,653) -- --
------- ------- -------
Cash flows from financing activities:
Acquisition of Company's Common Stock.................................................. (29,903)
Dividends paid......................................................................... (14,000)
Loans from subsidiary.................................................................. 62,689 -- --
------- ------- -------
Net cash flows from financing activities................................................. 18,786 -- --
------- ------- -------
Net increase in cash and cash equivalents................................................ -- -- --
Cash and cash equivalents at beginning of period......................................... -- -- --
------- ------- -------
Cash and cash equivalents at end of period............................................... $ -- $ -- $ --
======= ======= =======
</TABLE>
S-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
**2.1 -- Stock and VSR Purchase Agreement, dated as of October 23, 1996 (the 'Purchase
Agreement'), by and among the Registrant, Power Control Technologies Inc. and PCT
International Holdings Inc. The Registrant agrees to furnish supplementally a copy of
any omitted schedule to the Commission upon request.
3.1 (a) -- Restated Certificate of Incorporation of the Registrant (incorporated by reference
from Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated June 30, 1995).
3.1 (b) -- Amendment to Restated Certificate of Incorporation of the Registrant (incorporated by
reference from Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996).
3.2 -- By-Laws of the Registrant (incorporated by reference from Exhibit 4.2 to the
Registrant's Current Report on Form 8-K dated June 30, 1995).
4.1 (a) -- Value Support Rights Agreement, dated as of November 25, 1996, between the Registrant
and American Stock Transfer & Trust Company (incorporated by reference from Exhibit
4.1 to Form 8-K of the Registrant filed on November 27, 1996).
*4.1 (b) -- Amendment No. 1 to the Value Support Rights Agreement, dated as of December 20, 1996,
between the Registrant and American Stock Transfer & Trust Company.
***4.2 -- Draft form of Indenture for the VSR Notes.
*5.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to legality regarding the Value
Support Rights.
*8.1 -- Opinion of Skadden, Arps, Slate, Meagher & Flom LLP as to certain tax matters.
10.1 -- Credit Agreement between Consolidated Cigar Corporation and The Chase Manhattan Bank,
N.A., dated as of February 23, 1993 (incorporated by reference from Exhibit 10.2 to
Amendment No. 2 of Consolidated Cigar Corporation's Registration Statement on Form S-1
(Registration No. 33-56902)).
10.2 (a) -- Amendment No. 1 to the Credit Agreement, dated as of March 2, 1993 (incorporated by
reference from Exhibit 10.2(a) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.2 (b) -- Amendment No. 2 to the Credit Agreement, dated as of March 12, 1993 (incorporated by
reference from Exhibit 10.2(b) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.2 (c) -- Amendment No. 3 to the Credit Agreement, dated as of March 17, 1993 (incorporated by
reference from Exhibit 10.2(c) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.2 (d) -- Amendment No. 4 to the Credit Agreement, dated as of April 5, 1993 (incorporated by
reference from Exhibit 10.2(d) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
10.2 (e) -- Amendment No. 5 to the Credit Agreement, dated as of June 15, 1993 (incorporated by
reference from Exhibit 10.2(e) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1993).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.2 (f) -- Amendment No. 6 to the Credit Agreement, dated as of September 12, 1994 (incorporated
by reference from Exhibit 10.2(f) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994).
10.2 (g) -- Amendment No. 7 to the Credit Agreement, dated as of May 31, 1995 (incorporated by
reference from Exhibit 10.2(g) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.2 (h) -- Amendment No. 8 to the Credit Agreement, dated as of October 18, 1995 (incorporated by
reference from Exhibit 10.2(h) to Consolidated Cigar Corporation's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.2 (i) -- Amendment No. 9 to the Credit Agreement, dated as of March 13, 1996 (incorporated by
reference from Exhibit 10.2(i) of Amendment No. 1 of Consolidated Cigar Holdings
Inc.'s Registration Statement on Form S-1 (Registration No. 333-6819)).
