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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to__________________
Commission file number 1-11240
MAFCO CONSOLIDATED GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-042104
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
35 EAST 62ND STREET, NEW YORK, NY 10021
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 572-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, $.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ [root] ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ [root] ]
The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 7, 1997 was $146,167,593.
The number of shares of Common Stock outstanding as of March 7, 1997
were 23,237,340.
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PART 1
ITEM 1. DESCRIPTION OF BUSINESS
BACKGROUND AND RECENT DEVELOPMENTS
On June 15, 1995, as part of a series of transactions (collectively,
the "Abex Transactions"), C&F Merger Inc. ("C&F"), a wholly owned subsidiary
of Mafco Holdings Inc. ("Mafco Holdings"), which then owned 100% of the
outstanding capital stock of Consolidated Cigar Holdings Inc. ("Cigar
Holdings") and Flavors Holdings Inc. ("Flavors Holdings"), merged (the
"Merger") with and into Abex Inc. ("Abex"), with Abex being the surviving
corporation in the Merger and being renamed Mafco Consolidated Group Inc. ("MC
Group" or the "Company"). Prior to the Abex Transactions, Abex was engaged in
an aerospace business through its then wholly owned subsidiary, Pneumo Abex
Corporation ("Pneumo Abex"), a wholly owned subsidiary of Power Control
Technologies Inc. ("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 of the Company (the "Company Common
Stock") and all of the outstanding shares of PCT's common stock ("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 Series A 8%
Convertible Redeemable Preferred Stock of PCT ("PCT Preferred Stock") (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
beneficial ownership of PCT Common Stock to approximately 36%) 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
Common Stock for a period of three years.
On April 15, 1996, PCT sold its aerospace 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 (the "Cigar IPO") of 6,075,000 shares of its Class A common stock
(the "Cigar 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 Corporation
("Consolidated Cigar"). In connection with the Cigar IPO, Cigar Holdings
issued a
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promissory note in an original principal amount of $70 million to the Company.
On March 26, 1997, Cigar Holdings completed a public offering (the
"Cigar Secondary Offering") of 5,000,000 shares of the Cigar Common Stock at
an offering price of $23.75 per share. All of the shares sold were owned by MC
Group. In addition, the underwriters have been granted an overallotment option
to purchase an additional 750,000 shares, which as of the date hereof has not
been exercised.
On November 25, 1996, the Company sold (the "Flavors Disposition") to
a subsidiary of PCT (i) all of the outstanding shares of Flavors Holdings and
(ii) 23,156,502 Value Support Rights ("VSRs") for aggregate consideration of
approximately $297.3 million, consisting of $180.0 million in cash, the
assumption of approximately $110.1 million of indebtedness and deferred cash
payments to the Company of $3.7 million payable on June 30, 1997 and $3.5
million payable on December 31, 1997. The VSRs were subsequently distributed
to PCT shareholders, including 8,439,400 to MC Group due to its ownership of
PCT Common Stock and PCT Preferred Stock.
On February 20, 1997, Mafco Consolidated Holdings entered into an
Agreement and Plan of Merger (the "1997 Merger Agreement") with MC Group and
MCG Acquisition, Inc., a wholly owned subsidiary of Mafco Consolidated
Holdings, whereby Mafco Consolidated Holdings will acquire the remaining 15%
of MC Group Common Stock that it does not already own (the "1997 Merger").
Pursuant to the 1997 Merger Agreement, each outstanding share of Company
Common Stock (other than shares held by Mafco Consolidated Holdings) will be
converted into the right to receive $33.50 in cash, subject to upward
adjustment (the "Merger Consideration"). Additionally, on February 20, 1997,
in connection with the 1997 Merger Agreement, MC Group declared a special cash
dividend of $10 per share, which was paid on March 14, 1997 to stockholders of
record as of the close of business on March 10, 1997.
The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares of Cigar Common Stock.
The 1997 Merger Agreement has been unanimously approved by the Boards
of Directors of each company and, in the case of MC Group, by a special
committee of independent directors formed to consider the transaction. The
consummation of the acquisition is subject to the approval of MC Group
stockholders, the filing with and review by the Securities and Exchange
Commission of an information statement to be sent to MC Group stockholders,
and other customary conditions. Mafco Consolidated Holdings, which owns
approximately 85% of the outstanding shares of MC Group common stock, has
agreed to vote in favor of the transaction, which is expected to close during
the second quarter of 1997.
BUSINESS OF MC GROUP
The Company currently operates in one segment: manufacturing,
distributing, and selling cigars in all sections of the industry. The Company
also manufactures smoking tobaccos for sale under
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its own brand name, in bulk to tobacconists as well as private label brands
for chain stores and wholesale distributors. Prior to the Flavors Disposition,
the Company also produced licorice and other flavoring agents.
The Company is the largest manufacturer and marketer of cigars sold
in the United States in terms of dollar sales, with a 1996 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market, including premium
large cigars, mass market large cigars and mass market little cigars. The
Company attributes its leading market position to the following competitive
strengths: (i) well-known brand names, many of which are the leading brands in
their category; (ii) broad range of product offerings within both the premium
and mass market segments of the United States cigar market; (iii) commitment
to and reputation for manufacturing quality cigars; (iv) marketing expertise
and close attention to customer service; (v) efficient manufacturing
operations; and (vi) an experienced management team. The Company is also a
leading producer of pipe tobacco and is the largest supplier of private label
and branded generic pipe tobacco to mass market retailers. In addition, the
Company distributes a variety of pipe and cigar smokers' accessories.
The Company's cigars and pipe tobacco products are marketed under a
number of well-known brand names. The Company's premium cigars include the H.
UPMANN, MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO
DEL REY and MONTECRUZ brands. The Company's mass market large cigars include
the ANTONIO Y CLEOPATRA (also known as AYC), DUTCH MASTERS, EL PRODUCTO,
MURIEL, BACKWOODS, SUPER VALUE and SUPRE SWEETS brands. The Company's mass
market little cigars include the DUTCH TREATS, SUPER VALUE and SUPRE SWEETS
brands. The Company's pipe tobacco products include the MIXTURE NO. 79 and
CHINA BLACK brands.
According to industry sources, the cigar industry experienced
declining consumption between 1964 and 1993 at a compound annual unit rate of
3.6% (and, with respect to large cigar consumption, at a compound annual unit
rate of 5.0%). The Company experienced similar trends in the unit volume of
its cigars during such period. While the cigar industry has experienced
significantly better trends in unit consumption since 1993 compared to this
historical trend, there can be no assurance that the recent positive trends
will continue or that the Company would be able to offset any future decline
in consumption.
BUSINESS STRATEGY
The Company's business strategy is to (i) capitalize on growth
opportunities in the premium cigar market, (ii) expand mass market cigar and
pipe tobacco products business, (iii) broaden mass market cigar distribution
channels, (iv) improve manufacturing processes and raw material procurement
and (v) pursue selectively strategic acquisitions. The Company's ability to
implement its business strategy successfully will be dependent on business,
financial and other factors beyond the Company's control, including, among
others, prevailing changes in consumer preferences, access to sufficient
quantities of raw materials, availability of trained laborers and changes in
tobacco products regulation. There can be no assurance that the Company will
continue to be successful in implementing its business strategy or that the
Company's net sales, operating margin and net margin will continue to increase
at rates similar to those experienced by the Company in 1996.
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PRODUCTS
The Company manufactures cigars in all subcategories and at all price
levels. The Company also manufactures its own cigar boxes and man-made
wrapper, filler and binder and little-cigar filters.
Premium Cigars
Premium cigars are generally hand made and primarily sell at retail
price points above $1.00 per cigar. The Company's premium cigars are primarily
long-filler, large cigars that have high quality natural leaf wrappers and
binders. The Company uses tobaccos of the best grades for its premium cigars.
Such tobaccos are combined according to brand-specified formulas to create the
"filler" of each cigar. In order to make hand made cigars, "binder" tobacco is
hand-wrapped around filler to create the "bunch" which is placed into a mold.
Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a premium
cigar. In the Company's premium cigars, the wrapper, binder and filler are
natural tobacco leaf.
The Company's premium cigars include the well-known H. UPMANN,
MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY
and MONTECRUZ brands as well as other recognized brand names. The Company's
premium cigars are manufactured in its Dominican Republic and Honduras
facilities, except for TE-AMO, which is manufactured in Mexico and purchased
from a third party.
Mass Market Cigars
Mass market cigars are machine made and generally have a retail price
point of $1.00 or less per cigar. Mass market cigars use less expensive
tobacco than premium cigars. The Company uses a variety of techniques and
grades of tobacco to produce mass market cigars which compete at all the price
points in the mass cigar market. Mass market cigars include large cigars
(weighing three pounds per 1,000 cigars or more) and little cigars (weighing
less than three pounds per 1,000 cigars).
Mass market large cigars generally consist of filler tobacco that is
wrapped first with a binder and then with a wrapper. The more expensive mass
market large cigars combine natural leaf wrapper and man-made binder made from
tobacco ingredients instead of natural binder, with filler threshed into
short, uniform pieces. In less expensive mass market large cigars, man-made
wrapper made primarily from tobacco ingredients replaces natural tobacco
leaf. The Company adds flavors and/or plastic tips to certain of its popularly
priced mass market large cigars. The Company's major mass market brands in the
middle price range include ANTONIO Y CLEOPATRA, DUTCH MASTERS, EL PRODUCTO,
BACKWOODS, SUPER VALUE and SUPRE SWEETS. The Company's MURIEL brand is in
the less expensive range.
Little cigars consist of filler tobacco wrapped only by a wrapper
with a filter tip. Little cigars are made on a high-speed machine with
man-made wrapper made from tobacco ingredients and no binder. Little cigars
are flavored and produced with a filter. Generally, little cigars are the
lowest priced segment of the mass market category. The Company's little cigar
brands include DUTCH TREATS, SUPER VALUE and SUPRE SWEETS.
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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 1996 and 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.
BACKORDERS
The increased demand for cigars, especially premium cigars, has
caused the Company's back orders of premium cigars to increase from 3.2
million cigars at December 31, 1994 to 4.3 million cigars at December 31,
1995, and to further increase to 37.0 million cigars at December 31, 1996.
Although the demand for premium cigars has continued to increase, the
substantial increase in backorders of premium cigars experienced by the
Company in 1996 was due, at least in part, to the practice by customers of
submitting orders well in excess of required quantities in an attempt to
ensure a larger allocation of the Company's premium cigar production. As such,
the increase in backorders does not accurately reflect the demand for the
Company's premium cigars. Beginning in 1997, the Company established new
ordering policies to reduce backorders. The Company no longer accepts orders
from its largest customers for premium cigars, but instead allocates to each
of them a portion of its production. As a result of such new ordering
policies, the amount of future backorders will not be comparable to those
previously experienced by the Company. The Company's ability to increase its
production of premium cigars and decrease its backorders is, however,
constrained by a shortage of experienced skilled laborers. Although the
Company is hiring and training new rollers and bunchers, the training process
averages up to one year and not all trainees are able to successfully complete
the Company's training program. The Company is building additional plant
capacity to meet future growth in demand for its premium cigars. Although the
Company believes that these measures will enable it to increase its production
of premium cigars, there can be no assurance that the Company will be able to
meet any future level of demand for its premium cigars. There can be no
assurance, however, that demand for the Company's premium cigars will continue
to grow in the future.
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The Company's ability to manufacture premium and mass market cigars
may also be constrained by the ability of tobacco growers and suppliers to
meet the Company's demands for its raw materials in a timely manner. Tobacco,
as a crop that is harvested annually, restricts the ability of tobacco growers
to adjust acreage grown in any given year to meet changes in market demands.
In addition, increases in acreage of tobacco grown requires significant
capital, which growers may be unable or unwilling to invest. If the rate of
escalation in consumption of cigars and other tobacco products continues, but
the supply of tobacco remains constant or increases at a lower rate than
demand, the Company's ability to increase its production of cigars, and
thereby reduce its backorders, could be inhibited.
SALES AND MARKETING
The Company sells its cigar and pipe tobacco products throughout the
United States to over 2,500 customers, consisting of wholesale distributors,
direct buying chains, including drug store chains and mass market retailers,
and tobacconists. The Company employs a full-time in-house sales organization
to develop and service its sales to wholesalers, distributors, direct buying
chains and tobacconists. The Company's sales force is organized into two sales
units: a mass market division and a premium division. The Company believes
that the organization of its sales force into two divisions positions it to
maintain a high degree of focus on each of its principal product categories.
The mass market sales force calls on distributors and retail and chain store
accounts, including Kmart, Wal-Mart, Eckerd Drug Stores, CVS stores and
Thrifty Drug Stores, across the United States. Approximately 88% of the
Company's mass market cigar products are sold through wholesale distributors
while approximately 12% are sold to direct buying chains or independent
retailers that warehouse for themselves. The premium cigar sales force calls
directly on tobacconists and distributors. The Company's sales force operates
regionally and locally from home and car, maintaining close familiarity with
local customers. Most salespeople maintain a small stock of inventory which is
used primarily to replace local distributors' old or damaged products and to
display new product introductions or promotions.
The Company supplies cigar merchandising fixtures to retailers at no
cost and believes that it is the primary supplier of such fixtures to the
United States retail trade. These fixtures help to maintain an attractive
product display and to increase shelf space available for the Company's
products.
For the year ended December 31, 1996, the Company had more than 2,500
customers, the top five of which accounted for approximately 22% of annual
sales with the largest customer accounting for approximately 6%. The Company
believes that the loss of any one customer would not be material to the
Company's business. The Company maintains no long-term contracts for the sale
of its merchandise.
The Company advertises its mass market cigar products primarily
through coupons and other promotions distributed at point of sale and through
direct mail. The Company advertises its premium cigar products in magazines,
such as Cigar Aficionado, Playboy and The New York Times Sunday Magazine, as
well as in newspapers and on radio. In order to strengthen and broaden further
the brand recognition of its premium cigars and to maximize the business
opportunities created by the resurgence in popularity of and increased demand
for premium cigars, the Company has increased its marketing and advertising
expenditures in connection with its existing premium cigar brands. The
increased advertising and marketing expenditures are being used to support new
product introductions and increase awareness and recognition of the Company's
premium brands.
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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. See Note 15 of Notes to
Consolidated Financial Statements.
TRADEMARKS
Trademarks and brand name recognition are important to the Company's
business. The Company generally owns the trademarks under which its products
are sold. The Company has registered its trademarks in the United States and
many other countries and will continue to do so as new trademarks are
developed or acquired. The Company does not hold or own the right to use
certain of its well-known trademarks and brand names in certain foreign
markets. The Company's ability to expand into such markets by capitalizing on
the strength of its brand names in the United States may be limited by its
right to use or acquire such brand names in those foreign markets.
Unless otherwise indicated, the Company owns the trademarks listed
below:
PREMIUM CIGAR TRADEMARKS
Cabanas Henry Clay Primo Del Rey
Don Diego Las Cabrillas Santa Damiana
Don Marcos Malaguena Santa Ynez
Don Miguel Montecristo(a) Super Value
Flor de Canarias Montecruz Te-Amo
H. Upmann(a) Por Larranaga(a) Wonder Blend
MASS MARKET CIGAR TRADEMARKS
Antonio y Cleopatra El Producto Roi-Tan
Backwoods Harvester Super Value
Ben Franklin Headline Supre Sweets
Dutch Masters La Corona Wonder Blend
Dutch Treats Muriel
PIPE TOBACCO TRADEMARKS
China Black Mixture No. 79 Three Star Royal
Dutch Masters Super Value Wonder Blend
Kriswill
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(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.
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RAW MATERIALS
The Company has developed and is developing long-term relationships
with tobacco suppliers and is expanding its commercial and technical ties with
local growers to secure a variety of sources for raw materials, ensure the
quality of its raw materials and maximize cost savings.
The Company buys tobacco directly from a large number of suppliers in
Brazil, Cameroon, the Central African Republic, Costa Rica, Germany, Italy,
the Dominican Republic, Paraguay, the Philippines, Indonesia, the United
States, Ecuador, Honduras, Mexico and other countries and does not believe
that it is dependent on any single source for tobacco. The Company has
recently experienced shortages in certain types of its natural wrapper and
premium cigar tobaccos due to the increase in demand for high quality natural
wrapped cigars. These shortages have caused the price of natural wrapper and
premium cigar tobaccos to increase. To date, these shortages of tobacco have
not materially adversely affected cigar manufacturing or the Company's
profitability, but could if the Company is unable to purchase additional
quantities of certain tobaccos in the future or is unable to pass increases
for such raw materials onto its customers.
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 1996 market share, in order of
size, are Swisher International Group Inc., General Cigar Co. Inc., a division
of Culbro Corporation during 1996 and Havatampa/Phillies Cigar Corporation, a
privately held corporation. In addition, Tobacco Exporters International
Limited (a subsidiary of Rothmans International) is a significant competitor
in the little cigar market. The Company believes that its leading market
position in the cigar industry is due to its strong, well-known brand names,
broad range of product offerings within both the mass market and premium
segments of the United States cigar market, commitment to and reputation for
manufacturing quality cigars, marketing expertise, close attention to customer
service, efficient manufacturing operations and an experienced management
team. If and when normalization of relations between the United States and
Cuba occurs, the entry of Cuban premium cigars into the United States market
could increase competition in the Company's core premium cigar market.
Through its Allied Tobacco Division in Richmond, Virginia, the
Company competes in all areas of the U.S. pipe tobacco business including
branded, private label and bulk tobacco. The Company believes it is the fourth
largest manufacturer in the U.S. of pipe tobacco, in terms of dollar sales,
and its largest competitors in order of size are Lane Limited, John Middleton
Inc. and UST Inc.
THE TOBACCO INDUSTRY
Regulation
Cigar manufacturers, like other producers of tobacco products, are
subject to regulation in the United States at federal, state and local levels.
Together with changing public attitudes towards smoking, a constant expansion
of smoking regulations since the early 1970's has been a major cause of
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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 Federal
Trade Commission to the Food and Drug Administration (the "FDA"); (v)
increased tobacco excise taxes; and required tobacco companies to pay for
health care costs incurred by the federal government in connection with
tobacco related diseases. Hearings have been held on certain of these
proposals; however, to date, none of such proposals have been passed by
Congress. Future enactment of such proposals or similar bills may have an
adverse effect on the sales or operations of the Company. In addition, various
federal agencies, including the FDA, have recently proposed to regulate the
tobacco industry.
In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors.
Local legislative and regulatory bodies have also increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. In a few states, legislation has been
introduced, but has not yet passed, which would require all little cigars sold
in those states to be "fire-safe" (i.e., cigars which extinguish themselves if
not continuously smoked). Passage of this type of legislation could have a
material adverse effect on the Company's little cigar sales because of the
technological difficulties in complying with such legislation. The Company
does not expect the passage of any such legislation to have a material adverse
effect on the Company's business or results of operations taken as a whole.
There is currently an effort by the U.S. Consumer Product Safety Commission to
establish such standards for cigarettes. The enabling legislation, as
originally proposed, included little cigars; however, little cigars were
deleted due to the lack of information on fires caused by these products.
Increased cigar consumption and the publicity such increase has
received may increase the risk of additional regulation of tobacco products or
of cigars. Consideration at both the federal and state level also has been
given to the consequences of tobacco smoke on others who are not currently
smoking (so called "second-hand" smoke). There can be no assurance that
regulation relating to second-hand smoke will not be adopted or that such
regulation or related litigation would not have a material adverse effect on
the Company's results of operations or financial condition.
Although federal law has required health warnings on cigarettes since
1965, there is no federal law requiring that cigars or pipe tobacco carry such
warnings. However, California requires "clear and reasonable" warnings to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. Although
similar legislation has been introduced in other states, no action has been
taken.
During 1988, the Company and 25 manufacturers of tobacco products
entered into a settlement of legal proceedings filed against them pursuant to
Proposition 65. Under the terms of the settlement,
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the Company and such other defendants agreed to label retail packages or
containers of cigars, pipe tobaccos and other smoking tobaccos other than
cigarettes manufactured or imported for sale in California with a specified
warning label. To guarantee compliance with the California requirements, to
eliminate errors in distribution and to maintain the efficiencies of the
manufacturing process, the Company and most of its competitors have begun
using the label on all of their tobacco products shipped to customers in all
states, except for a few premium cigar customers.
Massachusetts recently enacted legislation requiring manufacturers of
cigarettes, chewing tobacco and snuff to provide the state annually with a
list of the additives (in descending order of weight) and the nicotine yield
ratings of each brand they produce, which information will, subject to certain
conditions, be made publicly available. In addition, various legislative
proposals have been introduced in Massachusetts that would extend such
reporting requirement to cigar manufacturers and that would require health
warnings on cigars. Similar legislation has been introduced in other states.
The U.S. Environmental Protection Agency (the "EPA") published a
report in January 1993 with respect to the respiratory health effects of
passive smoking, which concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health concern. In
June 1993, Philip Morris Companies Inc. and five other representatives of the
tobacco manufacturing and distribution industries filed suit against the EPA
seeking a declaration that the EPA does not have the statutory authority to
regulate environmental tobacco smoke, and that, in view of the available
scientific evidence and the EPA's failure to follow its own guidelines in
making the determination, the EPA's final risk assessment was arbitrary and
capricious. The court ruled in May 1995 that plaintiffs have standing to
pursue this action. Whatever the outcome of this litigation, issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers.
In February 1994, the FDA, in a letter to an anti-smoking group,
claimed that it may be possible for the FDA to regulate cigarettes under the
drug provisions of the Food, Drug, and Cosmetic Act (the "FDC Act"). The FDA's
claim is based upon allegations that manufacturers may intend that their
products contain nicotine to satisfy an alleged addiction on the part of some
of their customers. The letter indicated that regulation of cigarettes under
the FDC Act could ultimately result in the removal from the market of products
containing nicotine at levels that cause or satisfy addiction. In March 1994,
the FDA began investigating whether cigarettes should be regulated as a drug.
In July 1995, the FDA announced that it has concluded for the first time that
nicotine is a drug that should be regulated and proposed to regulate smokeless
tobacco and cigarettes. The FDA recently adopted final regulations relating to
the marketing, promotion and advertisement of smokeless tobacco and
cigarettes. Although the FDA's definition of cigarettes originally included
little cigars, little cigars were excluded from the final regulations. These
regulations are currently being challenged in the United States District Court
for the Eastern District of North Carolina and the United States District
Court for the Southern District of New York. While the Company is unable to
predict the effect of these regulations on its business, these and other
regulations promulgated by the FDA in the future could have a material adverse
effect on the operations of the Company.
Litigation
Historically, the cigar industry has not experienced material
health-related litigation and, to date, the Company has not been the subject
of any material health-related litigation. However, the cigarette and
smokeless tobacco industries have experienced and are experiencing significant
health-related litigation involving tobacco and health issues.
