-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N3tcguR1dh/3nTbqmiamlcT5mE1AYXkJ2VRDSxsxmiqivE8n/QiQ1rQEWEu/YmMx 6Sssz1HFAagiRcVmwmddOQ== 0000912057-97-009050.txt : 19970318 0000912057-97-009050.hdr.sgml : 19970318 ACCESSION NUMBER: 0000912057-97-009050 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CULBRO CORP CENTRAL INDEX KEY: 0000026093 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 130762310 STATE OF INCORPORATION: NY FISCAL YEAR END: 1128 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-01210 FILM NUMBER: 97557752 BUSINESS ADDRESS: STREET 1: 387 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2125618700 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL CIGAR CO INC DATE OF NAME CHANGE: 19760726 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996 ------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-1210 CULBRO CORPORATION (Exact name of registrant as specified in its charter) NEW YORK 13-0762310 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 387 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016-8899 - ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (Registrant's Telephone Number, Including Area Code) (212) 448-3800 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ------------------- ------------------- Common Stock, $1 par value New York Stock Exchange, Inc. SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: $179,000,000 approximately, based on the closing sales price on the New York Stock Exchange on February 20, 1997. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: Common Stock: 4,518,472 shares as of February 20, 1997. The following documents, or portions thereof as indicated in the following report, are incorporated by reference in the Parts of Form 10-K indicated: PART DOCUMENT - ---- -------- I Prospectus of General Cigar Holdings, Inc., dated February 27, 1997, as filed February 28, 1997 pursuant to Rule 424(b) and included as Exhibit 99 to this Report on Form 10-K (the "Prospectus"). II Prospectus of General Cigar Holdings, Inc., dated February 27, 1997, as filed February 28, 1997 pursuant to Rule 424(b) and included as Exhibit 99 to this Report on Form 10-K (the "Prospectus"). III Proxy Statement in connection with the 1997 Annual Meeting of Shareholders IV Prospectus of General Cigar Holdings, Inc., dated February 27, 1997, as filed February 28, 1997 pursuant to Rule 424(b) and included as Exhibit 99 to this Report on Form 10-K (the "Prospectus"). SEE PAGE 15 HEREOF FOR HOW TO REQUEST A COPY OF THE PROSPECTUS. FORM 10 -K 1996 CULBRO CORPORATION PART I ITEM 1 - BUSINESS Culbro Corporation and its subsidiaries (the "Corporation") comprise a diversified consumer and industrial products company. At the end of its 1996 fiscal year the Corporation engaged in three principal lines of business: (1) Tobacco Products, comprised of the manufacturing and marketing of cigars and the growing, processing and selling of cigar wrapper tobacco; (2) Nursery Products, comprised of growing for sale container and field grown nursery products principally to nursery mass merchandisers, and owning and operating wholesale sales and service centers; and (3) Real Estate, comprised of owning, building and managing commercial and industrial properties and developing residential subdivisions on real estate owned by the Corporation in Connecticut and Massachusetts, and owning and managing its headquarters building at 387 Park Avenue South in New York City. The approximate net sales and other revenue, operating profit and identifiable assets attributable to each reportable segment of the Corporation in each of the last three fiscal periods are set forth in Note 5 to the Consolidated Financial Statements. On November 8, 1996 the Corporation closed the sale of its CMS Gilbreth packaging and labeling business. The effect of the sale was accounted for in the Corporation's fiscal third quarter results. See Note 3 to the Consolidated Financial Statements. Subsequent to the end of its 1996 fiscal year end the Corporation's subsidiary, General Cigar Holdings, Inc. ("Holdings"), filed a Form S-1 Registration Statement (No. 333-18791, filed December 24, 1996) (the "Registration Statement") for the offering to the public (the "Offering") of its Class A Common Stock. The Offering took place on February 28, 1997. In connection with such sale the Corporation completed certain asset transfers (the "Asset Transfers"), pursuant to which (i) all of the Corporation's assets and liabilities relating to the cigar business, including approximately 1,100 acres of land used in the tobacco growing operations and its New York cigar bar, Club Macanudo, and certain other assets and liabilities, including the Corporation's corporate headquarters, were transferred to Holdings, and (ii) substantially all of the Corporation's non-tobacco related assets and liabilities, including all of its assets and liabilities relating to its nursery business and real estate business, together with the Corporation's 25% interest in Centaur Communications Limited and its interests in The Eli Witt Company and related liabilities, were transferred to Culbro Land Resources, Inc. ("CLR"). As a result of the Asset Transfers, the Corporation is a holding company with substantially no assets other than its ownership interests in Holdings and CLR. See "The Asset Transfers, the Distribution and the Merger" on pages 54-57 of the Prospectus. When used herein the "Corporation" includes the assets, liabilities and operations held by it indirectly through Holdings and CLR. Subsequent to the Offering, the Corporation intends to effect a distribution (the "Distribution") to the shareholders of the Corporation of all issued and outstanding shares of common stock of CLR. The Distribution will be contingent principally upon (i) either a tax ruling or an opinion of counsel satisfactory to the Corporation that the Distribution constitutes