10.2 (j) -- Amendment No. 10 to the Credit Agreement, dated as of July 31, 1996 (incorporated by
reference from Exhibit 10.3 of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s
Registration Statement on Form S-1 (Registration No. 333-6819)).
10.3 -- Indenture by and between Consolidated Cigar Corporation and Continental Bank, National
Association, as Trustee, relating to the Senior Subordinated Notes due 2003
(incorporated by reference from Exhibit 10.2(j) of Amendment No. 2 of Consolidated
Cigar Holdings Inc.'s Registration Statement on Form S-1 (Registration No. 333-6819)).
10.4 (a) -- Guarantee and Security Agreement, dated as of March 3, 1993, between the Registrant
and The Chase Manhattan Bank, N.A. (incorporated by reference from Exhibit 10.16(a) of
Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration Statement on Form
S-1 (Registration No. 333-6819)).
10.4 (b) -- First Amendment to Guarantee and Security Agreement, dated as of July 31, 1996
(incorporated by reference from Exhibit 10.16(b) of Amendment No. 2 of Consolidated
Cigar Holdings Inc.'s Registration Statement on Form S-1 (Registration No. 333-6819)).
***10.5 -- Promissory Note issued by Consolidated Cigar Holdings Inc. to the Registrant.
10.6 (a) -- Employment Agreement effective July 1, 1995 between the Registrant and James R. Maher
(incorporated by reference from Exhibit 10.33 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.6 (b) -- Amendment dated March 15, 1996 to the Employment Agreement effective July 1, 1995
between the Registrant and James R. Maher (incorporated by reference from Exhibit 10.1
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.7 (a) -- Employment Agreement, dated as of July 1, 1995 between the Registrant and Theo W. Folz
(incorporated by reference from Exhibit 10.34 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995).
10.7 (b) -- First Amendment, dated February 29, 1996, to the Employment Agreement, dated July 1,
1995, between the Registrant and Theo W. Folz (incorporated by reference from Exhibit
10.35 to the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).
10.7 (c) -- Second Amendment, dated August 1, 1996, to the Employment Agreement, dated July 1,
1995, between the Registrant and Theo W. Folz (incorporated by reference from Exhibit
10.4(c) of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration
Statement on Form S-1 (Registration No. 333-6819)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.8 -- Executive Employment Agreement, dated as of August 1, 1996, between Consolidated Cigar
Corporation and Theo W. Folz (incorporated by reference from Exhibit 10.17 of
Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration Statement on Form
S-1 (Registration No. 333-6819)).
***10.9 -- Employment Agreement, dated as of August 15, 1996, between Consolidated Cigar
Corporation and Gary R. Ellis.
10.10 -- Mafco Consolidated Group Inc. 1995 Stock Option Plan (incorporated by reference from
Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996).
10.11 -- Performance Bonus Plan (included within and incorporated by reference to the
Employment Agreement effective July 1, 1995 between the Registrant and James R. Maher
filed as Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995).
10.12 -- Chief Executive Officer Transaction Bonus Plan (included within and incorporated by
reference to the Employment Agreement effective July 1, 1995 between the Registrant
and James R. Maher filed as Exhibit 10.33 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.13 -- Tobacco Products Group Performance Bonus Plan (incorporated by reference from Exhibit
10.5 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996).
10.14 -- Consolidated Cigar Holdings Inc. 1996 Stock Plan (incorporated by reference from
Exhibit 10.12 of Amendment No. 2 of Consolidated Cigar Holdings Inc.'s Registration
Statement on Form S-1 (Registration No. 333-6819)).
10.15 -- Pension Plan Merger Agreement into Abex Retirement Plan (incorporated by reference
from Exhibit 10.1 to Consolidated Cigar Corporation's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995).
10.16 -- Agreement and Plan of Merger dated as of January 6, 1995, as amended, between the
Registrant and Mafco Holdings Inc. (incorporated by reference from Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated June 30, 1995).