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<PAGE>
Litigation against the cigarette industry has historically been
brought by individual cigarette smokers. In 1992, the United States Supreme
Court in Cippollone v. Liggett Group, Inc. ruled that federal legislation
relating to cigarette labeling requirements preempts claims based on failure
to warn consumers about the health hazards of cigarette smoking, but does not
preempt claims based on express warranty, misrepresentation, fraud or
conspiracy. To date, individual cigarette smokers' claims against the
cigarette industry have been generally unsuccessful; however, on August 9,
1996, a Florida jury in Carter v. Brown & Williamson Tobacco Corporation
determined that a cigarette manufacturer was negligent in the production and
sale of its cigarettes and sold a product that was unreasonably dangerous and
defective, awarding the plaintiffs a total of $750,000 in compensatory
damages. The verdict is on appeal.
Current tobacco litigation generally falls within one of three
categories: class actions, individual actions (which have been filed mainly in
the State of Florida), or actions brought by individual states or localities
to recover Medicaid costs allegedly attributable to tobacco-related illnesses.
The pending actions allege a broad range of injuries resulting from the use of
tobacco products or exposure to tobacco smoke and seek various remedies,
including compensatory and, in some cases, punitive damages together with
certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions, including by challenging the authority of state
attorneys general to bring Medicaid actions attributable to tobacco-related
illnesses and, in some states, bringing preemptive lawsuits to enjoin the
state attorneys general from instituting litigation.
The recent increase in the sales of cigars and the publicity such
increase has received may have the effect of increasing the probability of
legal claims. Also, a recent study published in the journal Science reported
that a chemical found in tobacco smoke has been found to cause genetic damage
in lung cells that is identical to damage observed in many malignant tumors of
the lung and, thereby, directly links lung cancer to smoking. This study could
affect pending and future tobacco regulation or litigation.
In May 1996, the Fifth Circuit Court of Appeals in Castano v.
American Tobacco, et al. reversed a Louisiana district court's certification
of a nationwide class consisting essentially of nicotine dependent cigarette
smokers. Notwithstanding the dismissal, new class actions asserting claims
similar to those in Castano have recently been filed in certain states. To
date, two pending class actions against major cigarette manufacturers have
been certified. The first case is limited to Florida citizens allegedly
injured by their addiction to cigarettes; the other is limited to flight
attendants allegedly injured through exposure to secondhand smoke.
There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco or
suppliers to the tobacco industry could have a material adverse effect on the
Company's business.
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<PAGE>
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.
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
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<PAGE>
excise taxes and, therefore, is unable to predict the extent of any adverse
effect on the Company's business or results of operations that may result from
the imposition of such taxes.
EMPLOYEES
The Company employs approximately 4,800 persons. The Company believes
that its relations with its employees are satisfactory. Union contracts,
expiring at various dates, cover salesmen in New York and hourly employees in
McAdoo, Pennsylvania and Richmond, Virginia. The McAdoo agreement with the
Teamsters Local 401 expires in December 1998 and the Richmond agreement with
the Warehouse Employees Local 322 expires in January 1999. The Company has
experienced no work stoppages due to labor problems in the last ten years.
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.
CONTINGENT AND OTHER LIABILITIES RELATING TO ABEX'S PREDECESSOR BUSINESSES
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. The Company has
also 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
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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 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 BF Goodrich 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 material 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 33 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.
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<PAGE>
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 Relating to the Former Friction Materials Business
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 January 31, 1997, 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 such claims are 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 December 31, 1996, the
Company had approximately $8.8 million in unreimbursed defense and settlement
costs pending receipt from the insurance carriers or Whitman.
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
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<PAGE>
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, 1996.
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
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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 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.
Management believes that reserves as of December 31, 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 and Henley allocated
between them certain liabilities related to the businesses of Henley or its
predecessors, including certain liabilities relating to self-insurance
programs, and each indemnified the other against loss associated with
liabilities assumed by the indemnifying party. In addition, Abex guaranteed
certain contingent obligations of Koll relating to a predecessor company
pension plan and environmental liabilities of Henley and certain of its
predecessors, and Koll agreed to indemnify Abex in respect thereof. During the
first quarter of 1997, the Company, Koll and certain of its subsidiaries
entered into certain agreements (the "1997 Koll Agreements") pursuant to
which, among other things, the parties re-allocated certain liabilities
relating to the self-insurance programs, the Company agreed to assume
sponsorship of, and financial responsibility for, the predecessor Company
pension plan referred to above, the Company paid to Koll $2.3 million, and the
Company received $0.5 million from a third party in connection with the sale
of an asset by Koll.
The Company believes that its balance sheet at December 31, 1996 reflects
adequate reserves for its remaining obligations under the 1997 Koll Agreements
with respect to these matters. Furthermore, Koll has been discharging its
assumed and indemnification responsibilities in the ordinary course. 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, that liability for the discharge of
the Company's remaining guarantee and indemnification 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.
In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to personal injury claims arising out of the operations of
either the passenger rail car business of Pullman Incorporated ("Pullman"), a
predecessor of Koll and the Company, or the business of Pullman Passenger Car
Company, a subsidiary of Koll (collectively, the "Pullman Claims"). Koll also
transferred to the Company all of the rights that Koll and such subsidiaries
may have against Wheelabrator Technologies Inc., another predecessor of Koll
and the Company, with respect to the Pullman Claims. As of the date of the
Company's assumption of the Pullman Claims, Koll was defending approximately
360 claims that individuals had contracted asbestos-related diseases by reason
of their work maintaining or
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repairing Pullman cars. Management believes that costs related to these
approximately 360 claims will not have a material adverse effect on the
Company.
ITEM 2. PROPERTIES
As of December 31, 1996, the principal properties owned or leased by
the Company for use in its business included:
<TABLE>
<CAPTION>
Approximate
Owned or Floor Space
Location Principal Use Leased (sq. ft.)
- -------- ------------- -------- -----------
<S> <C> <C> <C>
McAdoo, Pennsylvania Mass market cigar manufacturing Owned 369,000
and distribution
Cayey, Puerto Rico Mass market cigar manufacturing Owned 280,000
La Romana, Dominican Republic Premium cigar manufacturing Leased 170,000
Comerio, Puerto Rico Tobacco dressing Owned 151,000
Richmond, Virginia Pipe tobacco manufacturing and Leased 90,000
premium cigar distribution
Danli, Honduras Premium cigar manufacturing Owned 45,000
Maypen, Jamaica Premium cigar manufacturing Owned 25,000
Fort Lauderdale, Florida Administrative office Leased 19,000
</TABLE>
The Company believes that its existing and planned manufacturing
facilities and distribution centers are adequate for the current level of the
Company's operations. The Company believes that additional facilities, if
necessary, would be readily available on a timely basis on commercially
reasonable terms. For 1997, the Company is expanding its existing
manufacturing facilities in the Dominican Republic and Honduras and acquiring
additional manufacturing equipment for a total expected cost of approximately
$4 million.
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, as amended to February 3, 1997 (the "Credit Agreement") of
Consolidated Cigar Corporation ("Consolidated Cigar"), a wholly-owned
subsidiary of Cigar Holdings.
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.
The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.
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ITEM 3. 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 January 1997, six purported class-action lawsuits and one
purported derivative and class- action lawsuit were filed in the Delaware
Court of Chancery (the "Chancery Court"), under the captions Alan R. Kahn v.
Ronald O. Perelman, et al., C.A. No. 15450; Sandy Rywell v. Ronald O.
Perelman, et al., C.A. No. 15468; Crandon Capital Partners v. Ronald O.
Perelman, et al., C.A. No. 15469; Harry Voege v. Ronald O. Perelman, et al.,
C.A. No. 15470; Harry Polikoff v. Mafco Consolidated Group Inc., et al., C.A.
No. 15471; Sal S. Shiry v. Ronald O. Perelman, et al., C.A. No. 15475; and
Jack Fishbaum v. Mafco Consolidated Group Inc., et al., C.A. No. 15481
(collectively, the "Actions"). The Actions allege certain acts allegedly taken
or not taken by the Company and the members of its board of directors in
connection with the proposed transaction that ultimately culminated in the
1997 Merger Agreement and the price originally proposed to be paid for the
Company Common Stock and allege that Andrews Group Incorporated and MC Group's
board of directors breached fiduciary obligations to the Company's
stockholders by entering into certain transactions with Marvel Entertainment
Group, Inc. and Toy Biz, Inc. (the "Marvel and Toy Biz Transactions"), which
transactions were allegedly corporate opportunities of the Company. The
Actions seek to enjoin the consummation of the Merger Agreement and the Marvel
and Toy Biz Transactions, as well as damages and an award of attorneys' fees.
On March 17, 1997, the parties to all of the Actions except Fishbaum executed
a Memorandum of Understanding setting forth the terms of their agreement in
principle to settle these Actions. The Memorandum of Understanding
acknowledges the enhanced terms for stockholders set forth in the Merger
Agreement and provides that settling plaintiffs may seek up to $1.25 million
in attorney's fees. The Memorandum of Understanding contemplates the drafting
and execution of a Stipulation of Settlement by the parties and its approval
by the Chancery Court, which approval is expected to occur in the third
quarter of 1997.
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 "Business of MC Group -- Contingent and Other Liabilities
Related to Abex's Predecessor Business". 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.
In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to the Pullman Claims. Koll also transferred to the Company
all of the rights that Koll and such subsidiaries may have against
Wheelabrator Technologies Inc., another predecessor of Koll and the Company,
with respect to the Pullman Claims. As of the date of the Company's assumption
of the Pullman Claims, Koll was defending approximately 360 claims that
individuals had contracted asbestos-related diseases by reason
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<PAGE>
of their work maintaining or repairing Pullman cars. Management believes that
costs related to these approximately 360 claims will not have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
MARKET PRICES
From July 17, 1992 through June 15, 1995, the Abex Common Stock
traded on the NYSE under the symbol ABE. Since June 16, 1995, the Company
Common Stock has been traded on the NYSE under the symbol MFO. For the periods
indicated, the high and low closing prices for the Abex and Company Common
Stock as reported by the NYSE were as follows:
1995 HIGH LOW
- ---- ---- ---
First Quarter $7 $8
Second Quarter (Abex through June 15, 1995) 10 1/2 7 5/8
Second Quarter (MC Group from June 16, 1995 through
June 30, 1995) 22 3/8 19 3/4
Third Quarter 29 1/8 21 1/8
Fourth Quarter 26 17 1/4
1996
- ----
First Quarter $20 1/4 $14
Second Quarter 24 7/8 15 5/8
Third Quarter 30 5/8 19 7/8
Fourth Quarter 30 1/4 23 7/8
As of the close of business on March 7, 1997, there were
approximately 4,310 stockholders of record of Company Common Stock.
The Company has never paid any cash dividend with respect to the MC
Group Common Stock, except for the $10.00 special cash dividend paid on March
14, 1997 to holders of record on March 10, 1997. The MC Group Board of
Directors will review its dividend policy from time to time in light of MC
Group's results of operations and financial position and such other business
considerations the MC Group Board of Directors deems relevant. The terms of
the credit agreement (the "Cigar Credit Agreement") and Senior Subordinated
Notes due 2003 ("Senior Notes") of Consolidated Cigar limit the payment of
dividends or distributions by Consolidated Cigar to an amount equal to
approximately $9.3 million as of December 31, 1996. Therefore, the Company is
limited in its ability to pay dividends to its stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and Note 8 of the notes to the financial
statements.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Prior to the Merger, Mafco Holdings contributed all of the
outstanding capital stock of Flavors Holdings and Cigar Holdings, the
immediate parent companies of Mafco Worldwide Corporation and Consolidated
Cigar, respectively, to C&F. C&F and Abex merged, with Abex as the surviving
corporation and renamed Mafco Consolidated Group Inc. As a result of the
Merger and the purchase from Libra, MC Group owned directly or indirectly 100%
of Consolidated Cigar and Mafco Worldwide Corporation, all of the outstanding
shares of PCT Preferred Stock and a common equity interest in PCT. In
accordance with generally accepted accounting principles, 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 acquirer for accounting purposes.
On August 21, 1996, the Company completed the Cigar IPO in which it
issued and sold 6,075,000 shares of Cigar Holdings common stock, thereby
reducing MC Group's ownership interest in Cigar Holdings to approximately
80.2%.
On November 25, 1996, the Company completed the Flavors Disposition
in which it sold to a subsidiary of PCT (i) all of the outstanding shares of
Flavors Holdings and (ii) the VSRs.
On March 3, 1993, Mafco Holdings completed the acquisition of
Consolidated Cigar. Therefore, the historical financial data for the periods
preceding March 3, 1993 are not comparable to the financial data for the
periods after March 3, 1993 due to the acquisition of Consolidated Cigar.
The table below reflects financial information for each of the years
in the five year period ended December 31, 1996, which have been derived from
the audited financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company
included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995(3) 1994 1993(1)(2) 1992(1)
------ -------- ------ ----------- --------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $310.7 $261.1 $226.9 $202.6 $100.1
Income from continuing operations 243.6(4) 23.1 16.3 10.0 8.2
Net income 258.6(4) 24.4 13.7 10.0 8.2
Income from continuing operations
per share 10.48 1.06 0.82 0.50 0.41
Net income per share 11.13 1.12 0.69 0.50 0.03
BALANCE SHEET DATA (AT PERIOD END):
Total assets $769.5 $560.6 $282.9 $293.6 $ 82.6
Long-term debt (including current
portion and short-term
borrowings) 97.5 229.6 250.2 276.4 134.2
Total stockholders' (deficit)
equity 360.5(4) 103.7 (10.8) (25.4) (67.6)
</TABLE>
- --------------
(1) Reflects the results of Flavors Holdings or its predecessor prior to
March 3, 1993.
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<PAGE>
(2) Reflects the combined results of Flavors Holdings and Cigar Holdings
since March 3, 1993 (the first date that Flavors Holdings and Cigar
Holdings were under the common control of Mafco Holdings).
(3) Reflects the assets and liabilities of Abex acquired in the Merger from
June 15, 1995.
(4) Reflects the gains in 1996 on the Cigar IPO of $127.8 and the Flavors
Disposition of $151.7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following should be read in conjunction with the financial
statements of the Company included elsewhere herein.
OVERVIEW
The Company is the largest manufacturer and marketer of cigars sold
in the United States in terms of dollar sales, with a 1996 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market. The Company is also a
leading producer of pipe tobacco and is the largest supplier of private label
and branded generic pipe tobacco to mass market retailers. In addition, the
Company distributes a variety of pipe and cigar smokers' accessories. For the
year ended December 31, 1996, cigars accounted for approximately 92% of the
Company's net sales.
The United States cigar industry experienced declining consumption
between 1964 and 1993 at a compound annual unit rate of 3.6% (and, with
respect to large cigar consumption, at a compound annual unit rate of 5.0%).
Recently, cigar smoking has gained popularity in the United States, resulting
in a significant increase in consumption and retail sales of cigars,
particularly for premium cigars. Management
believes that this increase in cigar consumption and retail sales is the
result of a number of factors, including: (i) the increase in the number of
adults over the age of 50 (a demographic group believed to smoke more cigars
than any other demographic segment) and (ii) the emergence of an expanding
base of younger affluent adults who have recently started smoking cigars and
who tend to smoke premium cigars. The growth in industry retail sales of
cigars has outpaced unit growth since 1991 primarily as a result of a
combination of increased prices and a shift in the sales mix to more expensive
cigars. There can be no assurance that unit consumption and retail sales of
cigars will continue to increase in the future.
The increased demand for cigars, especially premium cigars, and the
shortage of experienced skilled laborers caused as a result thereof have
resulted in the Company's backorders of premium cigars to increase from 3.2
million cigars at December 31, 1994 to 4.3 million cigars at December 31,
1995, and to further increase to 37.0 million cigars at December 31, 1996.
Although the demand for premium cigars has continued to increase in 1996, the
substantial increase in backorders of premium cigars experienced by the
Company in 1996 was due, at least in part, to the practice by retailers of
submitting orders well in excess of required quantities in an attempt to
ensure a larger allocation of the Company's premium cigar production. As such,
the increase in backorders does not accurately reflect the demand for the
Company's premium cigars. Beginning in 1997, the Company established new
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<PAGE>
ordering policies to reduce backorders. As a result of such new ordering
policies, the amount of future backorders will not be comparable to those
previously experienced by the Company.
The Company is hiring and training new rollers and bunchers and is
building additional plant capacity to meet future growth in demand for its
premium cigars. Although the Company believes that these measures will enable
it to increase its production of premium cigars, there can be no assurance
that the Company will be able to meet any future level of demand for its
premium cigars. The Company's ability to manufacture premium and mass market
cigars may also be constrained by the ability of tobacco growers and suppliers
to meet the Company's demands for its raw materials in a timely manner.
The discussion of historical results below includes the results of
operations of Flavors' licorice extract and other flavoring agents business
through November 25, 1996, the date of the Flavors Disposition.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995.
Net sales were $310.7 million and $261.1 million in 1996 and 1995,
respectively, an increase of $49.6 million or 19.0%. The increase in net sales
was primarily due to a $58.7 million increase in sales of cigar products from
$158.2 million in 1995 to $216.9 million in 1996, partially offset by a
decrease in sales reflecting the Flavors Disposition on November 25, 1996.
Cigar sales, particularly in the premium market, increased primarily as a
result of both a shift in sales mix to higher priced cigars and price
increases on certain cigar brands, and, to a lesser extent, an increase in
cigar unit volume.
Cost of sales were $177.9 million and $154.0 million in 1996 and
1995, respectively, an increase of $23.9 million or 15.5%. The increase in
cost of sales for 1996 was primarily due to the increase in sales of cigars,
and increases in the costs of raw materials, partially offset by a decrease in
cost of sales reflecting the Flavors Disposition on November 25, 1996. As a
percentage of sales, cost of sales decreased to 57.3% in 1996 from 59.0% in
1995 primarily due to fixed manufacturing costs spread over increased
production volume.
Selling, general and administrative ("SG&A") expenses were $54.2
million and $51.4 million in 1996 and 1995, respectively, an increase of $2.8
million or 5.4%. The increase was primarily due to increased compensation,
marketing and selling expenses partially offset by a decrease in SG&A expenses
reflecting the Flavors Disposition on November 25, 1996. 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 1996 and 19.7% in 1995.
The decrease primarily reflects SG&A expenses increasing at a lower rate
relative to the increase in net sales. SG&A expenses in 1996 and 1995 include
compensation, public company and other incremental expenses incurred by the
Company since the Merger. The Company expects marketing and selling expenses
of the Company's operating business to continue to increase if net sales
continues to increase.
Interest expense was $24.6 million and $27.2 million in 1996 and
1995, respectively. The decrease of $2.6 million was due to a lower average
amount of debt outstanding in 1996 as compared to 1995.
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<PAGE>
Interest and investment income was $13.0 million and $6.0 million in
1996 and 1995, respectively. The increase primarily reflects interest income
on invested cash acquired in connection with the Merger, the Cigar IPO and the
Flavors Disposition.
Equity in earnings from continuing operations and preferred dividends
of PCT represents the Company's common equity interest in the continuing
operations of PCT since July 1995 and preferred dividends on the Company's
investment in PCT Preferred Stock from June 1995.
Equity in discontinued operations of PCT, net of income taxes, was
$15.1 million and $1.3 million in 1996 and 1995. The increase reflects the
gain recorded by PCT on the sale of its aerospace business.
The Company recorded gains of $151.7 million and $127.8 million in
1996 related to the Flavors Disposition and the Cigar IPO, respectively.
The provision for income taxes as a percentage of income from
continuing operations before income taxes was 30.1% and 29.6% in 1996 and
1995, respectively. The increase in the effective rate is due to an increase
in income subject to U.S. taxation in 1996, partially offset by a tax benefit
associated with the Company's operations in Puerto Rico and a permanent
benefit on basis differences associated with the Flavors Disposition. In
addition, the 1995 tax provision also reflects a tax benefit associated with
the utilization of Consolidated Cigar's net operating loss carryforwards.
Year Ended December 31, 1995 Compared to the 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 increase in sales of cigar products from $131.5
million in 1994 to $158.2 million in 1995 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 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 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.
24
<PAGE>
Interest and investment 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 from
continuing operations before income taxes 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 1994, the Company recorded an extraordinary loss of $2.7 million,
net of a $1.7 million tax benefit, 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.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows provided by (used in) operating activities were
$(358.8) million, $6.1 million and $32.8 million for 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 primarily reflects the use of the
proceeds from the Cigar IPO, Flavors Disposition and existing cash to purchase
trading securities partially offset by higher net income, excluding the
after-tax effect of the gain on the Cigar IPO and Flavors Disposition. The
decrease from 1994 to 1995 primarily reflects an increase in restricted
deposits, the payment of liabilities assumed in connection with the Merger and
a smaller decrease in inventories partially offset by increased net income.
Cash flows from investing activities in 1996 consists primarily of
the proceeds from the Flavors Disposition partially offset by capital
expenditures. Cash flows from investing activities in 1995 consist primarily
of cash acquired in the Merger partially offset by cash used to finance the
purchase of PCT Common Stock from Libra.
Capital expenditures were $7.0 million, $3.3 million and $2.7 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Capital
expenditures in 1995 and 1994 primarily relate to manufacturing equipment and
are part of the continual maintenance and upgrading of the Company's
manufacturing facilities. The capital expenditures in 1996 relate primarily to
investments in the Company's manufacturing facilities to meet increased demand
for the Company's premium cigars, including expansion of its existing
manufacturing facilities in the Dominican Republic and Honduras and
construction, as part of a joint venture, of a new facility in Jamaica. For
1997, the Company plans to continue expanding its facilities in the Dominican
Republic and Honduras as well as add equipment to other facilities for a total
cost of approximately $4.0 million. In 1996, $0.5 million of cash flows was
also invested, as part of an equity investment, in the Jamaican joint venture.
25
<PAGE>
Cash flows from financing activities in 1996 reflects the proceeds of
$127.8 million from the Cigar IPO partially offset by net repayments of
borrowings of $22.5 million. 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
On February 5, 1996, MC Group entered into a reimbursement agreement
with Chemical Bank and PCT, through Pneumo Abex, under which MC Group has a
reimbursement obligation relating to letters of credit totaling $20.8 million
which have been issued to cover certain environmental issues, not related to
the aerospace business of PCT. To secure its obligation under such agreement,
MC Group pledged the PCT Preferred Stock and its ownership of 5,939,400 shares
of PCT Common Stock.