a tax-free reorganization under Section 355 of the Internal Revenue Code and (ii) the approval by the holders of 66-2/3% of the Corporation's common stock of the merger of the Corporation into Holdings (the "Merger"). Holdings will be the surviving corporation in the Merger and will issue to the holders of the common stock of the Corporation 4.44557 shares of Class B Common Stock for each share of the Corporation's common stock outstanding on the date of the Merger, or approximately 20,087,182 shares of Class B Common Stock in the aggregate, subject to adjustment for 2 FORM 10 -K 1996 CULBRO CORPORATION any options exercised prior to the Merger. The shareholders of the Corporation will not vote with respect to the adoption of the Merger until May 1997. On January 21, 1997 the Corporation, through its subsidiary General Cigar Co., Inc. acquired substantially all of the assets of Villazon & Company, Inc. and all of the stock of its affiliate Honduras American Tobacco, S.A. de C.V. ("Hatsa" and together with Villazon & Company, Inc., "Villazon"). See Note 2 to the Consolidated Financial Statements and pages 5, 6 and 53 of the Prospectus. EQUITY INVESTMENTS The Corporation owns 50.1% of The Eli Witt Company ("Eli Witt"), a wholesale distributor of tobacco, sundries and general merchandise. See Note 11 to the Consolidated Financial Statements. The Corporation deconsolidated Eli Witt as of April 25, 1994 and is accounting for its remaining investment in Eli Witt under the equity method in its 1996 financial statements. In November 1996 Eli Witt filed for protection under Chapter 11 of the Federal Bankruptcy Law. In connection with such filing Eli Witt entered into a contract to sell all of its operating assets to another distributor. On January 13, 1997, the proposed sale was approved by the Bankruptcy Court and is expected to be completed in the second quarter of 1997. As a result of the terms of the proposed sale, shareholders of Eli Witt are not expected to receive any proceeds from the sale. The Corporation has no investment related to Eli Witt on its 1996 consolidated balance sheet. See Item 3 - Legal Proceedings. The Corporation owns approximately 25% of the stock of Centaur Communications Limited, a privately-held publisher of business magazines in the United Kingdom. TOBACCO BUSINESS The tobacco business is comprised principally of (a) the manufacture and sale, by General Cigar Co., Inc. ("General Cigar"), of domestic and imported cigars in all major price categories under numerous trademarks, and (b) the growing, processing and sale of cigar wrapper tobacco by the Culbro Tobacco Division of General Cigar. General Cigar's products are distributed in the United States through approximately 1,300 wholesale distributors and direct retail and chain store accounts. For a discussion of General Cigar's business see "General", "Market Overview", "Making a General Cigar Premium Cigar", "Business Strategy", "Backorders", "Sales and Marketing", "Trademarks", "Raw Materials" and "Competition" on pages 30-37 of the Prospectus. For a discussion of the tobacco industry and its effect on General Cigar see "Regulation", "Litigation" and "Excise Taxes" on pages 37-40 of the Prospectus. See "Legal Proceedings" on pages 40 and 41 and "Risk Factors" on pages 10- 16 of the Prospectus for various matters that could have an adverse effect on General Cigar's business or results of operations. 3 FORM 10 -K 1996 CULBRO CORPORATION NURSERY PRODUCTS BUSINESS The landscape nursery operations of the Corporation are operated by its wholly-owned subsidiary, Imperial Nurseries, Inc. ("Imperial"). Imperial is a grower, distributor and broker of wholesale landscape nursery stock. The landscape nursery industry is extremely fragmented, with the industry leader having less than 1% of total market share. Imperial believes that its volume places it among the ten largest landscape nursery companies in the country. Imperial's growing operations are located on property part owned by the Corporation and part by Imperial, in Connecticut (1,000 in ground acres and 400 acres for containers) and in northern Florida (350 of container acres). The largest portion of Imperial's container grown product consists of broad leaf evergreens, including azaleas and rhododendron. Its field grown as opposed to container product includes principally evergreen pines, hemlocks, spruce and arborvitae. Imperial also contracts with a grower in the Middle Atlantic states to grow field grown product for Imperial. The agreement provides for Imperial to purchase such product over a 5 year period. This program is part of a program intended to reduce Imperial's investment in field grown plants and to shorten its product growing cycles to increase the profitability of the field grown business. Imperial is also reviewing other approaches to increasing its return on assets. Among the possible approaches are holding some of its containerized production for a longer period and selling such plants in terra cotta or similar containers for immediate use by customers and adding a broader selection of perennial flowers both directed at increasing margin and selling price. The combined field grown and container operations serve principally landscapers, retail chain store garden departments, retail nurseries and garden centers, and wholesale nurseries and distributors. Imperial-grown products are also distributed through its own wholesale horticultural sales and service centers. Imperial's major markets service the Northeast, Mid-Atlantic, Southeast and Mid-West. Nursery sales are seasonal, peaking in spring, and are affected by commercial and residential building activity as well as weather conditions. The largest portion of Imperial's assets are represented by plant inventories. Imperial operates eight wholesale horticultural sales and service centers which sell a wide range of plant material, including a