10.17 -- Separation Agreement, dated as of June 15, 1995, by and between Fisher Scientific
International Inc. and C&F Merger Inc. (incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated June 30, 1995).
10.18 -- Transfer Agreement dated as of June 15, 1995 among Power Control Technologies Inc.,
MCG Intermediate Holdings Inc., Pneumo Abex Corporation and PCT International Holdings
Inc. (incorporated by reference from Exhibit 10.2 to the Registrant's Current Report
on Form 8-K dated June 30, 1995).
10.19 -- Securities Purchase Agreement, dated as of June 26, 1995 between Libra Invest and
Trade Ltd. and the Registrant (incorporated by reference from Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated June 30, 1995).
10.20 -- Letter Agreement dated as of June 26, 1995 between the Registrant and Power Control
Technologies Inc. (incorporated by reference from Exhibit 10.4 to the Registrant's
Current Report on Form 8-K dated June 30, 1995).
10.21 -- Letter Agreement, dated as of February 5, 1996, between the Registrant and Power
Control Technologies Inc. (incorporated by reference to Exhibit 6 to Amendment No. 2
to the Schedule 13D dated February 8, 1996 filed by Mafco Holdings Inc., Mafco
Consolidated Holdings Inc. and the Registrant in connection with Power Control
Technologies Inc.'s capital stock).
***10.22 -- Registration Rights Agreement, dated as of August 21, 1996, between the Registrant and
Consolidated Cigar Holdings Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.23 -- Registration Rights Agreement dated as of June 15, 1995 between the Registrant and
Abex Inc. (incorporated by reference from Exhibit 2 to the Registrant's Schedule 13D
dated June 26, 1995).
10.24 -- Registration Rights Agreement, dated as of June 15, 1995, between the Registrant and
Mafco Consolidated Holdings Inc. (incorporated by reference to Exhibit 2 to the
Schedule 13D dated June 26, 1995 filed by Mafco Holdings Inc. and Mafco Consolidated
Holdings Inc. in connection with the Registrant's capital stock).
10.25 -- Tax Sharing Agreement between Abex Inc. and Power Control Technologies Inc. dated June
15, 1995 (incorporated by reference from Exhibit 10.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.26 -- Tax Sharing Agreement entered into as of June 15, 1995 by Mafco Holdings Inc. and the
Registrant (incorporated by reference from Exhibit 10.6 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1995).
10.27 -- Amended and Restated Tax Sharing Agreement entered into as of June 15, 1995 by and
among Mafco Holdings Inc., the Registrant, Consolidated Cigar Holdings Inc. and
Consolidated Cigar Corporation and its subsidiaries (incorporated by reference from
Exhibit 10.7(a) to the Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 1995).
10.28 -- Second Amended and Restated Tax Allocation Agreement entered into as of June 15, 1995
by and among Mafco Holdings Inc., the Registrant, Flavors (Parent) Holdings Inc.,
Flavors Holdings Inc. and Mafco Worldwide Corporation and its subsidiaries
(incorporated by reference from Exhibit 10.8 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1995).
10.29 -- Stock Purchase Agreement, dated April 28, 1988, between Pneumo Abex Corporation and
Whitman Corporation (incorporated by reference to Exhibit 2.1 to Pneumo Abex's
Registration Statement on Form S-1 (Registration No. 33-22725)), as amended by an
Amendment, dated as of August 29, 1988, and a Second Amendment and related Settlement
Agreement, dated September 23, 1991 (incorporated by reference to Exhibit 10.04 to
Abex Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
10.30 -- Asset Purchase Agreement, dated as of May 15, 1993, between Pneumo Abex Corporation
and The BF Goodrich Company (incorporated by reference to Exhibit 2.1 to Abex Inc.'s
Current Report on Form 8-K dated June 10, 1993).
10.31 -- Asset Purchase Agreement, dated November 21, 1994, by and between Pneumo Abex
Corporation and Wagner Electric Corporation (incorporated by reference to Exhibit 1 to
Abex Inc.'s Current Report on Form 8-K dated November 21, 1994).