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. From the inception of the
agreements through January 1997, Consolidated Cigar has paid $0.8 million in
settlement, which occurs at the end of each six month period of the
agreements. Had Consolidated Cigar terminated these agreements, which the
Company considers to be held for other than trading purposes, on January 31,
1997, the Company would have realized a combined loss of approximately $1.1
million. Future positive or negative cash flows associated with these
agreements will depend upon the trend of short-term interest rates during the
remaining life of the agreements. In the event of non-performance of the
counterparties at anytime during the remaining lives of these agreements,
which expire at December 1998 and January 1999, the Company could lose some or
all of any future positive cash flows. However, the Company does not
anticipate non-performance by such counterparties. The Company does not
currently anticipate terminating these agreements; however, the Company will
from time to time continue to review its financing alternatives with respect
to its fixed and floating rate debt.
Consolidated Cigar intends to fund working capital requirements,
capital expenditures and debt service requirements for the foreseeable future
through cash flows from operations and borrowings under the Cigar Credit
Agreement. The terms of the Cigar Credit Agreement and the Senior Subordinated
Notes limit the payment of dividends or distributions to Cigar Holdings by
Consolidated Cigar to an amount (based on a formula set forth in the Senior
Subordinated Notes Indenture) equal to approximately $9.3 million as of
December 31, 1996.
The Cigar Credit Agreement consists of a revolving credit facility
(the "Revolving Credit Facility") and a working capital facility (the "Working
Capital Facility"). The Revolving Credit Facility and the Working Capital
Facility have final maturities on April 3, 1999 and have no scheduled
amortization requirements. The Cigar Credit Agreement is secured by first
priority liens on all of the material assets of Consolidated Cigar and its
domestic subsidiaries and pledges of the capital stock of all of Consolidated
Cigar's subsidiaries (with certain exceptions for the capital stock of foreign
subsidiaries). Consolidated Cigar's obligations under the Credit Cigar
Agreement are guaranteed by Cigar Holdings and by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by Cigar Holdings will
continue to be secured by a pledge of all of the shares of common stock of
Consolidated
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<PAGE>
Cigar owned by Cigar Holdings. The Cigar 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 Cigar Credit Agreement requires
Consolidated Cigar to maintain specified financial ratios and satisfy certain
tests, including maximum leverage ratios and minimum interest coverage ratios.
The Cigar Credit Agreement also contains customary events of default and
permits Consolidated Cigar to pay dividends and make distributions on terms
substantially similar to those contained in the Senior Subordinated Notes
Indenture. The Cigar Credit Agreement was amended on February 3, 1997 to
reduce the amount of various interest rate margins charged against outstanding
borrowings. As of December 31, 1996, there was approximately $25.7 million
unused and available under the Cigar Credit Agreement, after taking into
account approximately $1.7 million utilized to support letters of credit.
Restricted cash of $14.6 million and $16.6 million included in other
assets at December 31, 1996 and 1995, respectively, reflects segregated cash
held for the benefit of certain parties to cover obligations related to
certain prior dispositions and certain environmental and insurance matters.
On November 25, 1996, the Company sold to a subsidiary of PCT all of
the outstanding shares of Flavors Holdings and VSRs for an aggregate
consideration of $180 million in cash, the assumption of approximately $110.1
million of indebtedness and deferred cash payments to the Company of $3.7
million payable on June 30, 1997 and $3.5 million payable on December 31,
1997.
On February 20, 1997, Mafco Consolidated Holdings entered into the
1997 Merger Agreement with MC Group whereby Mafco Consolidated Holdings will
acquire the remaining 15% of Company Common Stock that it does not already
own. Pursuant to the 1997 Merger Agreement, each share of Company Common Stock
(other than shares held by Mafco Consolidated Holdings) will be converted into
the right to receive $33.50, subject to upward adjustment. Additionally, on
February 20, 1997, in connection with the 1997 Merger Agreement, MC Group
declared a special cash dividend of $10 per share which was paid on March 14,
1997 to stockholders of record as of the close of business on March 10, 1997.
In addition, pursuant to the 1997 Merger Agreement the Company has agreed to
make cash payments aggregating $38.8 million in respect of outstanding stock
options.
The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares of Cigar Common Stock.
On March 26, 1997, Cigar Holdings completed a public offering (the
"Cigar Secondary Offering") of 5,000,000 shares of the Cigar Common Stock at
an offering price of $23.75 per share. All of the shares sold were owned by MC
Group. In addition, the underwriters have been granted an overallotment option
to purchase an additional 750,000 shares which as of the date hereof has not
been exercised.
The Company expects to use the net cash proceeds from the Flavors
Disposition, the Cigar IPO, the Cigar Secondary Offering, and existing cash
for general corporate purposes, including the
27
<PAGE>
funding of corporate liabilities and the transaction contemplated by the 1997
Merger Agreement.
INFLATION
The Company's cigar business has historically been able to pass
inflationary increases for raw materials and other costs onto its customers
through price increases and anticipates that it will be able to do so in the
future.
TAXATION AND REGULATION
Excise Taxes
Cigars and pipe tobacco have long been subject to federal, state and
local excise taxes, and such taxes have frequently been increased or proposed
to be increased, in some cases significantly, to fund various legislative
initiatives. In particular, there have been proposals by the federal
government in the past to reform health care through a national program to be
funded principally through increases in federal excise taxes on tobacco
products. Enactment of significant increases in or new federal, state or local
excise taxes would result in decreased unit sales of cigars and pipe tobacco,
which would have a material adverse effect on the Company's business.
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
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, 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"). The Company
believes that it qualified for the possessions tax credit during 1996, 1995
and 1994. The Company expects that it will continue to qualify for the
possessions tax credit for every year that such credit is available in such
amounts to offset the majority of any United States federal income tax related
thereto, but eligibility and the amounts of the credit will depend on the
facts and circumstances of the Company's Puerto Rico operations during each of
the taxable years subsequent to 1996. Failure to receive the possessions tax
credit attributable to the Company's Puerto Rico operations would have a
material adverse effect on the Company.
On August 20, 1996, the Small Business Job Protection Act of 1996
(the "SBJPA") was enacted into law. Under the SBJPA, Section 936 of the Code,
the possessions tax credit, was repealed, subject to special grandfather rules
for which the Company would be eligible, provided that the Company does not
add a "substantial new line of business." Under the grandfather rules, for the
Company's taxable years beginning after December 31, 2001 and before January
1, 2006, the Company's business income from its Puerto Rico operations
eligible for the possessions tax credit would, in addition to the Current
Limitation, generally be limited to its average annual income from its Puerto
Rico operations, adjusted for inflation, computed during the Company's five
most recent taxable years ending before October 14, 1995 and excluding the
highest and lowest years (the "Income Limitation"). For taxable years after
December 31, 2005, the possessions tax credit would be eliminated. The repeal
of the possessions tax credit could have a material adverse effect on the
Company for taxable years beginning after December 31, 2001 and before January
1, 2006, to the
28
<PAGE>
extent that the Company's annual income from its Puerto Rico operations
exceeds its average annual income from its Puerto Rico operations (as computed
in the manner described in the preceding sentence), and for taxable years
after December 31, 2005. Although it does not currently have any definitive
plans with respect thereto, the Company expects to evaluate alternatives that
may be available to it in order to mitigate the effects of the SBJPA. On
February 6, 1997, President Clinton proposed certain tax law changes which, if
enacted, would eliminate the Income Limitation, extend the possession tax
credit indefinitely and make the credit available to newly established
business operations.
Puerto Rico Tax Exemption
Pursuant to a grant of industrial tax exemption which expires in
2002, income earned by Congar International Corporation from the manufacture
of cigars in Puerto Rico enjoys a 90% income tax exemption from Puerto Rican
income taxes. The remaining 10% of such income is taxed at a maximum surtax
rate of 45%, resulting in an effective income tax rate for such income of
approximately 4.5% under current tax rates. Funds repatriated to the Company
are subject to a maximum Puerto Rican tollgate tax of 10%. Legislation enacted
in Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.
There can be no assurance that the Puerto Rico tax exemption will not be
limited or eliminated in the future. Any significant limitation on or
elimination of the Puerto Rico tax exemption would have a material adverse
effect on the Company. See Note H of the Notes to Consolidated Financial
Statements of the Company included elsewhere in this Report.
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.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking statements
contained in this Form 10-K are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements contained
herein is the Company's ability to implement its business strategy
successfully, which will be dependent on business, financial, and other
factors beyond the Company's control, including, among others, prevailing
changes in consumer preferences, access to sufficient quantities of raw
materials, availability of trained laborers and changes in tobacco products
regulation. There can be no assurance that the Company will continue to be
successful in implementing its business strategy. Other factors could also
cause actual results to vary materially from the future results covered in
such forward-looking statements.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Consolidated Financial Statements and supplementary data
listed in the accompanying Index to Consolidated Financial Statements and
Schedule on page F-1 herein. Information required by other schedules called
for under Regulation S-X is either not applicable or is included in the
consolidated financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information (ages as of January 1,
1997) concerning the Directors and executive officers of the Company. All
Directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----- --- --------
<S> <C> <C>
Ronald O. Perelman................ 54 Chairman of the Board of Directors and a Director
Howard Gittis .................... 63 Vice Chairman 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
</TABLE>
Mr. Perelman has been Chairman of the Board and a Director 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")
30
<PAGE>
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") and PCT 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, California
Federal Bank, a Federal Savings Bank ("California Federal"), First Nationwide
Holdings, Inc. ("First Nationwide Holdings"), First Nationwide (Parent)
Holdings Inc. ("First Nationwide Parent"), Marvel, Marvel Holdings Inc.
("Marvel Holdings"), Marvel (Parent) Holdings Inc. ("Marvel Parent"), Marvel
III Holdings Inc. ("Marvel III"), Meridian Sports, PCT, Pneumo Abex, Revlon,
Inc., Revlon Products, Revlon Worldwide Corporation ("Revlon Worldwide") and
Toy Biz. (On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and
Marvel and several of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)
Mr. Gittis has been 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, California Federal, First
Nationwide Holdings, First Nationwide Parent, Jones Apparel Group, Inc., Loral
Space and Communications Ltd., PCT, Pneumo Abex, Revlon Worldwide, Revlon,
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 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, Chief Financial Officer and Director 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. (On December 27, 1996, Marvel
Holdings, Marvel Parent and Marvel III, of which Mr. Engelman is an executive
officer, and several subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code.)
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 since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
(On December 27, 1996, Marvel Holdings, Marvel Parent and Marvel III, of which
Mr. Schwartz is an executive officer, and several subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.)
31
<PAGE>
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 Pneumo Abex since January
1995. Mr. Folz is a Director of PCT, which files reports pursuant to the
Exchange Act.
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. From 1987
to 1988, Mr. Ellis was the Executive Vice President, Chief Financial Officer
and Treasurer of Brooks Drug, Inc. and from 1985 to 1987, he was the Vice
President and Controller of MacAndrews & Forbes Holdings.
Mr. 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.
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 Mr.
Beekman and Ms. LaFontant-Mankarious and a Compensation Committee consisting
of Mr. Gittis and Ms. LaFontant-Mankarious.
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 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
32
<PAGE>
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 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.
33
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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, 1996 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 $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------------------------
SECURITIES
OTHER UNDERLYING ALL OTHER
SALARY BONUS ANNUAL OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION (#)(B) ($)
- --------------------------- ---- --- --- ------------ ------ ---
<S> <C> <C> <C> <C> <C> <C>
James R. Maher
President and Chief 1996 1,000,000 4,972,685(a) 750,000 1,843,750(c)
Executive Officer 1995 500,000 1,250,000 750,000 1,843,750(c)
Theo W. Folz
President and Chief Executive 1996 1,072,500(d) 1,487,750(d) 51,243(e) 100,000 3,000(f)
Officer of Tobacco Products 1995 1,000,000 1,000,000 3,000(f)
Group 1994 675,000 400,000 3,000(f)
Gary R. Ellis
Senior Vice President and 1996 217,500 326,250 3,000(f)
Chief Financial Officer of 1995 200,000 200,000 3,000(f)
Tobacco Products Group 1994 185,000 100,000 3,000(f)
</TABLE>
____________
(a) Includes a performance bonus of $500,000, deferred bonus of
$1,500,000 and a transaction bonus of $2,972,685. See "-- Employment
Agreements".
(b) Excludes options granted pursuant to Cigar's 1996 Stock Option Plan.
(c) Represents that portion of the special payment that vested in 1996
and 1995 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."
(d) Reflects portion of Mr. Folz's employment agreement assumed by
Consolidated Cigar for 1996 and portion of Mr. Folz's employment
agreement paid by Pneumo Abex through November 25, 1996, the date of
the Flavors Disposition.
(e) Represents perquisites and other personal benefits, which, in total,
are valued in excess of $50,000 of which $39,046 was related to the
personal use of a company automobile.
(f) Represents the Company's contribution to the employee's account under
Consolidated Cigar's 401(k) plan.
34
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of
stock options under the Mafco Consolidated Group Inc. 1995 Stock Option Plan
to Mr. Folz in 1996. No option grants were made to the other Named Executive
Officers in 1996.
<TABLE>
<CAPTION>
GRANT DATE
INDIVIDUAL GRANT (A) VALUE (B)
------------------------------------------------------------ -------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED EXERCISE OR
UNDERLYING TO EMPLOYEES BASE PRICE EXPIRATION GRANT DATE
NAME OPTIONS GRANTED IN 1996 ($/SH) DATE PRESENT VALUE
---- --------------- ------- ------ ---- -------------
<S> <C> <C> <C> <C> <C>
Theo W. Folz 100,000(c) 80% $22.00 June 25, 2006 $1,012,000
</TABLE>
- ------------
(a) No stock appreciation rights were granted by the Company in 1996.
(b) Present values were calculated using the Black-Scholes option pricing
model. The model as applied used the grant date of June 25, 1996 and
the exercise price per share specified in the table above was equal
to the fair market value per share of Common Stock on the date of
grant. The model also assumes (i) risk-free rate of return of 6.52%
which was the rate as of the grant date for the U.S. Treasury Zero
Coupon Bond issues with a remaining term similar to the expected term
of the option, (ii) stock price volatility of .497 based upon
historical price analysis, (iii) a constant dividend rate of zero
percent and (iv) that the options normally would be exercised on the
final day of the fourth year after grant. No discount from the
theoretical value was taken to reflect the waiting period, if any,
prior to vesting of the stock options, the restrictions on the
transfer of the stock options and the likelihood that the stock
options will be exercised in advance of the final day of their term.
(c) Such stock options have a term of ten years and vest one third upon
the date of grant and one third on each of the first and second
anniversaries of the date of grant.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information with respect to options
exercised by Named Executive Officers of the Company during 1996 and the
number and value of securities underlying unexercised options held by the
Named Executive Officers of the Company on December 31, 1996. No options were
held by the other Named Executive Officers on December 31, 1996.
35
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(A)
ACQUIRED ON VALUE ------------------------------ ------------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James R. Maher -- -- 500,000 250,000 $4,000,000 $2,000,000
Theo W. Folz -- -- 33,333 66,667 112,499 225,001
</TABLE>
- ------------
(a) Amounts shown represent the market value of the underlying Company
Common Stock at year end calculated using the December 31, 1996 NYSE
closing price per share of Company Common Stock of $25 3/8 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.
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. Such performance goals will be based upon achievement
of operating results targets. 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 Flavors Disposition,
the Company's Chief Executive Officer received a payment of approximately
$3,000,000 under the Transaction Bonus Plan. See "--Employment Agreements."
36
<PAGE>
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 Salaried Employees Retirement Plan (the "Gulf &
Western Plan") as of March 8, 1983 and (ii) the actuarial equivalent of any
Consolidated Cigar-provided benefits received under 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.
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 benefits payable under the
Gulf & Western or the Company's 401(k) plan, is as follows:
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 35
- ------------ -------- ------- ------- -------- --------- -------
<C> <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>
37
<PAGE>
Benefits under the Plan are subject to the maximum limitations
imposed by federal law on pension benefits. The annual limitation in 1996 was
$120,000 or $10,000 per month, based on a maximum annual compensation of
$150,000. The maximum annual remuneration considered for purposes of the BRP
was $500,000 in 1996.
As of December 31, 1996, the credited years of service were thirteen
years for Mr. Folz, eight years for Mr. Ellis and one year 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; (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
38
<PAGE>
some other person and its affiliates owning more than 50% of the voting power
of the Company's voting securities.
The Company 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 Mr. Folz's employment
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 remaining term of the Folz Employment
Agreement or, if longer and if no non-renewal notice has been given by the
Company prior to that time, twelve months. The Folz Employment Agreement
provided for an initial annual base salary of $1 million. 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. After December 31, 1998, Consolidated Cigar may give
notice of non-renewal, in which case the term of the agreement will be
extended for a period of twelve months following such notice. From and after
January 1, 2000, the term will be automatically extended day-by-day until
Consolidated Cigar gives notice of non-renewal, in which case the term will be
extended for a period of twelve months. Consolidated Cigar has assumed 70% of
the obligations of 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 paid by Consolidated Cigar to Mr. Folz was
$770,000 for the year ended December 31, 1996. In addition, subject to
approval by stockholders of Consolidated Cigar, Mr. Folz is eligible to
receive annual performance bonus payments under the Consolidated Cigar
Performance Bonus Plan. See "-- Consolidated Cigar Performance Bonus Plan".
The Folz Employment Agreement includes compensation for his duties as Chief
Executive Officer of Mafco Worldwide. The portion allocable to Mafco Worldwide
through November 25, 1996, the date of the Flavors Disposition, was reimbursed
by Mafco Worldwide and is included in the compensation table above.
Consolidated Cigar entered into an employment agreement with Mr.
Ellis (the "Ellis Employment Agreement") with respect to an employment term
commencing July 1, 1995 and ending on December 31, 1999, 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 the employment
agreement 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. After December 31, 1998,
Consolidated Cigar may give notice of non-renewal, in which case the term of
the agreement will be extended for a period of twelve months following such
notice. From and after January 1, 2000, the term will be automatically
extended day-by-day until Consolidated Cigar gives notice of non-renewal, in
which case the term will be extended for a period of twelve months. In the
event that Consolidated Cigar breaches the Ellis Employment Agreement, Mr.
Ellis is entitled to terminate the
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employment agreement; in that event, base salary, performance bonuses and
benefits are to be paid to Mr. Ellis for the remaining term of the Ellis
Employment Agreement or, if longer and if no non-renewal notice has been given
by the Company prior to that time, twelve months, offset by any other
compensation Mr. Ellis receives during this period. The Ellis Employment
Agreement provides for an initial annual base salary of $217,500 for Mr.
Ellis. The Employment Agreement also provides, subject to approval by
stockholders of Consolidated Cigar, for annual performance bonus payments,
subject to an annual maximum of $1 million, based on achievement by
Consolidated Cigar of certain EBITDA targets, which bonus payments shall be
made pursuant to the Consolidated Cigar Performance Bonus Plan, as set forth
in the Ellis Employment Agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, Mr. Gittis and Ms. LaFontant-Mankarious served as members
of the Compensation Committee.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 28, 1997, 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.
NUMBER OF SHARES
BENEFICIALLY PERCENTAGE
BENEFICIAL OWNER OWNED(A) OF CLASS
---------------- -------- --------
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 *
Barry F. Schwartz 3,000 *
Theo W. Folz(d) 33,334 *
Gary R. Ellis 1,000 *
All directors and executive officers
as a group (10 persons)(e)(f) 20,577,086 86%
- ------------
* Less than 1%
(a) Shares of Company Common Stock that an individual or group has a
right to acquire within 60 days after March 28, 1997 pursuant to the
exercise of options, warrants or other rights are deemed to be
outstanding
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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 of Company Common Stock
owned by Mafco Holdings are, and shares of intermediate holding
companies may from time to time be, pledged to secure obligations of
Mafco Holdings or its affiliates.
(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.
ITEM 13. 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 through its 85% ownership of the
Company, in the manufacture and distribution of cigars and pipe tobacco and
through its 36% beneficial ownership of PCT, Mafco Holdings is engaged in the
processing of licorice and other flavors . Mafco Holdings also is in the
financial services business through its 80% ownership of California Federal.
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 1996 and
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1995, the amount allocated to the Company was $624,549 and $436,414,
respectively. 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 $39.1 million and $2.0 million
at December 31, 1996 and 1995, respectively, principally related to income
taxes payable to Mafco Holdings pursuant to a tax sharing agreement. See "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 is 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.
Since the completion of the Secondary Offering, Consolidated Cigar is
no longer included in the Mafco Holdings Group consolidated tax returns and,
instead, files its own tax returns and pays its own taxes on a separate
company basis.
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.
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.
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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 Flavors Disposition became an indirect wholly
owned subsidiary of PCT. During the years ended December 31, 1996, 1995 and
1994, the Company purchased approximately $211,000, $269,000 and $265,000 of
licorice extract from Pneumo Abex (successor by merger to Mafco Worldwide).
The Company believes that the licorice extract purchased from Pneumo Abex was
purchased on terms no less favorable to the Company than those obtainable in
an arm's length transaction with an independent third party.
SPECIALTY PRODUCTS DIVISION
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 $958,000, $874,000 and $763,000 for the years ended December 31,
1996, 1995 and 1994, 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
Pneumo Abex on a royalty-free basis the right to use the name "MacAndrews &
Forbes" until November 12, 1997.
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 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
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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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(a) (1 and 2) Financial statements and financial statement schedules. See
Index to Consolidated Financial Statements and Schedules which appear
on page F-1 herein.
All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Stock and VSR Purchase Agreement, dated as of October 23,
1996, by and among MC Group, PCT and PCT International
Holdings Inc. (incorporated by reference to Exhibit 7 of
MC Group's Schedule 13D, dated October 25, 1996, filed
with respect to PCT). The Company agrees to furnish
supplementally a copy of any omitted schedule to the
Securities and Exchange Commission upon request.
2.2 Agreement and Plan of Merger, dated as of February 20,
1997, among MC Group, Mafco Consolidated Holdings and MCG
Acquisition Inc. (incorporated by reference to Exhibit 6
of Amendment No. 4 to Schedule 13D dated February 24,
1997, filed by Mafco Holdings and Mafco Consolidated
Holdings with respect to MC Group).
3.1 Restated Certificate of Incorporation of MC Group
(incorporated by reference to Exhibit 4.1 to the Form 8-K
of MC Group filed on June 15, 1995 (the "June 8-K")).
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3.2 Amendment dated May 13, 1996 to the Company's Restated
Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to MC Group's Form 10-Q dated March 31,
1996).
3.3 By-Laws of MC Group (incorporated by reference to Exhibit
4.2 to the June 8-K).
4.1 Indenture by and between Consolidated Cigar and
Continental Bank, National Association, as trustee,
relating to the Senior Subordinated Notes due 2003
(incorporated by reference to Exhibit 10.2(j) to
Amendment No. 2 to Cigar Holdings Registration Statement
on Form S- 1 (No. 333-6819) as filed July 30, 1996 (the
"1996 Cigar S-1).
4.2 Value Support Rights Agreement dated November 20, 1996
between MC Group and American Stock Transfer & Trust
Company, as the trustee (incorporated by reference to
Exhibit 4.1 of MC Group's Form 8- K dated November 25,
1996).
4.3 Amendment No. 1 to the Value Support Rights Agreement,
dated as of December 20, 1996, between MC Group and
American Stock Transfer & Trust Company (incorporated by
reference to Exhibit 4.1(b) of MC Group's Form S-1
Registration Statement dated December 26, 1996 (No.
333-15257) (the "VSR Registration Statement")).
4.4 Form of Indenture for the VSR Notes (incorporated by
reference to Exhibit 4.2 of the VSR Registration
Statement).
10.1 Credit Agreement between Consolidated Cigar and The Chase
Manhattan Bank, N.A., dated as of February 23, 1993
(incorporated by reference to 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 to Exhibit
10.2(a) to Consolidated Cigar'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 to Exhibit
10.2(b) to Consolidated Cigar'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 to Exhibit
10.2(c) to Consolidated Cigar's Annual Report on Form
10-K for the fiscal year ended December 31, 1993).
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10.2(d) Amendment No. 4 to the Credit Agreement, dated as of
April 5, 1993 (incorporated by reference to Exhibit
10.2(d) to Consolidated Cigar'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 to Exhibit 10.2(e) to
Consolidated Cigar'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 to Exhibit
10.2(f) to Consolidated Cigar'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 to Exhibit 10.2(g) to
Consolidated Cigar'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 to Exhibit
10.2(h) to Consolidated Cigar'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 to Exhibit
10.2(i) of Amendment No. 1 of Cigar Holdings'
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 to Exhibit 10.3
of Amendment No. 2 of Cigar Holdings' Registration
Statement on Form S-1 (Registration No. 333- 6819)).
10.2(k) Amendment No. 11 to the Credit Agreement dated as of
February 3, 1997 (incorporated by reference to Exhibit
10.1(k) to Consolidated Cigar's Registration Statement on
Form S-1 (Registration No. 333-20743)).
10.3 Indenture by and between Consolidated Cigar and
Continental Bank, National Association, as Trustee,
relating to the Senior Subordinated Notes due 2003
(incorporated by reference to Exhibit 10.2(j) of
Amendment No. 2 of Cigar Holdings' Registration Statement
on Form S-1 (Registration No. 333-6819)).
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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 to Exhibit 10.16(a)
of Amendment No. 2 of Cigar Holdings' 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 to
Exhibit 10.16(b) of Amendment No. 2 of Cigar Holdings'
Registration Statement on Form S-1 (Registration No.
333-6819)).
10.5 Promissory Note issued by Cigar Holdings to MC Group
(incorporated by reference to Exhibit 10.5 of the VSR
Registration Statement).
10.6 Agreement and Plan of Merger, dated as of January 6,
1995, as amended, between Abex and Mafco Holdings,
without disclosure schedules (incorporated by reference
to
10.7 Separation Agreement, dated as of June 15, 1995, by and
between Fisher Scientific International Inc. ("Fisher
Scientific") and C&F (incorporated by reference to
Exhibit 10.1 to the June 8-K).
10.8 Transfer Agreement, dated as of June 15, 1995, among PCT,
MCG Intermediate Holdings Inc., Pneumo Abex and PCT
International Holdings Inc. (incorporated by reference to
Exhibit 10.2 to the June 8-K).
10.9 Securities Purchase Agreement, dated as of June 26, 1995
between Libra and the Registrant (incorporated by
reference to Exhibit 10.3 to MC Group's Current Report on
Form 8-K dated June 30, 1995).
10.10 Letter Agreement, dated as of June 26, 1995, between MC
Group and PCT (incorporated by reference to Exhibit 10.4
to the June 8-K).
10.11 Letter Agreement, dated as of February 5, 1996, between
MC Group and PCT (incorporated by reference to Exhibit 6
to Amendment No. 2 to the Schedule 13D dated February 8,
1996 filed by Mafco Holdings, C&F (Parent) Holdings Inc.
and MC Group in connection with PCT's capital stock).
10.12 Tax Sharing Agreement between Abex and PCT dated June 15,
1995 (incorporated by reference to Exhibit 10.5 to MC
Group's Form 10-K dated December 31, 1995).
10.13 Tax Sharing Agreement between MC Group and Mafco Holdings
dated June 15, 1995 (incorporated by reference to Exhibit
10.6 to MC Group's Form 10-K dated December 31, 1995).
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10.14 Amended and Restated Tax Sharing Agreement by and among
Mafco Holdings, MC Group, Cigar Holdings and Consolidated
Cigar (incorporated by reference to Exhibit 10.7 to
Mafco's Form 10-K dated December 31, 1995).
10.15 Second Amended and Restated Tax Allocation Agreement by
and among Mafco Holdings, MC Group, Flavors (Parent)
Holdings Inc., Flavors and Mafco Worldwide Corporation
(incorporated by reference to Exhibit 10.8 to Mafco's
Form 10-K dated December 31, 1995).
10.16 Registration Rights Agreement, dated as of August 21,
1996, between MC Group and Cigar Holdings (incorporated
by reference to Exhibit 10.22 of the VSR Registration
Statement).
10.17 Registration Rights Agreement between MC Group and PCT
(incorporated by reference to Exhibit 2 to the Schedule
13D dated June 26, 1995 filed by Mafco Holdings, Mafco
Consolidated Holdings and MC Group in connection with
PCT's capital stock).
10.18 Registration Rights Agreement, dated as of June 15, 1995,
between MC Group, Mafco Consolidated Holdings and Mafco
Holdings (incorporated by reference to Exhibit 2 to the
Schedule 13D dated June 26, 1995 filed by Mafco Holdings
and Mafco Consolidated Holdings in connection with MC
Group's capital stock).
10.19 Stock Purchase Agreement, dated April 28, 1988, between
Pneumo Abex and Whitman (incorporated by reference to
Exhibit 2.1 to Pneumo Abex's Registration Statement on
Form S-1, Commission File 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's Annual Report on Form 10-K for 1992).
10.20 Asset Purchase Agreement, dated as of May 15, 1993,
between Pneumo Abex and The BF Goodrich Company ("BF
Goodrich") (incorporated by reference to Exhibit 2.1 to
Abex's Current Report on Form 8-K dated June 10, 1993).
10.21 Asset Purchase Agreement, dated as November 21, 1994, by
and between Pneumo Abex and Wagner Electric Corporation
(incorporated by reference to Exhibit 1 to Abex's Current
Report on Form 8-K dated November 21, 1994).
10.22 Lease Agreement, dated as of June 15, 1995, between
Liberty Lane Real Estate, Inc. ("Liberty Lane") and
Fisher Scientific (incorporated by reference to Exhibit
10.14 to MC Group's Form 10-K dated December 31, 1995).
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10.23 Option Agreement, dated as of June 15, 1995, between
Liberty Lane and Fisher Scientific (incorporated by
reference to Exhibit 10.15 to MC Group's Form 10-K dated
December 31, 1995).
10.24 Mortgage and Security Agreement, dated as of June 15,
1995, between Liberty Lane and Fisher Scientific
(incorporated by reference to Exhibit 10.16 to MC Group's
Form 10-K dated December 31, 1995).
10.25 Reimbursement Agreement, dated as of March 3, 1993,
between Consolidated Cigar and Mafco Holdings
(incorporated by reference to Exhibit 10.10 to
Consolidated Cigar's Registration Statement on Form S-1
(Registration No. 333-6819)).
10.26 Agreement and Plan of Merger, dated as of March 26, 1992,
by and among Koll (formerly Henley Properties, Inc.), HP
Merger Co. and Henley (incorporated by reference to
Exhibit 2.01 to Abex's Registration Statement on Form
S-1, Commission File No. 33-48521).
10.27 Transition Agreement, dated as of July 16, 1992, among
Abex, Henley and Koll (incorporated by reference to
Exhibit 10.02 to Abex's Annual Report on Form 10-K for
1992).
10.28 Amendment No. 1 to the Transition Agreement, dated as of
April 1, 1993 between Abex and Koll (incorporated by
reference to Exhibit 10.18 to Abex's Registration
Statement on Form S-4, Commission File No. 33-92188).
10.29 Tax Sharing Agreement, dated as of June 10, 1992, between
Abex and Henley (incorporated by reference to Exhibit
10.03 to Abex's Annual Report on Form 10-K for 1992).
10.30 Letter Agreement, dated as of July 15, 1992, between Abex
and the Pension Benefit Guaranty Corporation ("PBGC")
(incorporated by reference to Exhibit 10.16 to Abex's
Annual Report on Form 10-K for 1992).
10.31 Letter Agreement, dated as of July 15, 1992, made by
Henley in favor of PBGC (incorporated by reference to
Exhibit 10.17 to Abex's Annual Report on Form 10-K for
1992).
10.32 Pension Agreement, dated as of July 16, 1992, among Koll,
Henley and Abex (incorporated by reference to Exhibit
10.18 to Abex's Annual Report on Form 10-K for 1992).
10.33 Conditional Guarantee, dated as of July 9, 1992, among
Abex, Henley, Koll and Allied-Signal Inc.
("Allied-Signal") (incorporated by reference to Exhibit
10.19 to Abex's Annual Report on Form 10-K for 1992).
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10.34 Reimbursement Agreement, dated as of July 16, 1992, among
Henley, Koll and Abex (incorporated by reference to
Exhibit 10.20 to Abex's Annual Report on Form 10-K for
1992).
10.35 Tax Sharing Agreement, dated as of December 15, 1988,
between Wheelabrator Technologies Inc. ("WTI") and Koll
(incorporated by reference to Exhibit 10.02 to Amendment
No. 3 on Form 8 to Koll's Registration Statement on Form
10, Commission File No. 0-17189).
10.36 Modification Agreement, dated as of August 24, 1989,
among WTI, Resco Holdings Inc. ("RHI"), Henley, Waste
Management of North America, Inc. and a subsidiary of
Henley (incorporated by reference to Exhibit 10.32 to
Henley's Registration Statement on Form 10, Commission
File 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
WTI's Registration Statement on Form S-4, Reg. No.
33-36118), as amended by Termination and Amendment
Agreement, dated as of December 31, 1991, among Henley,
Koll, WTI and RHI (incorporated by reference to Exhibit
10.39 to Henley's Annual Report on Form 10-K for 1991,
Commission File No. 0-18004).
10.37 Environmental Expenditures Agreement, dated as of July
28, 1989, among Koll, WTI, New Hampshire Oak, Inc. ("New
Hampshire Oak") and Fisher Scientific Group Inc. ("Fisher
Group") (incorporated by reference to Exhibit 10(a) to
Henley Properties' Quarterly Report on Form 10-Q for the
quarter ended June 30, 1989, Commission File No.
0-17189), as amended by Assignment and Assumption
Agreement, dated as of January 1, 1990, among Koll,
Henley, New Hampshire Oak, Fisher Group, WTI and Henley
Holdings, Inc. (incorporated by reference to Exhibit
10.34 to Henley's Annual Report on Form 10-K for 1989,
Commission File No. 0-18004).
10.38 Restated Environmental Matters Agreement, dated as of
July 28, 1989, among Allied-Signal, Koll, WTI, New
Hampshire Oak and Fisher Group (incorporated by reference
to Exhibit 10(b) to Henley Properties' Quarterly Report
on Form 10-Q for the quarter ended June 30, 1989,
Commission File No. 0-17189), amended by the Assignment,
Assumption and Indemnification Agreement, dated as of
December 21, 1989, among Henley, Henley Properties, New
Hampshire Oak, Fisher Group, WTI and Allied-Signal
(incorporated by reference to Exhibit 10.35 to Henley's
Annual Report on Form 10-K for 1989, Commission File
No. 0-18004).
10.39 Tax Sharing Agreement, dated as of February 26, 1986,
between Allied-Signal and WTI (incorporated by reference
to Exhibit 10E to WTI's Registration Statement on Form
10, Commission File No. 0-114246).
50
<PAGE>
10.40 Guarantee Agreement, dated as of June 10, 1993, between
Abex and BF Goodrich (incorporated by reference to
Exhibit 2.2 to Abex's Current Report on Form 8-K dated
June 10, 1993).
10.41 Mutual Guaranty Agreement, dated as of December 30, 1994,
between Abex and Cooper Industries Inc. (incorporated by
reference to Exhibit 10.29 to Abex's Registration
Statement on Form S-4, Commission File No. 33-92188).
10.42* Mutual release and Settlement Agreement, dated as of
March 11, 1997, among MC Group, New Abco Holdings Inc.,
Koll, Henley and New Henley Holdings Inc.
MANAGEMENT CONTRACTS AND COMPENSATORY PLANS
10.43 Employment Agreement by and between MC Group and James R.
Maher effective as of July 1, 1995 (incorporated by
reference to Exhibit 10.33 to MC Group's Form 10-K dated
December 31, 1995).
10.44 Amendment dated March 15, 1996 to Employment Agreement
effective July 1, 1995 between MC Group and James R.
Maher (incorporated by reference to Exhibit 10.1 to MC
Group's Form 10-Q dated March 31, 1996).
10.45 Employment Agreement by and between MC Group and Theo W.
Folz effective as of July 1, 1995 (incorporated by
reference to Exhibit 10.34 to MC Group's Form 10-K dated
December 31, 1995).
10.46 First Amendment dated February 29, 1996 to Employment
Agreement dated July 1, 1995 by and between MC Group and
Theo W. Folz (incorporated by reference to Exhibit 10.35
to MC Group's Form 10-K dated December 31, 1995).
10.47 Second Amendment, dated August 1, 1996, to the Employment
Agreement, dated July 1, 1995, between MC Group and Theo
W. Folz (incorporated by reference to Exhibit 10.4(c) of
Amendment No. 2 of Cigar Holdings' Registration Statement
on Form S-1 (Registration No. 333-6819)).
10.48 Executive Employment Agreement, dated as of August 1,
1996, between Consolidated Cigar and Theo W. Folz
(incorporated by reference to Exhibit 10.17 of Amendment
No. 2 of Cigar Holdings' Registration Statement on Form
S-1 (Registration No. 333-6819)).
10.49 Employment Agreement, dated as of August 15, 1996,
between Consolidated Cigar and Gary R. Ellis.
51
<PAGE>
10.50 The Company's 1995 Stock Option Plan (incorporated by
reference to Exhibit 10.2 to MC Group's Form 10-Q dated
March 31, 1996).
10.51 The Company's Performance Bonus Plan (included within and
incorporated by reference to the Employment Agreement
effective July 1, 1995 between the Company and James R.
Maher, filed as Exhibit 10.43).
10.52 The Company's Chief Executive Officer Transaction Bonus
Plan (included within and incorporated by reference to
the Employment Agreement effective July 1, 1995 between
the Company and James R. Maher, filed as Exhibit 10.43).
10.53 The Company's Tobacco Products Group Performance Bonus
Plan (incorporated by reference to Exhibit 10.5 to MC
Group's Form 10-Q dated March 31, 1996).
10.54 Cigar Holdings' 1996 Stock Plan (incorporated by
reference to Exhibit 10.12 of Amendment No. 2 of Cigar
Holdings' Registration Statement on Form S-1
(Registration No. 333-6819)).
10.55 Pension Plan Merger Agreement into Abex Retirement Plan
(incorporated by reference to Exhibit 10.1 to
Consolidated Cigar's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995).
21* List of Subsidiaries
23* Consent of Independent Auditors
24* Powers of Attorney executed by Messrs. Perelman, Beekman,
Folz, Gittis, LaFontant-Mankarious, Maher and Lewis.
27* Financial Data Schedule
*Filed herewith
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996:
Form 8-K filed on November 27, 1996 (Items 2 and 7).
Form 8-K/A filed on December 23, 1996 (Item 7).
52
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MAFCO CONSOLIDATED GROUP INC.
(Registrant)
Dated: March 28, 1997 By: James R. Maher*
--------------------------------------
James R. Maher
President and Chief Executive Officer
Dated: March 28, 1997 By:/s/ Irwin Engelman
--------------------------------------
Irwin Engelman
Executive Vice President and
Chief Financial Officer
Dated: March 28, 1997 By:/s/ Laurence Winoker
--------------------------------------
Laurence Winoker
Vice President and Controller
(Chief Accounting Officer)
53
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Ronald O. Perelman * Director March 28, 1997
- ------------------------------------
Ronald O. Perelman
Philip E. Beekman * Director March 28, 1997
- ------------------------------------
Philip E. Beekman
Theo W. Folz * Director March 28, 1997
- ------------------------------------
Theo W. Folz
Howard Gittis * Director March 28, 1997
- ------------------------------------
Howard Gittis
Jewel S. LaFontant-Mankarious * Director March 28, 1997
- ------------------------------------
Jewel S. LaFontant-Mankarious
James R. Maher * Director March 28, 1997
- ------------------------------------
James R. Maher
Drew Lewis * Director March 28, 1997
- ------------------------------------
Drew Lewis
*The undersigned by signing his name hereto does hereby execute this
Annual Report pursuant to powers of attorney filed as exhibits to this Annual
Report.
Dated: March 28, 1997 By:/s/ Laurence Winoker
---------------------------------
Laurence Winoker
Attorney-in-Fact
54
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
--------------------------
ITEM 8, ITEM 14 (A)(1) AND (2) AND (D)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
The following consolidated financial statements of Mafco Consolidated Group
Inc. and Subsidiaries are included in Item 8:
Report of Independent Auditors ...............................................................................F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995..................................................F-3
Consolidated Statements of Earnings
for the years ended December 31, 1996, 1995 and 1994.................................................F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1996, 1995 and 1994.................................................F-5
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994.................................................F-6
Notes to Consolidated Financial Statements....................................................................F-7
The following financial statement schedule of Mafco Consolidated Group Inc. is
included in Item 14(d):
Schedule II- Valuation and Qualifying Accounts................................................................F-34
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been
omitted.
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, 1996 and 1995, 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, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The 1995 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 1995 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, 1996 and 1995 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
Ernst & Young LLP
New York, New York
February 11, 1997
F-2
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
ASSETS 1996 1995
---------------- -----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,222 $ 93,417
Trading securities 409,605 190
Notes and trade receivables, net 19,498 25,211
Inventories 45,957 84,494
Prepaid expenses and other 25,396 25,420
---------------- -----------------
Total current assets 506,678 228,732
Property, plant and equipment, net 37,277 46,052
Pension asset 62,738 57,245
Investment in PCT preferred and common stock 12,996 55,547
Trademarks, net 31,155 32,021
Intangible assets related to businesses acquired, net 59,723 62,770
Other assets 58,934 78,232
================ =================
$ 769,501 $ 560,599
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and short-term borrowings $ - $ 10,960
Accounts payable 7,323 9,595
Accrued expenses and other 100,847 55,515
---------------- -----------------
Total current liabilities 108,170 76,070
Long-term debt 97,500 218,678
Deferred income taxes 36,109 5,280
Other liabilities 167,230 156,850
Commitments and contingencies
Stockholders' equity:
Common stock, par value $.01 per share, 250,000,000 shares
authorized, 24,722,190 shares issued in 1996 and 1995 247 247
Additional paid-in-capital 167,105 167,105
Retained earnings (accumulated deficit) 223,043 (35,605)
Currency translation adjustment - 1,877
Treasury stock at cost (1,484,850 shares) (29,903) (29,903)
---------------- -----------------
Total stockholders' equity 360,492 103,721
================ =================
$ 769,501 $ 560,599
================ =================
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $ 310,659 $ 261,126 $ 226,879
Cost of sales 177,854 154,022 135,967
--------------- --------------- ---------------
Gross profit 132,805 107,104 90,912
Selling, general and administrative expenses 54,161 51,360 37,906
--------------- --------------- ---------------
Operating income 78,644 55,744 53,006
Interest expense (24,589) (27,174) (27,547)
Interest and investment income 13,045 5,958 242
Amortization of deferred charges and bank fees (1,945) (2,095) (2,044)
Equity in earnings from continuing operations and preferred
dividends of PCT 3,850 727 -
Gain on Flavors Disposition 151,747 - -
Gain on Cigar IPO 127,809 - -
Other (expense) income, net (141) (366) 156
--------------- --------------- ---------------
Income from continuing operations before income taxes 348,420 32,794 23,813
Provision for income taxes (104,824) (9,703) (7,478)
--------------- --------------- ---------------
Income from continuing operations 243,596 23,091 16,335
Discontinued operations
Equity in discontinued operations of PCT,
net of income taxes of $1,311 and $712 15,052 1,322 -
--------------- --------------- ---------------
Income before before extraordinary item 258,648 24,413 16,335
Extraordinary item, net of tax benefit of $1,698 - - (2,667)
--------------- --------------- ---------------
Net income $ 258,648 $ 24,413 $ 13,668
=============== =============== ===============
Income per share:
Continuing operations $ 10.48 $ 1.06 $ 0.82
Discontinued operations 0.65 0.06 -
Extraordinary item - - (0.13)
--------------- --------------- ---------------
$ 11.13 $ 1.12 $ 0.69
=============== =============== ===============
Weighted average common shares outstanding 23,237 21,794 19,778
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON COMMON COMMON RETAINED
STOCK OF STOCK OF STOCK OF ADDITIONAL EARNINGS/ CURRENCY
MC FLAVORS CIGAR PAID-IN (ACCUMULATED TRANSLATION TREASURY
GROUP HOLDINGS HOLDINGS CAPITAL DEFICIT) ADJUSTMENT STOCK TOTAL
--------- -------- -------- ---------- ------------ ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Net income 258,648 258,648
Currency translation adjustment (1,877) (1,877)
--------- -------- -------- --------- ---------- -------- --------- --------
Balance at December 31, 1996 $ 24 $ - $ - 167,105 $ 223,043 $ - $(29,903) $360,492
========= ======== ======== ========= ========== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 258,648 $ 24,413 $ 13,668
------------- ------------- -------------
Adjustments to reconcile net income to net cash flows (used in) provided by
operating activities:
Extraordinary item - - 4,365
Gain on Flavors Disposition (151,747) - -
Gain on Cigar IPO (127,809) - -
Depreciation and amortization 10,088 10,483 10,407
Equity in earnings of affiliates in excess of distributions (18,613) (1,894) -
Changes in assets and liabilities net of acquisitions and dispositions:
Net increase in trading securities (409,415) - -
Increase in notes and trade receivables (5,512) (4,483) (1,952)
(Increase) decrease in inventories (6,768) 1,449 5,503
Increase (decrease) in accounts payable 2,684 (2,353) 912
Decrease (increase) in restricted deposits 1,987 (16,623) -
Deferred taxes, income taxes payable and other, net 87,662 (4,888) (87)
------------- ------------- -------------
(617,443) (18,309) 19,148
------------- ------------- -------------
Net cash flows (used in) provided by operating activities (358,795) 6,104 32,816
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in Abex Merger, net of transaction costs - 174,837 -
Net proceeds from the Flavors Disposition 172,005 - -
Capital expenditures (6,997) (3,318) (2,686)
Purchase of PCT Common Stock - (33,653) -
Proceeds from the sale of fixed and other assets 10 3,318 6,232
Other, net (607) (7) (8)
------------- ------------- -------------
Net cash flows provided by investing activities 164,411 141,177 3,538
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings - - 50,000
Repayment of borrowings (8,731) (5,725) (57,439)
Repayment of revolving loans, net (13,803) (14,872) (19,100)
Purchase of Company Common Stock and Abex VSRs - (29,903) -
Net proceeds from the Cigar IPO 127,809 - -
Dividends paid - (14,000) -
Due to affiliates and other, net 1,984 1,233 (3,654)
------------- ------------- -------------
Net cash flows provided by (used in) financing activities 107,259 (63,267) (30,193)
------------- ------------- -------------
Effect of exchange rate changes on cash (70) 80 64
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (87,195) 84,094 6,225
Cash and cash equivalents at beginning of period 93,417 9,323 3,098
------------- ------------- -------------
Cash and cash equivalents at end of period $ 6,222 $ 93,417 $ 9,323
============= ============= =============
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest paid $ 23,059 $ 28,278 $ 27,128
Income taxes paid, net of refunds 3,590 6,789 7,731
</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 continued 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 is convertible, at the option of MC Group, into 2.5 million shares
of PCT Common Stock, subject to adjustments 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 Holdings Inc. ("Cigar Holdings"), and Flavors Holdings Inc.