10.32 -- Lease Agreement, dated as of June 15, 1995, between Liberty Lane Real Estate, Inc. and
Fisher Scientific International Inc. (incorporated by reference to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1995).
10.33 -- Option Agreement, dated as of June 15, 1995, between Liberty Lane Real Estate, Inc.
and Fisher Scientific (incorporated by reference to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1995).
10.34 -- Mortgage and Security Agreement, dated as of June 15, 1995, between Liberty Lane Real
Estate, Inc. and Fisher Scientific International Inc. (incorporated by reference to
the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.35 -- Agreement and Plan of Merger, dated as of March 26, 1992, by and among Koll Real
Estate Group, Inc. (formerly Henley Properties, Inc.), HP Merger Co. and The Henley
Group, Inc. (incorporated by reference to Exhibit 2.01 to Abex Inc.'s Registration
Statement on Form S-1 (Registration No. 33-48521)).
10.36 -- Transition Agreement, dated as of July 16, 1992, among Abex Inc., The Henley Group,
Inc. and Koll Real Estate Group, Inc. (incorporated by reference to Exhibit 10.02 to
Abex Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
10.37 -- Amendment No. 1 to the Transition Agreement, dated as of April 1, 1993 between Abex
Inc. and Koll Real Estate Group, Inc. (incorporated by reference to Exhibit 10.18 to
Abex Inc.'s Registration Statement on Form S-4, Commission File No. 33-92188).
10.38 -- Tax Sharing Agreement, dated as of June 10, 1992, between Abex Inc. and The Henley
Group (incorporated by reference to Exhibit 10.03 to Abex Inc.'s Annual Report on Form
10-K for the year ended December 31, 1992).
10.39 -- Letter Agreement, dated as of July 15, 1992, between Abex Inc. and the Pension Benefit
Guaranty Corporation (incorporated by reference to Exhibit 10.16 to Abex Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1992).
10.40 -- Letter Agreement, dated as of July 15, 1992, made by The Henley Group in favor of PBGC
(incorporated by reference to Exhibit 10.17 to Abex Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1992).
10.41 -- Pension Agreement, dated as of July 16, 1992, among Koll Real Estate Group, Inc., The
Henley Group, Inc. and Abex Inc. (incorporated by reference to Exhibit 10.18 to Abex
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
10.42 -- Conditional Guarantee, dated as of July 9, 1992, among Abex Inc., The Henley Group,
Inc., Koll Real Estate Group, Inc. and Allied-Signal Inc. (incorporated by reference
to Exhibit 10.19 to Abex Inc.'s Annual Report on Form 10-K for the year ended December
31, 1992).
10.43 -- Reimbursement Agreement, dated as of July 16, 1992, among The Henley Group, Inc., Koll
Real Estate Group, Inc. and Abex Inc. (incorporated by reference to Exhibit 10.20 to
Abex Inc.'s Annual Report on Form 10-K for the year ended December 31, 1992).
10.44 -- Tax Sharing Agreement, dated as of December 31, 1988, between Wheelabrator
Technologies Inc. and Koll Real Estate Group, Inc. (incorporated by reference to
Exhibit 10.02 to Amendment No. 3 on Form 8 to Koll Real Estate Group, Inc.'s
Registration Statement on Form 10 (Registration No. 0-17189)).
10.45 -- Modification Agreement, dated as of August 24, 1989, among Wheelabrator Technologies
Inc., Resco Holdings Inc., The Henley Group, Inc. Waste Management of North America,
Inc. and a subsidiary of The Henley Group, Inc. (incorporated by reference to Exhibit
10.32 to The Henley Group, Inc.'s Registration Statement on Form 10, Registration No.