("Flavors") with Abex, which was renamed Mafco Consolidated Group Inc. ("MC
Group" or the "Company"), as the surviving corporation in the Merger. Cigar
Holdings and Flavors conduct their business operations through their
respective wholly owned subsidiaries, Consolidated Cigar Corporation
("Consolidated Cigar") and Mafco Worldwide Corporation ("Mafco Worldwide"). 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 until April 1996 (See Note 3).
Pursuant to the Merger, Abex's stockholders immediately prior to the
effective time of the Merger (the "Effective Time"), 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, 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., formerly known as C&F (Parent) Holdings Inc. ("Mafco Consolidated
Holdings"), 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 were
distributed to Mafco Holdings immediately before the Merger.
F-7
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Beginning June 15, 1995, the date of the Merger, the
financial statements of the Company reflect the consolidated results of
Flavors through November 25, 1996, the date of the Flavors Disposition, as
described below, Cigar Holdings and the assets and liabilities of Abex
acquired in the Merger. For all periods from March 3, 1993, the first date
that Flavors and Cigar Holdings were under the common control of Mafco
Holdings, to June 15, 1995, the financial statements reflect the combined
results of Flavors and Cigar Holdings. 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):
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
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 without the need for any payment 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. 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.
On November 25, 1996, MC Group and PCT consummated the transactions
contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement").
Pursuant to the Purchase Agreement, among other things, all the issued and
outstanding shares (the "Shares") of capital stock of Flavors were sold (see
Note 3).
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.
F-8
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company currently operates in the tobacco products business. The
Company's tobacco products include cigars and pipe tobacco products
manufactured and distributed by Consolidated Cigar and licorice extract and
flavoring agents manufactured and distributed by Mafco Worldwide through
November 25, 1996, the date of the Flavors Disposition (See Note 3).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its majority and wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments of less than 50% but greater than 20% in affiliates are accounted
for on the equity method.
Revenue Recognition:
Revenue is recognized from product sales upon shipment. Allowances
for sales returns, customer incentive programs and promotions are recorded at
the time of sale.
Restricted Cash:
Restricted cash of $14.6 million and $16.6 million included in other
assets at December 31, 1996 and 1995, respectively, 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:
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. Cigar and other inventories are generally valued at the lower
of cost (using the first-in, first-out method) or market.
Property, Plant and Equipment:
Property, plant and equipment is recorded at cost and depreciated on
a straight-line basis over the estimated useful lives of such assets ranging
from 3 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. Accumulated amortization of trademarks was $3.3 million
and $2.5 million in 1996 and 1995, respectively.
F-9
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets Related to Businesses Acquired:
Intangible assets related to businesses acquired primarily represents
goodwill related to the 1993 Acquisition which is being amortized on a
straight-line basis over 40 years, consistent with industry practice. The
Company's accounting policy regarding the assessment of the recoverability of
the carrying value of goodwill is to review the carrying value of goodwill if
the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted future cash flows of the Company, the carrying value of goodwill
will be reduced to its estimated fair value. Accumulated amortization of
intangible assets related to businesses acquired was $6.6 million and $5.3
million in 1996 and 1995, respectively.
Impairment of Long-Lived Assets:
The Company accounts for the impairment of long-lived assets under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The adoption of SFAS 121 did not impact the
results of operations of the Company.
Advertising:
The Company expenses advertising costs as incurred. Amounts charged
to advertising expense totaled $2.1 million, $1.2 million and $0.9 million for
the years ended December 31, 1996, 1995 and 1994, respectively.
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 Mafco Consolidated Holdings in the Merger. The dilutive effect of
options outstanding under the Company's stock option plan is not material.
Interest Rate Swaps:
The Company entered into interest rate swap agreements to modify the
interest characteristics of its outstanding debt from a fixed to a floating
rate basis. These agreements involve the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related amount payable
to or receivable from counterparties is included in accrued expenses. To the
extent previous interest rate swap agreements have been terminated, the
resulting gain is being recognized over the remaining original life of the
terminated agreements. The fair values of the swap agreements (See Note 8),
are not recognized in the financial statements.
F-10
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Issuance of Subsidiary Stock:
The Company recognizes gains and losses on issuances of subsidiary
stock in its Consolidated Statements of Earnings.
Stock-Based Compensation:
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123, encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. (See Note 12.)
Income Taxes:
The Company computes income taxes under the liability method. Under
the liability method, deferred income taxes are generally determined based on
the difference between the financial statement and tax bases of assets and
effect in the years in which the differences are expected to reverse. Net
deferred tax assets are recorded when it is more likely than not that such tax
benefits will be realized.
Concentration of Credit Risk:
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
trade receivables from customers in the tobacco industry in excess of
allowances provided.
Cash Flow Information:
Cash equivalents are considered to be all highly liquid investments
with maturities of three months or less when acquired and exclude restricted
cash.
Use of Estimates:
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.
F-11
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACQUISITIONS AND DISPOSITIONS
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).
The Company accounts for its investment in PCT on the equity method.
At December 31, 1996, PCT had total assets, total liabilities, redeemable
convertible preferred stock, and stockholders' equity of $318.1 million,
$132.1 million, $20.0 million and $166.0 million, respectively. 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, 1996, PCT had
income from continuing operations, income from discontinued operations and net
income of $10.4 million, $158.1 million and $168.5 million, respectively. For
the year ended December 31, 1995, PCT had a loss from continuing operations,
income from discontinued operations and net income of $4.0 million, $16.9
million and $11.3 million, respectively. At December 31, 1996 the market value
of PCT Common Stock owned by the Company was $44.5 million.
On April 15, 1996, PCT sold its aerospace 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 and recognized a gain in discontinued operations of
$153.7 million.
On August 21, 1996, Cigar Holdings completed an initial public
offering of 6,075,000 shares of its Class A common stock (the "Cigar IPO").
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, the Company recorded a
gain of $127.8 million.
On November 25, 1996, the Company sold (the "Flavors Disposition") to
a subsidiary of PCT (i) all of the outstanding shares of Flavors common stock
and (ii) 23,156,502 Value Support Rights ("VSRs") for aggregate consideration
of approximately $297.3 million, consisting of $180.0 million in cash, the
assumption of approximately $110.1 million of indebtedness and deferred cash
payments to the Company of $3.7 million payable on June 30, 1997 and $3.5
million payable on December 31, 1997. The VSRs were subsequently distributed
to PCT shareholders, including 8,439,400 to the Company due to its ownership
of PCT Common Stock and PCT Preferred Stock.
F-12
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, subject to adjustment, on January 1, 1999; provided, however, the
Company 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 the Company 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, subject to adjustment, as of such Optional Call Date.
If the Company 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, subject to adjustment, on such
Optional Call Date.
The Company's VSR obligation (which excludes the 8,439,400 VSR's
received by the Company as a distribution from PCT) was accounted for at the
fair value on the date of issuance and was subsequently marked to the closing
market price of the security on December 31, 1996. The VSR obligation 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 adjustment.
The Company recorded a gain of $151.7 million in connection with the
Flavors Disposition, which is net of a deferral of $61.2 million corresponding
to the Company's continuing approximate 29% equity interest in PCT following
the Flavors Disposition. The deferral of $61.2 million was recorded as a
reduction of the Company's investment in PCT preferred and common stock.
4. INVENTORIES
Inventories consisted of the following:
(in thousands)
DECEMBER 31,
---------------------
1996 1995
------- -------
Raw materials $34,469 $59,742
Work-in progress 1,974 1,988
Finished goods 9,514 22,764
------- -------
$45,957 $84,494
======= =======
F-13
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
(in thousands)
DECEMBER 31,
---------------------
1996 1995
------- -------
Land $ 1,884 $ 2,259
Buildings 14,140 19,814
Machinery and equipment 33,220 47,888
Furniture and fixtures 1,614 2,190
Leasehold improvements 361 276
Construction-in-progress - 640
------- -------
51,219 73,067
Accumulated depreciation (13,942) (27,015)
------- -------
$37,277 $46,052
======= =======
Depreciation expense was $5.8 million, $5.5 million and $5.5 million
for the years ended December 31, 1996, 1995 and 1994, respectively.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
(in thousands)
DECEMBER 31,
---------------------
1996 1995
------- -------
Employee benefits, severance and
other compensation $ 21,535 $ 21,614
Interest 3,388 4,737
Taxes payable 42,179 219
Indemnification reserve and other
tax reserves (see Note 9) 11,500 11,500
Other 22,245 17,445
-------- --------
$100,847 $ 55,515
======== ========
The increase in accrued expenses primarily reflects the tax liability
related to the Flavors Disposition.
F-14
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. OTHER LIABILITIES
Other liabilities consisted of the following:
(in thousands)
DECEMBER 31,
---------------------
1996 1995
------- -------
Casualty reserves $ 10,718 $ 11,583
Employee benefits and other
compensation 75,005 72,916
Indemnification reserve and other
tax reserves (see Note 9) 15,900 15,900
VSR obligation 13,797 -
Other 51,810 56,451
-------- --------
$167,230 $156,850
======== ========
8. LONG-TERM DEBT
(in thousands)
DECEMBER 31,
---------------------
1996 1995
------- -------
Consolidated Cigar:
Bank Borrowings (a) $ 7,500 $ 20,600
Senior Subordinated Notes (b) 90,000 90,000
Mafco Worldwide(c):
Senior Credit:
Tranche A Term Loans $ - $ 14,000
Tranche B Term Loans - 19,800
11 7/8% Senior Subordinated Notes
Due 2002 - 84,510
-------- --------
97,500 228,910
Less: current portion - (10,232)
-------- --------
$ 97,500 $218,678
======== ========
- -------------
(a) Represents borrowings under a credit agreement (the "Cigar Credit
Agreement") with Chase dated February 23, 1993, which provides for a
revolving credit facility (the "Revolving Credit Facility") and a
working capital facility (the "Working Capital Facility"). The
Revolving Credit Facility and the Working Capital Facility have final
maturities on April 3, 1999. The Revolving Credit Facility was
subject to quarterly commitment reductions of $2.5 million through
the end of 1996. The Cigar Credit Agreement was amended on February
3, 1997 to reduce the amount of various interest rate margins charged
against outstanding borrowings and waive any further scheduled
amortization of the commitment on the Revolving Credit Facility.
The maximum borrowings under the Cigar Credit Agreement, as amended,
at the end of December 31, 1996 and through maturity are $20 million
under the Working Capital Facility and $14.9 million under the
Revolving Credit Facility. Outstanding letters of credit of
F-15
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
approximately $1.7 million reduced the available borrowings under the
Cigar Credit Agreement at December 31, 1996.
The following indicates the Cigar Credit Agreement's established and
amended interest payment rates available at the option of
Consolidated Cigar:
Initial 1996 Rate Effective
Rate Rate March 1997
---- ---- ----------
Base Rate Loans Prime plus 1 3/4% 1% 0%
936 Loans 936 Rate plus 2 3/4% 2% 1%
Eurodollar Funds Eurodollar plus 2 3/4% 2% 1%
The average interest rate under the Cigar Credit Agreement was
approximately 7.7% at December 31, 1996.
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
Consolidated Cigar's subsidiaries (with certain exceptions for the
stock of foreign subsidiaries). The Cigar Credit Agreement is
guaranteed by the Company and by all of the domestic subsidiaries of
Consolidated Cigar. The guarantee by the Company is secured by a
pledge of all the outstanding stock of Consolidated Cigar.
The 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 Consolidated
Cigar to satisfy certain financial covenants related to net worth,
capital expenditures and various ratios.
(b) Represents the $90.0 million in principal amount of 10 1/2% Senior
Subordinated Notes Due 2003 (the "Senior Subordinated Notes") issued
in connection with the 1993 Acquisition.
The Senior Subordinated Notes bear interest at the rate of 10 1/2%
per annum, mature on March 1, 2003 and are redeemable at a premium
prior to maturity starting March 1, 1998. The Senior Subordinated
Notes are redeemable earlier at a premium in the event of a change of
control.
The indenture relating to the Senior Subordinated Notes limits, among
other things, dividends and other distributions, certain types of
indebtedness, certain mergers, consolidations and sales of assets.
The terms of the Cigar Credit Agreement and the Senior Subordinated
Notes of Consolidated Cigar limit the payment of dividends or distributions by
Consolidated Cigar to an amount equal to approximately $9.3 million as of
December 31, 1996.
F-16
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(c) In connection with the Flavors Disposition, PCT assumed Mafco
Worldwide's obligations under the Senior Credit and its 117/8% Senior
Subordinated Note indenture. Obligations under the Senior Credit bore
interest at November 25, 1996 at approximately 8.20%.
The fair value of the Company's long-term debt at December 31, 1996
is estimated based on the quoted market prices for the same issues or on the
current rates offered to the Company for debt of the same remaining
maturities. The estimated fair value of long-term debt was approximately $3.6
million more than the carrying value of $97.5 million.
In 1994, the Company recorded an extraordinary loss of $2.7 million,
net of $1.7 million tax benefit, 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.
Because judgment is required in interpreting market data to develop
estimates of fair value, the estimates are not necessarily indicative of the
amounts that could be realized or would be paid in a current market exchange.
The effect of using different market assumptions or estimation methodologies
may be material to the estimated fair value amounts.
Consolidated Cigar entered into two five year interest rate swap
agreements in an aggregate notional amount of $85.0 million. Under the terms
of the agreements, Consolidated Cigar receives a fixed interest rate averaging
5 4/5% and pays a variable interest rate equal to the six month LIBOR.
Consolidated Cigar entered into such agreements to take advantage of the
differential between long-term and short-term interest rates and effectively
converted the interest rate on $85.0 million of fixed-rate indebtedness to a
variable rate. From inception of the agreements through January 1997
Consolidated Cigar has paid $0.8 million in settlement, which occurs at the
end of each six month period of the agreements. Had Consolidated Cigar
terminated these agreements, which the Company considers to be held for other
than trading purposes, on January 31, 1997, a combined loss of approximately
$1.1 million would have been realized. Future positive or negative cash flows
associated with these agreements will depend upon the trend of short-term
interest rates during the remaining life of the agreements. In the event of
non-performance of the counterparties at anytime during the remaining lives of
these agreements which expire at December 1998 and January 1999, the Company
could lose some or all of any future positive cash flows. However, the Company
does not anticipate non-performance by such counterparties.
9. INCOME TAXES
Information pertaining to consolidated income from continuing
operations before income taxes and extraordinary item and the applicable
provision for income taxes, excluding amounts related to discontinued
operations and to the extraordinary item, is as follows:
F-17
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- ----
Income from continuing operations
before income taxes:
Domestic $320,035 $13,437 $ 8,567
Foreign (includes Puerto Rico) 28,385 19,357 15,246
-------- ------- -------
$348,420 $32,794 $23,813
======== ======= =======
Provision (benefit) for income taxes:
Current:
Federal $ 41,215 $ 2,827 $ 3,477
State and local 9,995 1,442 809
Foreign 2,712 1,941 2,036
-------- ------- -------
53,922 6,210 6,322
Deferred:
Federal 50,699 2,794 963
State and local (675) 108 174
Foreign 878 591 19
-------- ------- -------
$104,824 $ 9,703 $ 7,478
======== ======= =======
The effective tax rate on consolidated income from continuing
operations before income taxes varies from the current statutory federal
income tax rate as follows:
1996 1995 1994
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Foreign income taxed at other than the
statutory tax rate (1.0) (8.5) (7.4)
Non-deductible amortization 0.2 1.9 2.7
Permanent benefit on sale of Flavors
resulting from basis difference
in goodwill (11.9) - -
State and local taxes, net 1.7 3.1 3.0
Increase (Decrease) in valuation allowance 6.1 (1.8) (2.5)
Other, net - (0.1) 0.6
------ ------ ------
30.1% 29.6% 31.4%
====== ====== ======
The approximate effect of the temporary differences that gave rise to
deferred tax balances were as follows:
F-18
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
DECEMBER 31,
--------------------------
1996 1995
---- ----
Deferred tax assets:
Accounts receivable $ 1,930 $ 2,078
Inventory - 466
Prepaid and other 2,914 2,914
Property, plant and equipment - 933
Long term investments and other 23,184 4,277
Pension liability - 607
Accrued expenses and other 6,654 7,116
Employee benefits and other
compensation 27,092 25,108
Other long term liabilities 11,109 5,384
Net operating loss carryforwards - 4,900
-------- -------
Total deferred tax asset 72,883 53,783
Valuation allowance (23,864) -
-------- -------
Total deferred tax asset net of
valuation allowance 49,019 53,783
-------- -------
Deferred tax liabilities:
Subsidiary stock issuance $ 44,769 $ -
Property, plant and equipment 3,473 3,474
Pension asset 22,199 20,035
Unremitted foreign earnings 2,521 2,179
Other 385 403
-------- -------
Total deferred tax liability 73,347 26,091
-------- -------
Net deferred tax asset (liability) $(24,328) $27,692
======== =======
As a result of the pension plan merger in 1995 (see 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.
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.
F-19
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign income primarily consists of Puerto Rico and Dominican
Republic income. Pursuant to a grant of industrial tax exemption which expires
in 2002, 90% of the income earned from the manufacture of cigars in Puerto
Rico is tax exempt from Puerto Rican income taxes. The remaining 10% of such
income is taxed at a maximum surtax rate of 45%, resulting in an effective
income tax rate of approximately 4.5%.
The benefit to the Company amounted to approximately $3.5 million for the year
ended December 31, 1994, $5.1 million for the year ended December 31, 1995,
and $7.4 million for the year ended December 31, 1996.
Funds repatriated to the Company from its Puerto Rico subsidiary are
subject to a maximum Puerto Rico tollgate tax of 10%. Legislation enacted in
Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.
The Company manufactures cigars in the Dominican Republic pursuant to
a 100% exemption from Dominican Republic income taxes, which exemption expires
in 2010.
Income earned from Puerto Rico operations is generally exempt from
federal income tax. Section 936 of the Internal Revenue Code allows a
"possessions tax credit" against U.S. income tax attributable to the Puerto
Rico taxable earnings. As part of OBRA 1993, the Internal Revenue Service has
limited this exemption based upon a percentage of qualified wages in Puerto
Rico, plus certain amounts of depreciation. The Company believes that it
qualified for the possessions tax credit during each of the fiscal years ended
1994, 1995 and 1996.
On August 20, 1996, the Small Business Job Protection Act of 1996
(the "SBJPA") was enacted into law. Under the SBJPA, Section 936 of the
Internal Revenue Code, the possessions tax credit was repealed, subject to
special grandfather rules for which the Company would be eligible, provided
that the Company does not add a "substantial new line of business." Under the
grandfather rules, for the Company's taxable years beginning December 31, 2001
and before January 1, 2006, the Company's business income from its Puerto Rico
operations eligible for the possessions tax credit would, in addition to the
current limitation based upon a percentage of qualified wages in Puerto Rico,
plus certain amounts of depreciation, generally be limited to its average
annual income from its Puerto Rico operations, adjusted for inflation,
computed during the Company's five most recent taxable years ending before
October 14, 1995 and excluding the highest and lowest years (the "Income
Limitation"). For taxable years after December 31, 2005, the possessions tax
credit would be eliminated. The repeal of the possessions tax credit could
have a material adverse effect on the Company for taxable years beginning
after December 31, 2001 and before January 2006 to the extent that the
Company's annual income from its Puerto Rico operations exceeds its average
annual income from its Puerto Rico operations (as computed in the manner
described in the preceding sentence), and for taxable years after December 31,
2005. Although it does not currently have any definitive plans with respect
thereto, the Company expects to evaluate alternatives that may be available to
it in order to mitigate the effects of the SBJPA. On February 6, 1997,
President Clinton proposed certain tax law changes which, if enacted, would
eliminate the Income Limitation, extend the possession tax credit indefinitely
and make the credit available to newly established business operations.
F-20
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $7.0 million, which is an obligation of the Company, remain
open as of December 31, 1996.
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
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.
Management believes that reserves as of December 31, 1996 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
F-21
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
benefits for each year of service. Plan assets consist primarily of equity and
fixed income securities and mutual 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 $27.1 million and $26.1 million
at December 31, 1996 and 1995, respectively, are held by a rabbi trust and are
presented as other assets in the Company's balance sheet 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 $2.1 million and $2.6 million at December 31, 1996 and 1995, respectively,
and is included in other liabilities.
The following table reconciles the funded status of the Company's
significant pension plans as of the date indicated:
<TABLE>
<CAPTION>
(IN THOUSANDS)
DECEMBER 31,
--------------------------------------------------------------------------
1996 1995
----------------------------------- ---------------------------------
ASSETS ACCUMULATED ASSETS ACCUMULATED
EXCEED BENEFITS EXCEED BENEFITS
ACCUMULATED EXCEED ACCUMULATED EXCEED
BENEFITS ASSETS BENEFITS ASSETS
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligation:
Accumulated benefit obligation
includes vested benefits of
$127,258 and $27,874 in 1996
and $127,847 and $28,527 in 1995 $ 127,834 $ 27,938 $ 128,935 $ 28,535
========= ======== ========= ========
Projected benefit obligation for
service rendered to date 133,095 28,259 135,180 28,684
Less: plan assets at fair value (202,211) - (195,579) -
--------- -------- --------- --------
Projected benefit obligation in excess
of (less than) plan assets (69,116) 28,259 (60,399) 28,684
Unrecognized transition asset
(obligation) 62 - (182) -
Unrecognized prior service benefit (cost) 219 (541) 1 (309)
Unrecognized net (loss) gain 6,080 404 5,264 (452)
Adjustment for minimum liability - 198 - -
--------- -------- --------- --------
Net pension (asset) liability $ (62,755) $ 28,320 $ (55,316) $ 27,923
========= ======== ========= ========
</TABLE>
Pension liabilities are included in accrued expenses and other
liabilities.