0-18004), as amended by the Assignment, Assumption and Release Agreement, dated as of
December 18, 1989 (incorporated by reference to Exhibit 10.69 to Wheelabrator
Technologies Inc.'s Registration Statement on Form S-4 (Registration No. 33-36118), as
amended by Termination and Amendment Agreement, dated as of December 31, 1991, among
The Henley Group, Inc., Koll Real Estate Group, Inc., Wheelabrator Technologies Inc.,
and Resco Holdings Inc., (incorporated by reference to Exhibit 10.39 to The Henley
Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 1991
(Registration No. 0-18004)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
-------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10.46 -- Environmental Expenditures Agreement, dated as of July 28, 1989, among Koll Real
Estate Group, Inc., Wheelabrator Technologies Inc., New Hampshire Oak, Inc. and Fisher
Scientific Group Inc. (incorporated by reference to Exhibit 10(a) to Henley
Properties' Quarterly Report on Form 10-Q for the quarter ended June 30, 1989
(Registration No. 0-17189)), as amended by Assignment and Assumption Agreement, dated
as of January 1, 1990, among Koll Real Estate Group, Inc., The Henley Group, Inc., New
Hampshire Oak Inc., Fisher Scientific Group Inc., Wheelabrator Technologies Inc., and
Henley Holdings, Inc. (incorporated by reference to Exhibit 10.34 to The Henley Group,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1989 (Registration
No. 0-18004)).
10.47 -- Restated Environmental Matters Agreement, dated as of July 28, 1989, among
Allied-Signal, Inc., Koll Real Estate Group, Inc., Wheelabrator Technologies Inc., New
Hampshire Oak Inc. and Fisher Scientific Group Inc. (incorporated by reference to
Exhibit 10(b) to Henley Properties' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1989 (Registration No. 0-17189)), amended by the Assignment, Assumption
and Indemnification Agreement, dated as of December 21, 1989, among The Henley Group,
Inc., Henley Properties, New Hampshire Oak Inc., Fisher Scientific Group Inc.,
Wheelabrator Technologies Inc. and Allied-Signal Inc. (incorporated by reference to
Exhibit 10.35 to The Henley Group, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1989 (Registration No. 0-18004)).
10.48 -- Tax Sharing Agreement, dated as of February 26, 1986, between Allied-Signal Inc. and
Wheelabrator Technologies Inc., (incorporated by reference to Exhibit 10E to WTI's
Registration Statement on Form 10 (Registration No. 0-114246)).
10.49 -- Guarantee Agreement, dated as of June 10, 1993, between Abex Inc. and BF Goodrich
Company (incorporated by reference to Exhibit 2.2 to Abex Inc.'s Current Report on
Form 8-K dated June 10, 1993).
10.50 -- Mutual Guaranty Agreement, dated as of December 30, 1994, between Abex Inc. and Cooper
Industries Inc. (incorporated by reference to Exhibit 10.29 to Abex Inc.'s
Registration Statement on Form S-4 (Registration No. 33-92188)).
**12 -- Computation of Ratio of Earnings to Fixed Charges.
**21 -- List of Subsidiaries
*23.1 -- Consent of Ernst & Young LLP.
*23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in the opinions filed as
Exhibits 5.1 and 8.1 hereto).
**24 -- Powers of Attorney.
***25.1 -- Form T-1 with respect to the eligibility of American Stock Transfer & Trust Company,
as Trustee under the VSR Agreement.
*99.1 -- Report of Independent Public Accountants of Arthur Andersen LLP
</TABLE>
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* Filed herewith.
** Filed on October 31, 1996.
*** Filed on December 10, 1996.
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MAFCO CONSOLIDATED GROUP INC.
Issuer
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AMENDMENT NO. 1 TO
VALUE SUPPORT RIGHTS AGREEMENT
Dated as of December 20, 1996
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AMERICAN STOCK TRANSFER & TRUST COMPANY
Trustee
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AMENDMENT NO. 1 (this "Amendment"), dated as of December 20, 1996, to the
VALUE SUPPORT RIGHTS AGREEMENT (the "VSR Agreement"), dated as of November 25,
1996, by and between MAFCO CONSOLIDATED GROUP INC., a Delaware corporation (the
"Company"), and AMERICAN STOCK TRANSFER & TRUST COMPANY, as trustee (the
"Trustee").