F-22
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7 1/4% in 1996 and
7 1/4%-7 1/2% in 1995. The rate of increase in future compensation levels
reflected in such determination was 4 1/2% in 1996 and 4%-5% in 1995. The
assumed long-term rate of return on assets was 8-9% for 1996, 6 1/2%-9% for
1995 and 7%-8 1/4% for 1994. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service's minimum
funding standards.
Pension (income) expense includes the following components for the
years ended December 31, 1996, 1995 and 1994 respectively:
(in thousands)
1996 1995 1994
---- ---- ----
Service cost-benefits earned during
the period $ 1,047 $ 800 $ 893
Interest cost on projected benefit
obligation 12,525 7,416 2,194
Actual return on plan assets (31,945) (20,732) (827)
Net amortization and deferrals 14,548 11,594 (685)
-------- ------- -------
Net pension (income) expense $ (3,825) $ (922) $ 1,575
======== ======= =======
In addition, the Company maintains certain 401(k) plans for which the
expense for matching contributions was $436,000, $273,000 and $280,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
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 made
payments of $4.3 million in 1996 and $2.6 million in 1995 from the date of the
Merger. 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, 1996 and 1995:
(in thousands)
------------------
1996 1995
---- ----
Accumulated postretirement benefit
obligation:
Retirees $ 41,681 $ 41,800
Fully eligible active plan participants - 1,300
-------- --------
Postretirement benefit liability $ 41,681 $ 43,100
======== ========
Unrecognized items at December 31, 1996 and 1995 were not
significant. Net periodic postretirement benefit costs other than pensions
attributable to interest on the accumulated post-
F-23
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
retirement benefit obligation was $2.9 million for December 31, 1996 and $1.7
million in 1995 from the date of the Merger on June 15, 1995. For measurement
purposes, a 5.5%-8% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 1997 declining to 5.5% 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% at December 31, 1996 and 1995.
12. STOCK BASED COMPENSATION
Under the terms of the Company's 1995 stock option plan (the "MC
Group Stock Option Plan"), 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 MC Group Stock
Option Plan. The MC Group options vest one-third each year beginning on the
first anniversary of the date of grant and become 100% vested on the third
anniversary of the date of grant.
The following table summarizes the stock option transactions under
the MC Group Stock Option Plan and the grant of 750,000 options to the
Chairman of the Board of Directors for services rendered and to be rendered to
the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995
------------------------- -------------------------
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- ----- ------- -----
<S> <C> <C> <C>
Outstanding - beginning of year 750,000 $ 17.38 - $ -
Granted 875,000 21.57 750,000 17.38
--------- -------
Outstanding at year end 1,625,000 19.63 750,000 17.38
Exercisable at year end 791,667 250,000
Weighted average fair value of
options granted during the year 10.08 7.31
Weighted aaverage remaining
contractual life of options
outstanding (in years) 9.27 9.92
</TABLE>
Cigar Holdings adopted its 1996 stock plan (the "Cigar Stock Option
Plan") prior to the effectiveness of the Cigar IPO. Under the Cigar Stock
Option Plan, incentive stock options, non-qualified stock options, stock
appreciation rights, restricted and unrestricted stock (collectively
"Awards"), may be granted to selected employees, consultants and directors of
Cigar Holdings, and any of its affiliates, from time to time. The aggregate
number of shares of Cigar Holdings common stock as to which options and rights
may be granted under the Cigar Stock Option Plan may not exceed 3,000,000. As
of December 31, 1996 there were 1,237,500 shares of Cigar Holdings
non-qualified options outstanding that were issued to officers and employees,
1,150,000 shares at an exercise price equal to the initial public offering
price of $23.00 per share and 87,500 shares at $25.00 per share. None of the
Cigar Holdings option shares were exercisable at December 31, 1996 and
1,762,500 shares remained available for future grants. These Cigar Holdings
options vest one-third each year
F-24
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning on the first anniversary of the date of grant and become 100% vested
on the third anniversary of the date of grant. The weighted average fair value
of Cigar Holdings options granted in 1996 is $16.91 per share. At December 31,
1996 the weighted average exercise price of the Cigar Holdings options
outstanding is $23.14 and the weighted average remaining contractual life of
those options is 9.75 years.
The exercise price of the stock options issued were equal to the
market price of the respective companies' stock on the dates of grant,
accordingly, no compensation cost has been recognized for stock options
issued. Had compensation cost for the stock options issued by the Company and
Cigar Holdings been determined based on the fair value at grant date for
awards in 1995 and 1996 consistent with the provisions of SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
------ ------
(IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income - as reported $ 258,648 $ 24,413
Net income - pro forma 250,338 21,063
Income per share -
as reported 11.13 1.12
Income per share -
pro forma 10.77 0.97
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants under the MC Group Stock Option Plan in 1996
and 1995, respectively: dividend yield of 0.0%; expected volatility of 50.9%
and 45.6%; risk-free interest rate of 6.52% and 5.37%; and expected life of 4
years. The following weighted-average assumptions were used for grants under
the Cigar Stock Option Plan in 1996: dividend yield of 0.0%; expected
volatility of 90%; risk-free interest rate of 6.13%; and expected life of 5
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The Chief Executive Officer of the Company has been granted the right
to receive a special payment of up to $5.5 million which is deferred and is
dependent upon the overall performance of the Company's Common Stock. At
December 31, 1996, the Company has accrued the earned and vested portion of
the special payment right.
F-25
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. 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 1996 and
1995, the amount allocated to the Company was $624,549 and $436,414,
respectively. 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 $958,000, $874,000 and $763,000 for
the years ended December 31, 1996, 1995 and 1994.
Included in accrued expenses and other liabilities are payables to
Mafco Holdings and affiliates in the amount of $39.1 million and $2.0 million
at December 31, 1996 and 1995, respectively, principally related to income
taxes payable to Mafco Holdings pursuant to a tax sharing agreement (See
Note 9).
14. COMMITMENTS AND CONTINGENCIES
Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2008, amounted to $2.5
million, $2.3 million and $2.3 million for the years ended December 31, 1996,
1995 and 1994 respectively. Future minimum rental commitments, which include
obligations related to former operations of Abex, for operating leases with
noncancelable terms in excess of one year from December 31, 1996, net of
sublease payments of $11.9 million, are as follows:
(IN THOUSANDS)
--------------
1997 $ 2,717
1998 2,836
1999 2,678
2000 1,670
2001 and thereafter 2,790
--------
$12,691
========
At December 31, 1996, outstanding contracts to purchase tobacco
amounted to $7.3 million which were all U.S. dollar obligations.
Under a June 15, 1995 Transfer Agreement to which PCT and a
subsidiary of MC Group are parties, such subsidiary will reimburse PCT for
amounts spent in excess of $1.5 million during each of the years 1996, 1997
and 1998 in connection with certain public company costs. The amount spent for
such costs by PCT in the 1996 and 1995 periods did not exceed $1.5 million;
therefore, no reimbursement was made.
F-26
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 21, 1997, 19,777,752 shares, or approximately 85% of the
Company's stock were pledged and shares of intermediary holding companies may
from time to time be pledged, to secure indebtedness of Mafco Holdings or its
affiliates.
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. The Company has
also assumed responsibility for various other matters relating to businesses
formerly conducted by Abex or its predecessors.
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 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 which were recently sold to
F-27
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Parker Hannifin. 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, 1997, Pneumo Abex
or the predecessor has 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
F-28
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
such claims are not subject to the Whitman indemnity. Pneumo Abex maintained
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,
1996, the Company has approximately $8.8 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, Abex and Henley allocated
between them certain liabilities related to the businesses of Henley or its
predecessors, including certain liabilities relating to self-insurance
programs, and each indemnified the other against loss associated with
liabilities assumed by the indemnifying party. In addition, Abex guaranteed
certain contingent obligations of Koll relating to a predecessor company
pension plan and environmental liabilities of Henley and certain of its
predecessors, and Koll agreed to indemnify Abex in respect thereof. During the
first quarter of 1997, the Company, Koll and certain of its subsidiaries
entered into certain agreements (the "1997 Koll Agreements") pursuant to
which, among other things, the parties re-allocated certain liabilities
relating to the self-insurance programs, the Company agreed to assume
sponsorship of, and financial responsibility for, the predecessor Company
pension plan referred to above, the Company paid to Koll $2.3 million, and the
Company received $0.5 million from a third party in connection with the sale
of
F-29
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
an asset by Koll. The Company believes that its balance sheet at December 31,
1996 reflects adequate reserves for its remaining obligations under the 1997
Koll Agreements with respect to these matters. Furthermore, Koll has been
discharging its assumed and indemnification responsibilities in the ordinary
course. 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, that
liability for the discharge of the Company's remaining guarantee and
indemnification obligations would have a material adverse effect on its
financial position or results of operations even if Koll's financial
circumstances, as described in Note 9, were to cause Koll to stop discharging
its responsibilities.
In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to personal injury claims arising out of the operations of
either the passenger rail car business of Pullman Incorporated ("Pullman"), a
predecessor of Koll and the Company, or the business of Pullman Passenger Car
Company, a subsidiary of Koll (collectively, the "Pullman Claims"). Koll also
transferred to the Company all of the rights that Koll and such subsidiaries
may have against Wheelabrator Technologies Inc., another predecessor of Koll
and the Company, with respect to the Pullman Claims. As of the date of the
Company's assumption of the Pullman Claims, Koll was defending approximately
360 claims that individuals had contracted asbestos-related diseases by reason
of their work maintaining or repairing Pullman cars. Management believes that
costs related to these approximately 360 claims will not have a material
adverse effect on the Company.
15. 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, equity in earning
from continuing operations of PCT, 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.
F-30
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GEOGRAPHIC AREAS:
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---- ---- ----
Net Sales (a):
Domestic - U.S. $ 269,725 $ 217,394 $ 187,513
- Export 24,877 26,032 25,425
Foreign 16,057 17,700 13,941
--------- --------- ---------
$ 310,659 $ 261,126 $ 226,879
========= ========= =========
Operating Profit:
Domestic $ 85,684 $ 61,502 $ 50,656
Foreign (b) 4,139 3,476 2,506
Corporate (9,070) (9,740) -
--------- --------- ---------
$ 80,753 $ 55,238 $ 53,162
Net interest expense and financing
charges (11,889) (22,444) (29,349)
Gain on Cigar IPO and Flavors
Disposition 279,556 - -
--------- --------- ---------
Income from continuing operations
before income taxes $ 348,420 $ 32,794 $ 23,813
========= ========= =========
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
1996 1995
---- ----
Identifiable assets:
Domestic (c) $ 193,867 $ 237,303
Foreign 1,852 18,919
Corporate 573,782 304,377
--------- ---------
$ 769,501 $ 506,599
========= =========
- ------------
(a) The Company had no intercompany sales from their U.S. businesses to
their foreign businesses in 1996, 1995 and 1994. Sales from their
foreign businesses to their U.S. businesses were $39,457, $23,084 and
$17,473 for the years ended December 31, 1996, 1995 and 1994,
respectively. Such amounts are excluded from the above table.
(b) Includes foreign currency transaction gain of $756, $40 and $215 in
1996, 1995 and 1994, respectively.
(c) Includes assets located in foreign countries of $15,161 and $14,071
at December 31, 1996 and 1995, respectively.
F-31
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of unaudited quarterly financial
information for the quarterly periods in 1996 and 1995:
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1996
---------------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- --------
Net sales $66,168 $78,577 $85,635 $ 80,279
Gross profit 27,866 34,212 36,434 34,293
Income from continuing
operations 7,640 9,886 98,025(a) 128,045(b)
Net income 8,311 23,883 98,409(a) 128,045(b)
Net income per share $ .36 $ 1.03 $ 4.24 $ 5.51
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1995
---------------------------------------------
FIRST SECOND THIRD FOURTH
------- -------- ------- --------
Net sales $58,353 $68,236 $68,679 $65,858
Gross profit 23,804 28,210 27,984 27,106
Income from continuing
operations 4,556 7,885 3,944 6,706
Net income 4,556 7,885 4,604 7,368
Net income per share $ .23 $ .38 $ .20 $ .32
- ------------------
(a) Reflects the gain on the Cigar IPO.
(b) Reflects the gain on the Flavors Disposition.
17. SUBSEQUENT EVENTS
On February 20, 1997, Mafco Consolidated Holdings entered into an
Agreement and Plan of Merger (the "1997 Merger Agreement") with MC Group
whereby Mafco Consolidated Holdings will buy the remaining 15% of MC Group
that it does not already own. Pursuant to the 1997 Merger Agreement, each
outstanding share of MC Group Common Stock (other than shares held by Mafco
Consolidated Holdings) will be converted into the right to receive $33.50 in
cash, subject to upward adjustment (the "Merger Consideration"). Additionally,
on February 20, 1997, in connection with the 1997 Merger Agreement, MC Group
declared a special cash dividend of $10 per share which was paid on March 14,
1997 to stockholders of record as of the close of business on March 10, 1997.
In addition, pursuant to the 1997 Merger Agreement the Company has agreed to
make cash payments aggregating $38.8 in respect of outstanding stock options.
The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares
F-32
<PAGE>
MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Cigar Common Stock.
The 1997 Merger Agreement has been unanimously approved by the Boards
of Directors of each company and, in the case of MC Group, by a special
committee of independent directors formed to consider the transaction. The
consummation of the transaction is subject to the approval of MC Group
stockholders, the filing with and review by the Securities and Exchange
Commission of an information statement to be sent to Mafco stockholders, and
other customary conditions. Mafco Consolidated Holdings, which owns
approximately 85% of the outstanding shares of MC Group common stock, has
agreed to vote in favor of the transaction, which is expected to close during
the second quarter of 1997.
In January 1997, six purported class-action lawsuits and one
purported derivative and class- action lawsuit were filed in the Delaware
Court of Chancery (the "Chancery Court"), under the captions Alan R. Kahn v.
Ronald O. Perelman, et al., C.A. No. 15450; Sandy Rywell v. Ronald O.
Perelman, et al., C.A. No. 15468; Crandon Capital Partners v. Ronald O.
Perelman, et al., C.A. No. 15469; Harry Voege v. Ronald O. Perelman, et al.,
C.A. No. 15470; Harry Polikoff v. Mafco Consolidated Group Inc., et al., C.A.
No. 15471; Sal S. Shiry v. Ronald O. Perelman, et al., C.A. No. 15475; and
Jack Fishbaum v. Mafco Consolidated Group Inc., et al., C.A. No. 15481
(collectively, the "Actions"). The Actions allege certain acts allegedly taken
or not taken by the Company and the members of the board of directors in
connection with the proposed transaction that ultimately culminated in the
1997 Merger Agreement and the price originally proposed to be paid for the
Company Common Stock and allege that Andrews Group Incorporated and MC Group's
board of directors breached fiduciary obligations to the Company's
stockholders by entering into certain transactions with Marvel Entertainment
Group, Inc. and Toy Biz, Inc. (the "Marvel and Toy Biz Transactions"), which
transactions were allegedly corporate opportunities of the Company. The
Actions seek to enjoin the consummation of the Merger Agreement and the Marvel
and Toy Biz Transactions, as well as damages and an award of attorneys' fees.
On March 17, 1997, the parties to all of the Actions except Fishbaum executed
a Memorandum of Understanding setting forth the terms of their agreement in
principle to settle these Actions. The Memorandum of Understanding
acknowledges the enhanced terms for stockholders set forth in the Merger
Agreement and provides that settling plaintiffs may seek up to $1.25 million
in attorney's fees. The Memorandum of Understanding contemplates the drafting
and execution of a Stipulation of Settlement by the parties and its approval
by the Chancery Court, which approval is expected to occur in the third
quarter of 1997.
On March 26, 1997, Cigar Holdings completed a public offering of
5,000,000 shares of the Cigar Common Stock at an offering price of $23.75 per
share. All of the shares sold were owned by MC Group. In addition, the
underwriters have been granted an overallotment option to purchase an
additional 750,000 shares, which as of the date hereof has not been exercised.
F-33
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) PERIOD
----------- --------- -------- ------------- ------
<S> <C> <C> <S> <S>
Year ended December 31, 1994
Deducted from asset accounts:
Sales allowances $ 2,734 $ - $ - $ 2,734
Allowance for doubtful accounts 1,867 145 (61) 1,951
Inventory reserves 514 247 - 761
------- -------- ---------- --------
Totals $ 5,115 $ 392 $ (61) $ 5,446
======= ======== ========== ========
Year ended December 31, 1995
Deducted from asset accounts:
Sales allowances $ 2,734 $ 650 $ - $ 3,384
Allowance for doubtful accounts 1,951 206 (190) 1,967
Inventory reserves 761 198 (137) 822
------- -------- ---------- --------
Totals $ 5,446 $ 1,054 $ (327) $ 6,173
======= ======== ========== ========
Year ended December 31, 1996
Deducted from asset accounts:
Sales allowances $ 3,384 $ 1,557 $ - $ 4,941
Allowance for doubtful accounts 1,967 (634) (670) 663
Inventory reserves 822 818 (339) 1,301
------- -------- ---------- --------
Totals $ 6,173 $ 1,741 $ (1,009) $ 6,905
======= ======== ========== ========
</TABLE>
- ---------
(1) Doubtful accounts written off, less recoveries, reclassifications and
foreign translation adjustment and effects of businesses sold.
F-34
<PAGE>
MUTUAL RELEASE AND SETTLEMENT AGREEMENT
This MUTUAL RELEASE AND SETTLEMENT AGREEMENT (the
"Agreement") is entered into as of the 11th day of March, 1997
(the "Effective Date"), by and between MAFCO CONSOLIDATED GROUP
INC., formerly Abex Inc. ("MAFCO") and NEW ABCO HOLDINGS INC.
("Abco" and, together with MAFCO, the "Abex Parties"), on the one
hand, and KOLL REAL ESTATE GROUP, INC. ("KREG"), THE HENLEY
GROUP, INC. ("Henley III") and NEW HENLEY HOLDINGS INC. ("New
Henley Holdings" and, together with KREG and Henley III, the
"KREG Parties"), on the other hand.
RECITALS
This Agreement is made with respect to the following facts:
1. The Abex Parties and the KREG Parties are currently in discussion
over their respective rights, duties and obligations under a number of
agreements, including (a) that certain Restated Transfer, Assignment, and
Assumption Agreement (the "Assignment and Assumption Agreement") dated as of
July 16, 1992, between New Henley Holdings and MAFCO, then known as Abex Inc.,
and (b) that certain Pension Agreement dated as of July 16, 1992, among KREG,
then known as The Bolsa Chica Company, Henley III and MAFCO (the "Pension
Agreement").
2. The discussion involves, among other matters, disputes arising
over the following issues:
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<PAGE>
A. New Henley Holdings alleges that MAFCO breached the
Assignment and Assumption Agreement in failing to assume all liability and
defense costs for past, present and future product liability or completed
operations liability in respect of:
(i) any of the businesses conducted by the
passenger rail car operations of Pullman Incorporated ("Pullman"), or any
affiliate, company or division thereof, which is or alleged to be the
predecessor-in-interest or successor-in-interest to Pullman's passenger rail
car operations ("Pullman Claims");
(ii) any of the businesses conducted by the
Pullman Passenger Car Company ("PPC"), or any affiliate, company or division
thereof, which is or alleged to be the predecessor- in-interest or the
successor-in-interest to any such business including, but not limited to, the
claims listed in Exhibit 1 attached hereto (hereafter "PPC Claims"). Mafco
denies any such breach.
A. MAFCO alleges that it has paid or received invoices for
Uninsured Retention Liabilities (as defined in the Assignment and Assumption
Agreement) in excess of the Casualty Reserve Limits set forth in Exhibit A to
Schedule II of the Assignment and Assumption Agreement with respect to the
Wolverine, TM Leasing-Miami and Bunker Ramo categories (collectively, the
"Exceeded Categories"), the amount of such excess being approximately $96,000,
$86,400, and $8,000
-2-
<PAGE>
respectively as of December 31, 1996. MAFCO further alleges that such excess
amounts are the responsibility of KREG. KREG denies such liability.
B. MAFCO alleges that it has paid or received invoices for
amounts due with respect to workers compensation claims relating to Procon
International, Inc. ("Procon"), which invoices total approximately $139,000
and $118,500. MAFCO further alleges that such invoices are the responsibility
of KREG under the Assignment and Assumption Agreement. KREG denies such
liability.
C. New Henley Holdings is the owner of record of 100,000
shares of common stock of Winfield Medical, formerly known as Winfield
Industries ("Winfield"). The Abex Parties allege that Abco is the beneficial
owner of such shares. KREG denies that Abco has any legal or beneficial
ownership of such Winfield shares, or that Abco assumed in connection with the
1992 transactions reflected in part in the Assignment and Assumption Agreement
any beneficial interest in any other property owned by any of the KREG Parties
as of the Effective Date.
D. Nichols Engineering and Research Corporation ("Nichols"),
an indirect subsidiary of KREG, and/or one or more of the KREG Parties have
been named in two environmental clean-up actions: (1) a New Jersey state
enforcement action for ground water remediation in Hillsborough, New Jersey,
under NJPDES permit No. NJ0074713 ("Belle Mead"), and (2) a civil action
-3-
<PAGE>
entitled Svedala Industries, Inc. v. John Wills, Inc., et al., Superior Court
of New Jersey, Docket No. MRS L-3814-93 ("Svedala"). KREG alleges that it has
paid approximately $1,185,299 through June 30, 1996 to respond to these two
clean-up actions. KREG further alleges that MAFCO assumed liability for the
Belle Mead and Svedala claims under the Assignment and Assumption Agreement.
MAFCO denies that it has any responsibility for the Belle Mead and Svedala
claims.
E. KREG alleges that it has incurred approximately $768,831
through June 30, 1996 in defending and settling claims generically described
as follows: (1) M.W. Kellogg asbestos litigation; (2) Whiting asbestos
litigation; (3) Signal Landmark construction defects litigation; and (4) Heat
Research Corporation product liability litigation. KREG further alleges that
such sums are the responsibility of MAFCO because they fall within the Henley
Properties Inc. category of Uninsured Retention Liabilities (the "Henley
Properties Category") set forth in Exhibit A to Schedule II of the Assignment
and Assumption Agreement. MAFCO denies that it has at least a portion of this
liability.
F. The items identified in parts "A" through "F" of this
paragraph 2 are collectively referred to as the "Disputes."
2. MAFCO alleges that it has paid or received invoices as of December
31, 1996, for all but $4,916,571 of the amount it is required to pay with
respect to the Henley Properties Category.
-4-
<PAGE>
3. The Parties believe that it is in their mutual interest to resolve
amicably their differences with respect to the Disputes in order to avoid the
uncertainty, expense, inconvenience and burden of protracted litigation, and,
subject to the terms and conditions of this Agreement, to resolve any and all
claims, causes of action and liabilities, known or unknown, that the Parties
ever had, now have or hereafter could, shall or may have against each other
arising out of or relating to the Disputes or the Pension Agreement, and to
compromise and eliminate the remainder of the Casualty Reserve Limit available
as of December 31, 1996 with respect to the Henley Properties
Category.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing facts and the terms
and conditions set forth in this Agreement, the Parties agree as follows;
3. Payment. Concurrently with the execution of this Agreement, MAFCO
shall pay KREG the sum of $2,250,000 in cash via wire transfer to:
Wells Fargo Bank, San Francisco
ABA # 121000248
WFB Account # 4068-000769
For Further Credit to A/C #324-143328
Account Name: Koll Real Estate Group, Inc.
Attn: Rod Ocmond - (415) 396-7179
4. Casualty Reserve Limits.
-5-
<PAGE>
A. Accounting. MAFCO represents and warrants that it has
made all reasonable efforts to prepare in good faith a true, correct and
complete accounting of all invoices or claims received as of December 31, 1996
under each category of the Uninsured Retention Liabilities as measured against
the Casualty Reserves Limits (as set forth in Exhibit A to Schedule II of the
Assignment and Assumption Agreement), a summary of which accounting is
attached hereto as Exhibit 2 and that it has not received any further invoices
or requests for payment related to the Henley Properties Category or any of
the Categories through the Effective Date hereof except as set forth in
Exhibit 2. KREG shall have no liability for any invoices not disclosed in
Exhibit 2, and which the Abex Parties have received or had actual knowledge of
prior to the Effective Date.
B. Payments Under The Henley Properties Category. MAFCO
shall pay, cause to be paid, or deliver to KREG a sufficient amount (in
addition to the amount set forth in paragraph 1 above) so that it may pay all
invoices and other requests for payment actually received by it on or prior to
December 31, 1996 from any person with respect to the Henley Properties
Category and the Exceeded Categories. MAFCO shall deliver to KREG a sufficient
amount (in addition to the amount set forth in paragraph 1 above) so that it
may pay invoices totalling $38,554 received after December 31, 1996 with
respect to the defense of certain Kellogg asbestos matters. Other than
-6-
<PAGE>
the obligation set forth in the preceding sentence, none of the Abex Parties
shall have any obligation now or in the future with respect to the Henley
Properties Category or any liability within the scope of the Henley Properties
Category, including without limitation (a) any liability with respect to M.W.
Kellogg asbestos litigation, Whiting asbestos litigation, Signal Landmark
construction defects litigation or Heat Research Corporation product liability
litigation, or (b) any obligation to pay any amount that (i) may have been
paid or incurred by KREG or (ii) may be invoiced to MAFCO subsequent to
December 31, 1996 with respect to the Henley Properties Category. Promptly
after the execution of this Agreement, KREG and MAFCO shall jointly notify in
writing, in the form attached hereto as Exhibit 3, (a) the insurers and any
other persons or entities who have been identified by MAFCO as having
submitted or authorized to submit invoices or requests for payment in respect
of the Henley Properties Category, (b) the relevant present and former
affected Henley entities with respect to the Henley Properties Category, as
identified in Exhibit 3 attached hereto, by MAFCO, that after December 31,
1996, KREG shall be solely responsible for all obligations or liabilities with
respect to the Henley Properties Category including, without limitation, all
claims identified on Exhibit 3. Except with respect to the payments made or to
be made by or on behalf of MAFCO pursuant to this paragraph 2, KREG shall
indemnify, defend and hold harmless the Abex Parties, their
-7-
<PAGE>
shareholders, parents, subsidiaries and affiliates and the officers,
directors, employees and agents of any of them from and against any and all
claims, damage, loss, liability or expense (including without limitation
reasonable attorneys' fees and expenses) with respect to any liability within
the scope of the Henley Properties Category. Notwithstanding any other
provision of this paragraph, MAFCO shall promptly advise KREG of any payment
obligation with respect to the Henley Properties Category of which MAFCO is
first made aware subsequent to December 31, 1996, and shall promptly forward
to KREG a copy of all correspondence and documentation received by MAFCO with
respect to such potential obligation.
C. Casualty Reserve Limit Status Report. MAFCO shall make
available to KREG upon KREG's reasonable request all records and source
documents, including all papers and work product, used to prepare the report
set forth in Exhibit 2. MAFCO shall furnish quarterly reports to KREG of all
Casualty Reserve Limits that are not exhausted as of the Effective Date
hereof. MAFCO shall make available to KREG, upon KREG's reasonable request,
records and source documents, including all papers and work product, used to
prepare said quarterly update reports.
D. Exceeded Casualty Reserve Limits. Notwithstanding any
provision of the Assignment and Assumption Agreement, MAFCO shall have no
recourse against any of the KREG Parties with respect to any invoices or
claims received by or on behalf of
-8-
<PAGE>
MAFCO on or before December 31, 1996, with respect to any of the Uninsured
Retention Liabilities in excess of the Casualty Reserve Limits set forth in
Exhibit A to Schedule II of the Assignment and Assumption Agreement. As to the
Exceeded Categories, as well as any category of Uninsured Retention
Liabilities for which MAFCO shall make or cause to be made a payment
subsequent to December 31, 1996 that, when added to all previous payments made
by or on behalf of MAFCO with respect to such category, shall equal or exceed
the Casualty Reserve Limit for such category set forth in Exhibit A to
Schedule II of the Assignment and Assumption Agreement (hereinafter,
"Subsequently Capped Category"), MAFCO shall have no further obligation,
whether by assumption, indemnity or otherwise, and all such liability and
responsibility as to each such category shall return, as of the later of
December 31, 1996, and the date of such exceeding payment, to the KREG
Parties. Promptly after the execution of this Agreement, and, in the case of
any Subsequently Capped Category, after MAFCO shall have notified KREG that
its aggregate payments equal or exceed the Casualty Reserve Limit for such
Category set forth in Exhibit A to Schedule II of the Assignment and
Assumption Agreement, and MAFCO shall have furnished an accounting confirming
same which is reasonably acceptable to KREG (for each such category, the
"Category Transfer Date"), KREG and MAFCO shall jointly notify in writing, in
the form attached hereto as Exhibit 3, (a) the insurers and any other persons
or
-9-
<PAGE>
entities who have been identified by MAFCO as having submitted or authorized
to submit invoices or requests for payment in respect of any such Subsequently
Capped Category and any of the Exceeded Categories, (b) the relevant present
and former affected Henley entities with respect to any such category, as
identified in Exhibit 3, that after the Category Transfer Date KREG shall be
solely responsible for all obligations or liabilities with respect to such
category of Uninsured Retention Liabilities, and that any and all rights,
claims, causes of action, demands or rights of subrogation or indemnification
or third party reimbursement relating to such obligations or liabilities have
been assigned to the KREG Parties.
E. Non-Allocated Costs. For purposes of allocating to the
various categories of Uninsured Retention Liabilities all third-party costs
associated with the administration of Uninsured Retention Liabilities that are
not readily identifiable to any single claim, including without limitation all
costs of computer hardware and software that track claims generally, such
allocation has been and will be performed based on the weighted average of
each category of Uninsured Retention Liability as reflected by the Casualty
Reserve Limits set forth in Exhibit A to Schedule II of the Assignment and
Assumption Agreement; provided, however, that only those categories of
Uninsured Retention Liability administered by MAFCO pursuant to the Assignment
and Assumption Agreement, as amended by this
-10-
<PAGE>
Agreement, or pursuant to any other understanding of the Parties, during the
period reflected in such third-party billings shall be considered as part of
such allocation. KREG has the right in its sole and absolute discretion to
terminate utilizing MAFCO's claims management system, including but not
limited to J&H Stars, on 30 days written notice. In such event, KREG would
only be obligated to pay MAFCO through the date of termination.
F. AIG Billing Allocation. Notwithstanding any other
provision of this Agreement, with respect to the AIG Risk Management, Inc.
Financial Account Update ("Account Update") with respect to the Henley Group
insurance program for policy years 4/1/86-87 through 4/1/92-93 forwarded to
MAFCO by Marsh & McLennan, Inc. under cover of letter dated February 28, 1997,
it is agreed that, as between MAFCO, on the one hand, and the KREG Parties, on
the other hand, any amount ultimately determined by both Parties to be payable
to AIG in connection with any single policy year shall be allocated to each
Responsible Party in the same proportion as the ratio of the total value of
the incurred losses, as of the applicable valuation date for such policy year,
that are the responsibility of such Responsible Party to the total value of
all incurred losses under the Henley Group insurance program for such policy
year, as of that same valuation date. Any credit due in any single policy year
shall be reimbursed using the same procedure. (For purposes of this
subparagraph 2.F., the term "Responsible Party" shall mean each
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<PAGE>
of those companies that are currently responsible for paying or reimbursing
costs associated with any of the Henley Group insurance policies that are the
subject of the Account Update. These companies include but are not limited to
MAFCO, KREG, Fisher Scientific International Inc., General Chemical
Corporation and Wheelabrator Technologies Inc.
2. Assignment of Insurance Claims, Rights and Information.
A. The Abex Parties shall reasonably cooperate and make
available to the KREG Parties any and all insurance policies and related
insurance files or information owned or maintained by the Abex Parties under
the Casualty Reserve Program to which Part II of Schedule II of the Assignment
and Assumption Agreement relates.
B. For any claim relating to the Henley Properties Category,
the Exceeded Categories or any Subsequently Capped Category, the Abex Parties
hereby assign, as of the Effective Date, the Effective Date and the Category
Transfer Date, respectively, to the KREG Parties any and all rights, claims,
causes of action, demands, or rights of subrogation or indemnification or
third party reimbursement. As of such dates, the KREG Parties assume any and
all obligations relating to such claims under the corresponding insurance
policies, including without limitation loss fund deposits, collateralization,
administrative fees, and assessments. To the extent any portion of such
beneficial interest is not assignable, the Abex Parties
-12-
<PAGE>
shall permit the KREG Parties, in their sole discretion, to pursue, in any or
all of their names as appropriate, any such claim. The Abex Parties shall pay
to the KREG Parties an amount equal to any amount actually received by such
person within ten (10) days of such receipt.
3. Pullman Pension Plan.
A. MAFCO and KREG shall cause MAFCO to assume sponsorship of
the Pullman Inc. Non-Contributory Pension Plan (the "Plan") as of such date as
may be prescribed by the Pension Benefit Guaranty Corporation ("PBGC") or any
earlier date agreed to by MAFCO, but in all events, no later than March 31,
1997, MAFCO shall use its best efforts to cause the PBGC to issue a written
release of KREG, MAFCO, and their respective affiliates of any obligation
created prior to MAFCO's assumption of Plan sponsorship, including without
limitation a release of any obligation of the KREG Parties pursuant to that
certain letter agreement between Henley III and PBGC dated July 15, 1992.
B. KREG represents and warrants that (i) it is and has been
continuously since July 17, 1992 sponsor of the Plan; (ii) through and
including the Effective Date, (a) the Plan has obtained a favorable
determination letter dated June 13, 1995 as to its qualified status under
Section 401(a) of the Internal Revenue Code (the "Code") from the Internal
Revenue Service (the "IRS"), a copy of which has been provided to MAFCO; (b)
since July 17, 1992, the Plan has been operated and administered in
-13-
<PAGE>
accordance with its terms and all applicable law, including without limitation
the Code and the Employee Retirement Income Security Act of 1974, as amended
("ERISA"); (c) since July 17, 1992, there has been no non-exempt, "prohibited
transaction" (within the meaning of the Code and ERISA) with respect to the
Plan; (d) other than the PBGC matter set forth in this paragraph 4, there has
not been commenced or overtly threatened since July 17, 1992, and there has
never been pending at any time since July 17, 1992, against the Plan or any
trustee or fiduciary with respect to the Plan any claim or proceeding relating
to the Plan or its operation or administration, other than claims for benefits
in the ordinary course; and (e) since July 17, 1992, all reports required to
be filed with any governmental agency with respect to the Plan or its
operation or administration were prepared in good faith, true and correct as
of their filing dates and timely so filed; and (iii) nothing has occurred to
the actual knowledge of any officer or director of any of the KREG Parties
since the issuance of the most recent IRS favorable determination letter with
respect to the Plan that could reasonably be expected to cause the loss of the
tax-qualified status of the Plan. KREG shall indemnify, defend and hold
harmless the Abex Parties, the parents, subsidiaries, affiliates,
shareholders, officers, directors, employees and agents of any of them and all
fiduciaries and trustees of any benefit plan sponsored or maintained by any of
them from and against any and all claims,
-14-
<PAGE>
damage, loss, liability or expense (including without limitation reasonable
attorneys' fees and expenses) arising out of or relating to any breach of any
representation or warranty set forth in this subparagraph 4.B.
C. Upon the Effective Date, the Abex Parties shall defend,
indemnify and hold harmless the KREG Parties and each of their affiliates from
and against any and all claims, damage, loss, liability or expense (including
without limitation reasonable attorneys' fees and expenses) including without
limitation claims by the PBGC and/or any beneficiary of the Plan other than
(i) a claim of breach of fiduciary duty of which any KREG officer or director
had actual knowledge with respect to any act or omission, which claim arises
prior to the Effective Date, or (ii) a claim for which KREG is providing an
indemnity pursuant to subparagraph B of this paragraph 4.
4. Plan Asset Report. KREG has previously furnished MAFCO with a
certificate (the "Certificate") from Mellon Trust certifying the amount of
assets in the Plan as of December 31, 1996.
5. Additional Pullman Assets. KREG believes that Prudential Life
Insurance Company ("Prudential") holds approximately $3.0 million or more in
assets, and there may be other assets located elsewhere and not currently
reported as Plan assets in the Certificate ("Additional Pullman Assets") which
may
-15-
<PAGE>
be attributable to the Plan. KREG asserts that it has expended monies pursuing
these assets. MAFCO shall use reasonable efforts, and pay any and all costs
associated with its efforts, to continue the pursuit and recovery of any and
all Additional Pullman Assets for the benefit of the Plan. MAFCO's obligation
to expend its efforts as set forth in this paragraph 6 is conditioned upon
KREG's cooperation in all material respects in this matter, including the
prompt furnishing by KREG of all correspondence and other documentation
relating to its efforts through the execution date of this Agreement to obtain
Additional Pullman Assets and KREG's making available at its expense any
employee or officer with knowledge of such matters not reflected in any
correspondence or other documentation. In the event there is recovery of any
of the Additional Pullman Assets by the Plan or any successor-in-interest to
the Plan, MAFCO shall promptly pay to KREG 25 cents in cash for each $1.00
recovered. In no event shall MAFCO be obligated to pay KREG in excess of
$1,000,000 for the recovery of any and all Additional Pullman Assets.
6. Pullman Claims and PPC Claims. Without conceding the merits of any
claim made or contemplated by any third party to this Agreement, upon the
Effective Date, as between MAFCO, on the one hand, and the KREG Parties and
PPC, on the other hand, MAFCO shall be solely responsible for and shall assume
any and all liability for all present, past or future Pullman Claims and PPC
-16-
<PAGE>
Claims made against any of the KREG Parties and PPC. The allocation of
responsibility as between MAFCO, on the one hand, and the KREG Parties and
PPC, on the other hand, for the Pullman Claims and PPC Claims shall be further
explicated as follows:
A. Upon the Effective Date, MAFCO shall assume from KREG the
defense of all Pullman Claims and PPC Claims pending on such date against PPC
or any of the KREG Parties and those claims described in Exhibit 1 attached
hereto. KREG shall cooperate fully in such assumption and defense, including
without limitation (i) turning over all papers and files, including without
limitation papers and files in the possession of counsel, relating to such
Claims, (ii) executing all documents in furtherance of the foregoing, and
(iii) making available its employees and officers at its expense in order to
assure a smooth transition to counsel appointed by MAFCO.
B. Upon the Effective Date, the Abex Parties shall defend,
indemnify and hold harmless the KREG Parties and each of their affiliates from
any and all claims, costs, demands, reasonable attorneys' fees, causes of
action, settlements, judgments or damages for any past, present or future
Pullman Claims and PPC Claims made against any of the KREG Parties or PPC, and
those claims attached as Exhibit 1.
C. KREG shall notify MAFCO promptly of any Pullman Claims
and PPC Claims commenced against PPC or any of the KREG Parties, so that MAFCO
may assume the defense of such Claims
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<PAGE>
without prejudice to the defense. KREG shall cooperate fully with MAFCO
in such defense, including without limitation the execution of all documents
in furtherance of the foregoing.
D. Upon the Effective Date, MAFCO shall be solely liable, as
between MAFCO, on the one hand, and PPC and the KREG Parties, on the other
hand, and the Abex Parties shall defend, indemnify and hold harmless PPC and
the KREG Parties against any liability, for any and all claims, costs,
demands, reasonable attorneys' fees, causes of action, settlement, judgement,
or damages occurring after the Effective Date with respect to any PPC Claim.
E. At its option, KREG may participate at its expense with
MAFCO in the defense of PPC Claims, but MAFCO shall, in all events, control
such defense in all respects. If KREG elects to participate in the defense of
the PPC Claims within the terms of this Agreement, such participation shall
not in any way relieve the Abex Parties of any of its obligations hereunder.
F. Notwithstanding any other provisions of this Agreement,
MAFCO shall have no obligation to reimburse PPC, any of the KREG Parties or
any officer, director, employee, subsidiary, parent, affiliate or shareholder
of any of them for any expense, including without limitation attorneys' fees
or expenses, that they may have incurred or been billed with respect to the
defense or settlement of PPC Claims, Pullman Claims, or
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the claims set forth in Exhibit 1 attached hereto through December 31, 1996.
G. The KREG Parties shall, and shall cause PPC to, assign to
MAFCO any and all claims, interests and rights any of them may have against
Wheelabrator Technologies Inc. or any of its subsidiaries, including without
limitation, Resco Holdings Inc. (collectively, "WTI") with respect to PPC
Claims, Pullman Claims, or the claims set forth in Exhibit 1 attached hereto.
In the event of litigation between WTI and MAFCO, or between WTI and KREG,
with respect to Pullman Claims or PPC Claims, MAFCO shall defend, indemnify
and hold harmless KREG with respect to such litigation if WTI names KREG as a
party in such litigation, or if KREG is otherwise joined in any such
litigation by any party.
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PPC and the KREG Parties shall execute any and all papers necessary to
effectuate the intent of this subparagraph.
H. Based on KREG's actual knowledge, KREG represents and
warrants that the PPC Claims and Pullman Claims pending against the KREG
Parties as of the Effective Date are set forth in Exhibit 1 attached to this
Agreement. MAFCO shall have no liability for any lawsuits which included PPC
Claims or Pullman Claims which were properly served on KREG on or before the
Effective Date and not set forth in Exhibit 1 and where a Party has filed with
the court a default, request to enter default or similar document in a
judicial proceeding. In such event, such claims shall be the responsibility of
KREG until the default or request to enter default has been vacated or
withdrawn, at which time MAFCO shall assume such claim.
I. Upon the Effective Date, the KREG Parties shall, and
shall cause PPC to, assign to MAFCO, to the extent permitted by law and by the
relevant contracts of insurance, all benefit of any insurance that was
purchased to cover risks of the passenger rail car operations of Pullman or
any successor to Pullman possessing any liability with respect to such risks,
regardless of the source of such beneficial interest (whether, for example, by
purchase of insurance, assignment, corporate successorship, indemnity or
otherwise). To the extent any portion of such beneficial interest is not
assignable, the KREG Parties shall, and shall cause PPC to, permit MAFCO, in
its sole discretion, to
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pursue in any or all of their names as appropriate, any insurance coverage
with respect to the Pullman Claims and PPC Claims. The KREG Parties shall pay
to MAFCO an amount equal to any amount actually received by such person from
any insurer by reason of any insurance claim made with respect to a PPC Claim
within ten (10) days of such receipt.
7. Rights Against Allied Signal. The KREG Parties hereby assign, and
shall cause all of their subsidiaries, including without limitation PPC, to
assign to MAFCO any and all rights, interests and claims any of them may have
against Allied Signal, Inc. ("Allied Signal") relating to or arising out of
the Plan, including without limitation any right, claim or interest arising
from (a) the Distribution and Adjustment Agreement dated August 31, 1988, by
and between Allied Signal and The Henley Group, Inc. (now known as WTI), and
(b) the Assignment and Assumption Agreement dated as of December 11, 1988
between The Henley Group, Inc. (now known as WTI) and Henley Newco Inc. (now
known as KREG).
8. Winfield.
A. The Parties hereby acknowledge and agree that, until the
recent sale to Mr. Sickels, (i) Abco was the sole beneficial owner of 25,000
of the 100,000 Winfield shares owned of record by New Henley Holdings, and
(ii) New Henley Holdings was the sole beneficial owner of the other 75,000
Winfield shares.
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B. In order to maximize the value and liquidity of
the Winfield shares, the Parties hereby acknowledge that the KREG
Parties, with the informed written consent of the Abex Parties,
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<PAGE>
have sold the Winfield shares for $19.00 per share and distributed the net
proceeds as follows:
(i) $1,425,000 to KREG; and
(ii) $475,000 to MAFCO.
The Parties hereby release any and all claims related to any ownership
disputes of the Winfield shares or the proceeds received on sale therefrom.
10. Nichols and Procon.
A. MAFCO shall have no responsibility or liability with
respect to (a) any claim arising out of the manufacture, possession, presence,
use, generation, transportation, treatment, storage, disposal, release (as
that term is defined in Environmental Laws), abatement or remediation of or
any response action with respect to any "hazardous substance" (as that term is
defined in any current or future statute, regulation or other law
(collectively "Environmental Laws") pertaining to the protection of health,
safety and the indoor or outdoor environment, including without limitation
laws pertaining to the conservation, management or use of natural resources,
the protection or use of air, surface water and groundwater, or the
management, manufacture, presence, use, generation, transportation, treatment,
storage or disposal of any hazardous substance) by or on behalf of Nichols
(collectively, the "Nichols Environmental Claims"), including without
limitation the Belle Mead and Svedala
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claims, or (b) any workers compensation claim relating to Procon ("Procon
Workers Compensation Claims").