RECITALS OF THE COMPANY
WHEREAS, the Company and the Trustee are parties to the VSR Agreement
pursuant to which the Company issued 23,156,502 Value Support Rights (the
"Securities"; capitalized terms used herein and not defined shall have the
meanings given them in the VSR Agreement");
WHEREAS, pursuant to the Purchase Agreement by and among the Company, PCT,
and Purchaser, the Company agreed to sell to Purchaser all of the outstanding
common stock of Flavors Holdings Inc., a Delaware corporation, and the Company
agreed to issue to Purchaser the Securities;
WHEREAS, on November 14, 1996, the Board of Directors of Purchaser approved
the distribution of the Securities to PCT;
WHEREAS, on November 5, 1996, the Company entered into a Memorandum of
Understanding (the "Memorandum of Understanding") relating to certain
stockholder litigation brought in connection with the Purchase Agreement and the
VSR Agreement;
WHEREAS, Section 6.1 of the VSR Agreement, "Amendments Without Consent of
Holders," provides that the Company and the Trustee, at any time and from time
to time, may enter into one or more amendments to the VSR Agreement, without the
consent of the Holders of Securities, to add to the covenants of the Company
such further covenants, restrictions, conditions or provisions as its Board of
Directors and the Trustee shall consider to be for the protection of the Holders
of the Securities;
WHEREAS, the Company desires to amend certain terms of the VSR Agreement
in order to reflect the Memorandum of Understanding;
NOW, THEREFORE, for and in consideration of the premises and the
consummation of the transactions referred to above, it is covenanted and
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agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
AGREEMENT
1. Each of the Company and the Trustee agrees that the following
provisions and exhibits of the VSR Agreement be and they hereby are amended
pursuant to Section 6.1 of the VSR Agreement as set forth below.
(a) Section 3.1(g) is hereby amended by replacing the words "have an
interest rate and redemption provisions determined in good faith by the Board of
Directors of the Company to result in such debt having in the opinion of an
Independent Financial Expert a market value as of the date of issuance on a
fully distributed basis equal to 100% of its principal amount. Such
determination of the Board of Directors will be supported by a written opinion
delivered to the Board of Directors by an Independent Financial Expert"
beginning on line fifteen with the following:
", in the opinion of Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and Rothschild Inc. ("Rothschild"), have an interest rate
and redemption provisions designed to result in such debt having a
market value on a fully distributed basis on the date of issuance
equal to 100% of its principal amount; provided, however, that in the
event that Morgan Stanley and Rothschild are unable to agree, a
nationally recognized investment banking firm shall be chosen by such
two firms (the "Independent Firm") to render its opinion with respect
to the foregoing, and, in such event, at the Company's option, either
the opinion of Rothschild or the opinion of the Independent Firm shall
be controlling. In addition, such debt shall receive an initial
rating of at least B+ from Moody's Investors Service or B1 from
Standard & Poors. The reasonable fees and expenses of Rothschild and,
if applicable the Independent Firm, incurred in connection with the
valuation of such debt, as set forth above, shall be paid by the
Company."
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(b) Exhibit A of the VSR Agreement is hereby amended by replacing the
paragraph labeled "Interest; Redemption" in its entirety with the following:
"Interest; Redemption: The Notes will have, in the opinion of Morgan Stanley &
Co. Incorporated ("Morgan Stanley") and Rothschild Inc.
("Rothschild"), an interest rate and redemption
provisions designed to result in such debt having a
market value on a fully distributed basis on the date of
issuance equal to 100% of its principal amount;
provided, however, that in the event that Morgan Stanley
and Rothschild are unable to agree, a nationally
recognized investment banking firm shall be chosen by
such two firms (the "Independent Firm") to render its
opinion with respect to the foregoing, and, in such
event, at the Company's option, either the opinion of
Rothschild or the opinion of the Independent Firm shall
be controlling.
Rating: The Notes shall receive an initial rating of at least B+
from Moody's Investors Service or B1 from Standard &
Poors."
2. Except as amended hereby, the VSR Agreement shall remain in full force
and effect.
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IN WITNESS WHEREOF, the Company and the Trustee have caused this Amendment
to be duly executed by their respective officers thereunto duly authorized as of
the day and the year first above written.
MAFCO CONSOLIDATED GROUP INC.
By: /s/ Glenn P. Dickes
Name: Glenn P. Dickes
Title: Vice President
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Trustee
By: /s/ Joseph F. Wolf
Name: Joseph F. Wolf
Title: Vice President
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[Letterhead of SASM&F LLP]
December 26, 1996
Mafco Consolidated Group Inc.
35 East 62nd Street
New York, New York 10021
Re: Mafco Consolidated Group Inc.
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as special counsel to Mafco Consolidated Group Inc., a
Delaware corporation (the "Company"), in connection with the Value Support
Rights (the "VSRs") of the Company issued under a Value Support Rights
Agreement, dated November 25, 1996 (the "VSR Agreement"), between the Company,
as issuer, and American Stock Transfer & Trust Company, as trustee. Pursuant to
the terms of the VSR Agreement, all amounts payable in respect of the VSRs on
the maturity date thereof may be paid, at the option of the Company, in senior
debt obligations of the Company (the "VSR Notes"), subject to certain
conditions.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the
"Securities Act").
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of the following: (i) the
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Mafco Consolidated Group Inc.
December 26, 1996
Page 2
Registration Statement on Form S-1 (File No. 333-15257) as filed with the
Securities and Exchange Commission (the "Commission") under the Securities Act
on October 31, 1996, Amendment No. 1 to the Registration Statement, as filed
with the Commission on December 10, 1996, and Amendment No. 2 to the
Registration Statement, as filed with the Commission on the date hereof (such
Registration Statement, as so amended, being hereinafter referred to as the
"Registration Statement"); (ii) an executed copy of the Purchase Agreement,
dated as of October 23, 1996, by and among the Company, Power Control
Technologies Inc. and PCT International Holdings Inc.; (iii) an executed copy of
the VSR Agreement (including the form of certificate evidencing each VSR); (iv)
the form of indenture (the "Indenture") pursuant to which any VSR Notes are to
be issued (including the form of certificate evidencing each VSR Note); (v) the
Certificate of Incorporation of the Company, as presently in effect; (vi) the
By-Laws of the Company, as presently in effect; and (vii) certain resolutions of
the Board of Directors of the Company relating to the issuance of the VSRs and
related matters. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
other representatives of the Company and others, and such other documents,
certificates and records as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies and the
authenticity of the origi-
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Mafco Consolidated Group Inc.
December 26, 1996
Page 3
nals of such latter documents. In making our examination of documents executed
or to be executed by parties other than the Company, we have assumed that such
parties had or will have the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof. As to
any facts material to the opinions expressed herein that we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Members of our firm are admitted to the bar in the State of New York, and
we do not express any opinion as to the laws of any other jurisdiction other
than the Delaware General Corporation Law.
Based upon and subject to the foregoing, we are of the opinion that:
(a) the VSRs have been validly issued by the Company and are valid and
binding obligations of the Company entitled to the benefits of the VSR
Agreement and enforceable against the Company in accordance with their
terms, except to the extent that enforcement thereof may be limited by (1)
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance
or other similar laws now or hereafter in effect relating to creditors'
rights generally and (2) general principles of equity (regardless of
whether enforceability is considered in a proceeding at law or in equity);
and
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Mafco Consolidated Group Inc.