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B. MAFCO hereby assumes and reaffirms its assumption under
the Assignment and Assumption Agreement all liability relating to past,
present or future product liability or completed operations liability in
respect of the business conducted by Nichols and Procon (collectively, the
"Nichols/Procon Product Liability/Completed Operations Liability"), and shall
indemnify, defend and hold harmless the KREG Parties, their shareholders,
parents, subsidiaries and affiliates and the officers, directors, employees
and agents of any of them from and against any and all claims, damage, loss,
liability or expense (including without limitation reasonable attorneys' fees
and expenses) arising out of or relating to any Nichols/Procon Product
Liability/Completed Operations Liability.
C. KREG shall cause Nichols to assume and reaffirm its
assumption under the Assignment and Assumption Agreement all liability for the
Belle Mead and Svedala claims and any and all past, present or future Nichols
Environmental Claims, and the KREG Parties shall indemnify, defend and hold
harmless the Abex Parties, their shareholders, parents, subsidiaries and
affiliates and the officers, directors, employees and agents of any of them
from and against any and all claims, damage, loss, liability or expense
(including without limitation reasonable attorneys' fees and expenses) arising
out of or relating to any Nichols Environmental Claims.
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D. KREG shall cause Procon to assume and reaffirm its
assumption under the Assignment and Assumption Agreement all liability for
Procon Workers Compensation Claims, and the KREG Parties shall indemnify,
defend and hold harmless the Abex Parties, their shareholders, parents,
subsidiaries and affiliates and the officers, directors, employees and agents
of any of them from and against any and all claims, damage, loss, liability or
expense (including without limitation reasonable attorneys' fees and expenses)
arising out of or relating to any Procon Workers Compensation Claims.
E. Except for the Procon invoices described in paragraph C
of the Recitals above, MAFCO hereby represents and warrants that it has no
actual or constructive knowledge of any unpaid invoices with respect to any
Procon Workers Compensation Claim through the Effective Date.
F. Notwithstanding the foregoing, MAFCO shall not seek
reimbursement from the KREG Parties or Procon for the payment of $139,000, and
MAFCO shall pay the outstanding invoice of $118,500, both of which relate to
Procon Workers Compensation Claims, and neither KREG nor Procon shall have any
liability for any amount paid by MAFCO with respect to the Procon Workers
Compensation Claims received prior to December 31, 1996.
G. Nothing in this paragraph is intended as, or should be
considered, an admission or concession that any party
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to this Agreement or any of their subsidiaries has any liability to any third
party.
10. Releases.
A. MAFCO's Special Release of KREG. Except as specifically
set forth in this Agreement, the Abex Parties hereby release and forever
discharge the KREG Parties and all of their respective agents, employees,
representatives, officers, attorneys and shareholders from any and all claims,
disputes, demands, debts, liabilities, obligations, claims for
indemnification, causes of action, suits and costs (including without
limitation reasonable attorneys' fees and expenses), of whatever nature,
character or description, whether known or unknown, anticipated or
unanticipated, that any of the Abex Parties ever had, now has or hereafter
can, shall or may have or claim to have by reason of, arising out of or
relating to in any way the Disputes, the Pension Agreement, ownership of the
Winfield shares or proceeds thereof, and/or any act, omission, matter or
transaction that can be or could have been directly or indirectly alleged,
asserted, described or set forth in connection with the matters referred to
herein.
B. KREG's Special Release of MAFCO. Except as specifically
set forth in this Agreement, the KREG Parties hereby release and forever
discharge the Abex Parties and all of their respective agents, employees,
representatives, officers, attorneys and shareholders from any and all claims,
disputes,
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demands, debts, liabilities, obligations, claims for indemnification, causes
of action, suits and costs (including without limitation reasonable attorneys'
fees and expenses), of whatever nature, character or description, whether
known or unknown, anticipated or unanticipated, that any of the KREG Parties
ever had, now has or hereafter can, shall or may have or claim to have by
reason of, arising out of or relating to in any way the Disputes, the Pension
Agreement, ownership of the Winfield shares or proceeds thereof, and/or any
act, omission, matter or transaction that can be or could have been directly
or indirectly alleged, asserted, described or set forth in connection with
these matters described herein.
C. Ownership of Rights, Claims and Stock. The Parties
warrant and represent that, except as to such interests as reference is made
in this Agreement, they are the only persons or entities that have any
interest in any of the matters herein released, and that none of such claims,
causes of action, costs or demands, or stock interests or certificates, or any
part thereof, or any interest therein, has been pledged, hypothecated,
assigned, granted or otherwise transferred in any way to any other person or
entity.
D. No Effect. No release in this paragraph 11 shall affect
or preclude any party's ability to enforce the terms of this Agreement.
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11. No Admission. This Agreement is a compromise and settlement of
the Disputes executed in order to avoid any continued uncertainty, expense,
inconvenience and burden associated with attempting to resolve the Disputes.
After months of extensive arms'-length bargaining between the Parties and
their counsel, the Parties believe that this Agreement represents fair
consideration and reasonably equivalent value for each party. Neither this
Agreement nor the settlement reflected herein is or shall be deemed or
construed to be an admission or confession for any purpose or in any respect
by any party hereto of any liability whatsoever to any other party hereto, and
may not be offered, admitted or received into evidence in any court proceeding
for any purpose other than to establish its terms or enforce its provisions.
Except for the matters expressly addressed herein, nothing contained in this
Agreement shall in any way modify, cancel, extinguish or surrender any other
contract obligation to which any or all of the KREG Parties and the Abex
Parties are parties, including without limitation the Assignment and
Assumption Agreement, the Pension Agreement and any other agreement executed
between or among the Parties or their predecessors-in-interest or their
current or former affiliates.
12. Remedies.
A. Intention of the Parties. It is the intention of the
parties, subject to the rights of the non-breaching party
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under this paragraph 13, that this Agreement be fully and specifically
performed even in the event of a breach, a remedy at law being inadequate.
Without limiting the foregoing, the Abex Parties understand, based on their
discussions with KREG, that KREG has commenced discussions with certain
representatives for KREG senior and junior bondholders regarding a
restructuring of its obligations to them, which restructuring may take the
form of a case under the United States Bankruptcy Code, 11 U.S.C. ss. 101 et
seq., that KREG has informed the representatives of the content of this
Agreement, and that such representatives have not objected to the KREG
Parties' entry into this Agreement. If the restructuring of any of the KREG
Parties' obligations takes the form of a case under the Bankruptcy Code, they
will seek the full performance of this Agreement, including without
limitation, to the extent such provisions are applicable, the assumption of
this Agreement under Section 365 of the Bankruptcy Code. In the Registration
Statement that becomes effective with the Securities and Exchange Commission,
the KREG Parties shall schedule this Agreement as a contract to be assumed
pursuant to the Plan of Reorganization.
B. Remedies. The Parties shall, in addition to any rights or
remedies for another's breach of this Agreement that are set forth herein,
have and may pursue any and all rights, remedies and claims available by
statute, at law or in equity for any such breach. Any party's pursuit and
enforcement of any one
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<PAGE>
or more rights, remedies or claims shall not be deemed an election or a waiver
by such party of any other right, remedy or claim for any breach hereof or
otherwise.
C. Executory Accord. This Agreement constitutes an executory
accord within the meaning of New York General Obligations Law ss. 15-501. In
the event that (a) any default or breach by any Party of any obligation under
this Agreement shall remain unremedied for more than ten (10) days after
notice to the defaulting or breaching Party of such default or breach, or (b)
any Party shall commence or have commenced against it any bankruptcy case or
insolvency proceeding in which this Agreement is not to be fully and
specifically performed, any Party in whose favor such obligations ran or any
Party opposite such bankrupt or insolvent Party, as the case may be, may elect
in its sole
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discretion to consider this Agreement null and void and proceed under its
rights existing as if this Agreement never occurred.
D. Specific Remedies. Without limiting any other rights or
remedies of any Party hereto, the Parties having determined each such remedy
to be reasonable, hereby acknowledge the following as a remedy for any breach
hereof:
(1) The non-breaching Party shall have the right to
setoff or recoup the amount that it has paid in performance of this Agreement
prior to such breach, as well as the amount of any future, or post-breach
payment obligations, against any claims that the breaching Party has against
it under the Agreement or otherwise.
(2) If KREG breaches this Agreement,
notwithstanding paragraph 4 of this Agreement, KREG shall assume sponsorship
of the Plan and/or liability for any claims or obligations in respect of, or
arising because of the satisfaction by any means of any underfunding or other
liabilities of, the Plan.
13. Fees and Costs. Each party shall bear its own costs and
attorneys' fees incurred with respect to the preparation and negotiation of
this Agreement and the settlement herein contained.
14. Entire Agreement. This Agreement contains the entire
understanding and agreement among the Parties with respect to the Disputes,
the Pension Agreement, the Henley Properties Category
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and the matters referred to in this Agreement and supersedes any and all the
other agreements, understandings, negotiations or discussions, either oral or
in writing, express or implied among the Parties with respect to the Disputes,
the Pension Agreement, the Henley Properties Category and such matters. All
prior agreements not specifically superseded by this Agreement between or
among the Parties, including without limitation the Assignment and Assumption
Agreement, remain in full force and effect except as specifically modified by
this Agreement.
15. Binding on Successors and Others. This Agreement and the
covenants and conditions contained herein shall be binding upon and inure to
the benefit of the Parties and their administrators, executors, conservators,
trustees, legal representatives, successors and assigns. Nothing in this
Agreement other than any release or indemnity set forth anywhere in this
Agreement shall create a benefit in any third party.
16. Construction. The Parties participated jointly in the preparation
of this Agreement. Each Party to this Agreement has had the opportunity to
review, comment upon and redraft this Agreement. It is agreed that no rule of
construction shall apply against any Party or in favor of any Party. This
Agreement shall be construed as if the Parties jointly prepared this
Agreement, and any uncertainty and ambiguity shall not be interpreted against
any one Party as the draftsman.
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17. Arbitration. Except in the event that any Party commences or has
commenced against it any bankruptcy case or insolvency proceeding, in which
event this paragraph 18 shall become null and void and of no further force or
effect, and notwithstanding any provision of the agreement dated February 3,
1995 by and among MAFCO, WTI and KREG, in the event of any future dispute
arising out of this Agreement, said dispute shall be resolved by arbitration
conducted in accordance with the following:
A. Arbitration may be initiated by any Party by serving a
written demand for arbitration on all Parties to the dispute that is the
subject matter of the arbitration (together with the initiating party, the
"Arbitration Parties"). Said demand shall state with reasonable specificity
the issues to be arbitrated.
B. The arbitration shall be conducted in either New York or
California at the election of the petitioner, or at such other location as the
Arbitration Parties may agree, before a single arbitrator who shall be a
former federal or state judge. Said arbitrator shall be selected by agreement
of the Arbitration Parties with five (5) business days of receipt by the
respondent(s) of the demand of arbitration.
C. In the event the Arbitration Parties cannot reach
agreement on the single arbitrator within the time frame set forth in
subparagraph (B) hereof, each side shall, within two (2)
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business days following the expiration of the period in subparagraph (B)
hereof, nominate a former judge, whose sole function shall be to confer with
the other former judge for the purpose of selecting another former judge who
shall act as the single arbitrator in the dispute. In the event that any of
the Arbitration Parties fails to make the nomination required by this
subparagraph, the remaining nominee(s) shall select a single, neutral
arbitrator. The respective nominees shall be instructed to confer and select
an arbitrator within five (5) business days of the final nomination to be
announced. Upon selection of the arbitrator, the nominees shall advise the
parties of the identity of the arbitrator by written notice transmitted by
overnight courier.
D. Within thirty (30) days of the date of the written notice
of the appointment of the arbitrator, each party shall produce to all other
Arbitration Parties all documents in its possession, custody or control
relevant to the issues that are the subject of the arbitration as well as the
name and address of each individual likely to have relevant information not
otherwise available relating to those issues.
E. Each side may take up to four (4) depositions, each
consisting of no more than six (6) hours of direct examination and two (2)
hours of cross-examination. The Arbitration Parties shall cooperate so that
said depositions shall be completed no more than sixty (60) days after the
date of
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the written notice of the appointment of the arbitrator. Nothing in
this subparagraph shall preclude any party from making an application to the
arbitrator to allow additional depositions and/or third-party subpoenas for
documents or depositions, provided that any such discovery is completed within
the sixty (60) day period provided herein.
F. The arbitrator is vested with jurisdiction to order,
enforce, modify or limit any discovery obligations contemplated hereunder.
G. Except as provided in subparagraphs (D) and (E) hereof,
no discovery may be had.
H. Each side shall provide to the arbitrator, not later than
eighty (80) days after the date of the written notice of his or her
appointment, a statement, including all supporting documents or other evidence
on which it relies, as to why it believes that the dispute should be resolved
in its favor. Such materials and any other materials provided to the
arbitrator by any party will simultaneously be provided by such party to all
other parties. Within fifteen (15) days after submission of such statements by
all sides, the arbitrator shall hold a hearing with respect to the dispute. At
such hearing, the arbitrator may, in his or her sole discretion, allow the
parties to call and cross-examine witnesses, make any additional arguments or
submit any additional materials to support the positions taken in their
respective statements. Although the arbitrator is urged to
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consider the Parties' desire for an expeditious resolution, the arbitrator may
order as many days of hearing as he or she deems necessary.
I. The arbitrator shall enter an award within fifteen (15)
days following the hearing provided for in subparagraph (H) hereof. The award
shall include a determination as to which party is the "prevailing party" for
the purposes of subsection (K) hereof.
J. Nothing in subsections (D) through (I) hereof shall
preclude any party from making an application to the
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arbitrator, for good cause, to expedite the proceedings, nor restrict the
arbitrator from granting such an application.
K. In addition to such other relief as the arbitrator may
award, the arbitrator shall be vested with jurisdiction to and may award to
the prevailing party its reasonable attorneys' fees and expenses, and all
other costs associated with the arbitration.
18. Survival of Representations. All representations and warranties
set forth in this Agreement shall survive the execution of this Agreement and
shall remain operative and in full force and effect, regardless of any
investigation made by or on behalf of any party.
19. Choice of Law. The validity, construction and enforceability of
this Agreement and any dispute arising therefrom shall be governed by Delaware
law applicable to agreements made and to be performed in Delaware by its
citizens. The Parties agree that California Civil Code Section 1542 has no
applicability to this Agreement.
20. No Third Party Beneficiaries. This Agreement is solely for the
benefit of the Parties hereto and their respective subsidiaries, successors
and assigns, and nothing herein is intended or shall be deemed to confer any
rights or remedies, whether express or implied, under or by reason of this
Agreement, on any other person, whether as a third party beneficiary or
otherwise, nor is anything in this Agreement intended to relieve
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or discharge the obligation or liability of any third party to any party to
this Agreement.
21. Modification and Waiver. This Agreement may not be modified by
any of the Parties by oral representation made before or after the execution
of this Agreement. All modifications must be in writing and signed by each of
the Parties affected. No waiver of any right pursuant to this Agreement or of
any breach thereof shall be effective unless in writing and signed by the
party waiving such right or breach. No waiver of any right or of any breach
shall constitute a waiver of any other or similar right or breach, and no
failure to enforce any right under this Agreement shall preclude or affect the
later enforcement of such right.
22. Cooperation and Further Documents. The Parties shall cooperate
fully, and execute and deliver all documents and perform all further acts that
may reasonably be necessary, to effectuate the provisions of this Agreement.
23. Counterparts. This Agreement may be executed in multiple
counterpart facsimile signature pages, each of which shall be deemed an
original, and all of which taken together shall constitute one agreement and
shall be immediately binding and enforceable upon execution as of the
Effective Date.
24. Effective Date. This Agreement shall be effective as March 11,
1997.
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25. Notice. Any notices under this Agreement shall be personally
served and/or mailed and/or transmitted via facsimile to the Parties as
follows:
If to any of the Abex Parties:
General Counsel
Mafco Consolidated Group, Inc.
35 East 62nd Street
New York, NY 10021
Telephone: (212) 572-5170
Facsimile: (212) 572-5056
If to any of the KREG Parties:
Raymond J. Pacini
Koll Real Estate Group, Inc.
4343 Von Karman Avenue
Newport Beach, CA 92660
Telephone: (714) 833-3030
Facsimile: (714) 261-6550
1. Advice of Counsel. The Parties acknowledge that they have been
represented by counsel of their own choice in the negotiations leading to
their execution of this Agreement, and that they have read this Agreement and
have had it fully explained to them by their counsel.
2. Headings. The headings in this Agreement are for the convenience
of the reader only and may not be used to construe or interpret any provision
of this Agreement.
3. Authorization. The individuals executing this Agreement represent
that they are authorized to do so by their respective Parties.
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DATED: March 11, 1997 MAFCO CONSOLIDATED GROUP INC.
By: /s/ Joram C. Salig
-------------------------
Its: V.P.
DATED: March 11, 1997 NEW ABCO HOLDINGS, INC.
By: /s/ Joram C. Salig
-------------------------
Its: V.P.
DATED: March 11, 1997 KOLL REAL ESTATE GROUP, INC.
By: /s/ Raymond J. Pacini
-------------------------
Raymond J. Pacini
Its Chief Financial Officer
DATED: March 11, 1997 THE HENLEY GROUP, INC.
By: /s/ Sandra G. Sciutto
-------------------------
Sandra Sciutto
Its Senior Vice President and
Controller
DATED: March 11, 1997 NEW HENLEY HOLDINGS, INC.
By: /s/ Sandra G. Sciutto
-------------------------
Sandra Sciutto
Its Senior Vice President and
Controller
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APPROVED AS TO FORM AND CONTENT:
DATED: March 11, 1997
By: /s/ Steven Fasman
-------------------------
Steven L. Fasman, Esq.
Attorney for MAFCO
CONSOLIDATED GROUP, INC. and
NEW ABCO HOLDINGS, INC.
DATED: March 11, 1997 McDERMOTT, WILL & EMERY
By: /s/ Joseph E. Thomas
-------------------------
Joseph E. Thomas, Esq.
Attorney for KOLL REAL ESTATE
GROUP, INC., THE HENLEY GROUP,
INC., and NEW HENLEY HOLDINGS,
INC.
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INDEX OF EXHIBITS
Exhibit 1 PPC Claims
Exhibit 2 Accounting
Exhibit 3 Form of Notice, Distribution List, List of
Affected Companies
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MAFCO CONSOLIDATED GROUP
LIST OF SUBSIDIARIES
AS OF FEBRUARY 28, 1997
<TABLE>
<CAPTION>
COMPANY NAME STATE OF INCORPORATION
- ---------------------------------------------------------------- --------------------------
<S> <C>
Consolidated Cigar Holdings Inc. Delaware (DE)
Consolidated Cigar Corporation DE
Jamaica Tobacco Manufacturing Company (1995) Limited Jamaica
Triple C Marketing Inc. DE
Tobacos San Andres S.A. de C.V. Honduras
Congar International Corporation DE
Tabacalera De Garcia, Ltd. Bermuda
Cuban Cigar Brands, NV Netherlands-Antilles
Direct Products Inc. DE
MCG Intermediate Holdings Inc. DE
PA Abex Acquisition Limited Canada
PA Abex Acquisition Canada Inc. Canada
New Abco Holdings Inc. DE
Henley Shareholder Services Inc. DE
Henley Residence Inc. DE
Liberty Lane Real Estate, Inc. DE
Newco K.M.R. Corporation Florida
Pershing Park, Inc. DE
Garden City Fan of Canada Limited Canada
Garden City Fan & Blower De Mexico S.A. de D.V. Mexico
SCSA, Inc. DE
Cleveco Inc. DE
Abco Canada Holdings Inc. DE
PA Defense Systems Inc. DE
PA Partners, L.P. DE
Power Control Technologies Inc. (28.7% owned) DE
</TABLE>
Exhibit 21
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-15719) pertaining to the 1995 Stock Option Plan of Mafco
Consolidated Group Inc. of our report dated February 11, 1997, with respect
to the consolidated financial statements and schedules of Mafco Consolidated
Group Inc. included in the Annual Report on Form 10-K for the year ended
December 31, 1996.
Ernst & Young LLP
New York, New York
March 26, 1997
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Ronald O. Perelman
--------------------------
RONALD O. PERELMAN
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 10th day of February 1997.
/s/ Philip E. Beekman
--------------------------
PHILIP E. BEEKMAN
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Theo W. Folz
--------------------------
THEO W. FOLZ
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Howard Gittis
--------------------------
HOWARD GITTIS
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Drew Lewis
--------------------------
DREW LEWIS
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ James R. Maher
--------------------------
JAMES R. MAHER
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 5th day of February 1997.
/s/ Jewel S. Lafontant-Mankarious
---------------------------------
JEWEL S. LAFONTANT-MANKARIOUS
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Irwin Engelman
--------------------------
IRWIN ENGELMAN
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Gary R. Ellis
--------------------------
GARY R. ELLIS
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Joram C. Salig and Laurence
Winoker or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
MAFCO CONSOLIDATED GROUP INC. (the "Corporation") Annual Report on Form 10-K
for the year ended December 31, 1996 under the Securities Exchange Act of
1934, as amended, including, without limiting the generality of the foregoing,
to sign the Form 10-K in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments to the Form 10-K and any instrument, contract, document or other
writing, of or in connection with the Form 10-K or amendments thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, including this power of attorney, with the Securities and Exchange
Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has signed these
presents this 14th day of February 1997.
/s/ Laurence Winoker
--------------------------
LAURENCE WINOKER
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Mafco
Consolidated Group Consolidated Balance Sheet and Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000888676
<NAME> Mafco Consolidated Group
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,222
<SECURITIES> 409,605
<RECEIVABLES> 19,498<F1>
<ALLOWANCES> 0<F1>
<INVENTORY> 49,957
<CURRENT-ASSETS> 506,678
<PP&E> 37,277<F2>
<DEPRECIATION> 0<F2>
<TOTAL-ASSETS> 769,501
<CURRENT-LIABILITIES> 108,170
<BONDS> 0
0
0
<COMMON> 247
<OTHER-SE> 360,245
<TOTAL-LIABILITY-AND-EQUITY> 769,501
<SALES> 310,659
<TOTAL-REVENUES> 607,110
<CGS> 177,854
<TOTAL-COSTS> 232,015
<OTHER-EXPENSES> 2,086
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,589
<INCOME-PRETAX> 348,420
<INCOME-TAX> 104,824
<INCOME-CONTINUING> 243,596
<DISCONTINUED> 15,052
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 258,648
<EPS-PRIMARY> 11.13
<EPS-DILUTED> 0
<FN>
Amounts inapplicable or not disclosed as a separate line on the Consolidated
Statements of Operations are reported as 0 herein.
<F1>Notes and trade receivables are reported net of allowance for doubtful
accounts on the Consolidated Balance Sheets.
<F2>Property, plant and equipment is reported net of accumulated depreciation on
the Consolidated Balance Sheets.
</FN>
</TABLE>