December 26, 1996
Page 4
(b) when (i) the Registration Statement becomes effective, (ii) the
Indenture has been qualified under the TIA, (iii) the Indenture has been
duly executed and delivered, and (iv) the VSRs Notes have been duly
executed and authenticated in accordance with the terms of the Indenture
and delivered to the holders of the VSRs in accordance with the VSR
Agreement, the VSR Notes will have been validly issued by the Company and
will be valid and binding obligations of the Company entitled to the
benefits of the Indenture and enforceable against the Company in accordance
with their terms, except to the extent that enforcement thereof may be
limited by (1) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar laws now or hereafter in effect
relating to creditors' rights generally and (2) general principles of
equity (regardless of whether enforceability is considered in a proceeding
at law or in equity).
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement. We also consent to the reference to our
firm under the caption "Legal Matters" in the Registration Statement. In giving
this consent, we do not thereby admit that we are included in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom
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[Letterhead of SASM&F LLP]
December 26, 1996
Mafco Consolidated Group Inc.
35 East 62nd Street
New York, New York 10021
Re: Mafco Consolidated Group Inc.
Registration Statement on Form S-1
No. 333-15257
Ladies and Gentlemen:
We have acted as special counsel to Mafco Consolidated Group Inc. (the
"Company"), in connection with Registration Statement on Form S-1 No. 333-15257,
as amended (the "Registration Statement"), filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, respecting the
issuance by the Company of Value Support Rights (the "VSRs") pursuant to the
Value Support Rights Agreement, dated as of November 25, 1996, as amended (the
"VSR Agreement"), between the Company and the American Stock Transfer & Trust
Company as Trustee (the "Trustee"). Capitalized terms used herein and not
otherwise defined herein have the meanings assigned to them in the Registration
Statement.
In this connection, we have examined the Registration Statement filed with
the Securities and Exchange Commission (the "SEC") on October 31, 1996,
Amendment No. 1 thereto, filed with the SEC on December 11, 1996, and Amendment
No.2 thereto, filed with the SEC on December 24, 1996, including (i) the
Prospectus included therein (the "Prospectus"), (ii) the VSR Agreement, (iii)
the form of Indenture for the VSR Notes between the Company and the Trustee, and
(iv) such other documents as we have
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Mafco Consolidated Group Inc.
December 26, 1996
Page 2
deemed necessary or appropriate as a basis for the opinion set forth below, and
we have assumed (i) that such documents will not be amended and (ii) that the
parties to such documents will comply with the terms thereof.
In our examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. As to
any facts material to the opinions expressed herein which were not independently
established or verified, we have relied upon statements, representations, and
certifications of officers and other representatives of the Company.
In rendering our opinion, we have also considered and relied upon the
Internal Revenue Code of 1986, as amended, and administrative rulings, judicial
decisions, regulations, and such other authorities as we have deemed
appropriate, all as in effect as of the date hereof. The statutory provisions,
regulations, interpretations, and other authorities upon which our opinion is
based are subject to change, and such changes could apply retroactively. In
addition, there can be no assurance that positions contrary to those stated in
our opinion will not be taken by the Internal Revenue Service.
We express no opinions as to the laws of any jurisdiction other than the
federal laws of the United States of America to the extent specifically referred
to herein.
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Mafco Consolidated Group Inc.
December 26, 1996
Page 3
Based upon and subject to the foregoing, and subject to the
qualifications set forth therein, we adopt the opinions expressed in the
Prospectus under the heading "Certain United States Federal Income Tax
Consequences" as our opinion in this matter.
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Mafco Consolidated Group Inc.
December 26, 1996
Page 4
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to our being named in the Prospectus.
Very truly yours,
/s/ Skadden, Arps, Slate,
Meagher & Flom LLP
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Exhibit 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated February 9, 1996, in the Registration Statement (Form
S-1, No. 333-15257) and related Prospectus of Mafco Consolidated Group, Inc. for
the registration of 23,156,502 of Mafco Consolidated Group Inc. Value Support
Rights.
/s/ Ernst & Young LLP
New York, New York
December 24, 1996
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Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Detroit, Michigan
December 26, 1996