large portion purchased from growers other than Imperial, and horticultural tools and products to the trade. The centers owned by Imperial are located in Windsor, Connecticut; Aston, Pennsylvania; Pittsburgh, Pennsylvania; Columbus and Cincinnati, Ohio; White Marsh, Maryland; and Manassas, Virginia. In addition, Imperial leases a center in Monroeville, Pennsylvania. In 1996, Imperial continued to diversify its customer base in order to reduce its dependence on a few large customers. Currently Imperial's sales are made to a large variety of customers, none of whom represents more than 3% of sales. Containerized growing and shipping capacity has been increased to meet the potential volume and quality needs of Imperial's customers and to capitalize on any growth in the Mid-Atlantic and Midwest markets. REAL ESTATE BUSINESS The Real Estate business is comprised of Culbro Land Resources, Inc. and 387 Park Avenue South, the New York City building which the Corporation owns and operates. 4 FORM 10 -K 1996 CULBRO CORPORATION The Corporation is directly engaged in the real estate development business on portions of its land in Connecticut through Culbro Land Resources, Inc. ("CLR"), headquartered in Bloomfield , Connecticut. CLR develops portions of the Corporation's properties for commercial, residential and office use. In connection with the Asset Transfers and Distribution described on page 2, CLR is expected to be named Griffin Land & Nursery Co. During the last several years, the real estate market in the Hartford area, particularly that in the northwest quadrant, where the majority of the Corporation's acreage is located, has been depressed by a number of factors, including the decline of employment in the defense and insurance industries. The development of the Corporation's land was also affected by land planning questions, particularly in the town of Simsbury. In Simsbury, the value of the Corporation's land is affected by the presence of chlordane on a portion of the land which is intended for residential development. The Corporation is examining means of remediation on its lands and will seek to subdivide certain of its Simsbury properties over a reasonable period. CLR's most substantial development is Griffin Center in Windsor, Connecticut and Griffin Center South in Bloomfield, Connecticut. Together these master planned developments comprise approximately 600 acres, half of which have been developed with nearly 1,750,000 square feet of office and industrial space. Griffin Center currently includes nine corporate office buildings built by CLR. During the 1980's, CLR sold 70% interests in five of the buildings to a bank-managed real estate investment fund. In 1996, these buildings were sold in a transaction initiated by the successor of that partner. CLR recorded a pre-tax loss as a result of this transaction. In the 1980's, CLR also sold 70% interests in two other office buildings to an insurance company. CLR currently maintains a 30% interest in those two office buildings in the Griffin Center Office Complex which aggregate 160,000 sq. ft. One other office building which had been leased to the State of Connecticut was transferred to the lender to the building in a deed in lieu of foreclosure in 1996. Griffin Center South, a 130-acre tract, comprises fifteen buildings of industrial and research/development space. Nine of these buildings have been retained by CLR for rental and are 78% rented. The other buildings have been built on land sold by CLR to commercial users who occupy the space. CLR has a master plan state traffic certificate which allows for the development of an additional 300,000 square feet of space. CLR owns a 600-acre tract of land near Bradley International Airport and Interstate 91 known as the New England Tradeport. To date, 140,000 square feet of warehouse and light manufacturing space have been developed and are 95% occupied and a bottling and distribution plant for Pepsi-Cola has been built. A state traffic control certificate for the future development of 1.3 million square feet has been obtained for the Tradeport. CLR intends to direct its primary efforts at the construction and leasing of light industrial and warehouse facilities at Tradeport. Development at Tradeport will require investment in offsite infrastructure on behalf of Windsor, Connecticut and improvement of some state or town roads. Two additional CLR parcels available for development include 28 acres in the Day Hill Technology Center in Windsor, and 100 acres in the South Windsor Technology Center. State traffic certificates have been obtained for these parcels for 500,000 square feet and 200,000 square feet of development, respectively. 5 FORM 10 -K 1996 CULBRO CORPORATION In 1988, a subsidiary of CLR began infrastructure work at Walden Woods, a 153-acre site in Windsor, Connecticut which was planned to contain more than 365 residential units. Prior to 1992 CLR had built and sold 45 homes before discontinuing its home building operations at Walden Woods. Since then two third-party home builders have completed an additional 64 homes. CLR is seeking to develop a joint venture to process bulky waste and build a transfer station and recycling operation on a portion of its land in East Granby,Connecticut. In addition, approximately 500 acres are leased for tobacco growing to General Cigar at rentals approximating carrying cost. These leases, which extend for 10 years, may be terminated, as to 100 acres, annually on one year's prior notice. CLR also leases office space to General Cigar. 387 PARK AVENUE SOUTH In 1983 the Corporation acquired all of the outstanding stock of a corporation whose principal asset was an office building in New York City. The building is 12 stories and contains approximately 210,000 square feet of rental space. The purchase price was approximately $15 million. The Corporation has advanced substantial amounts for building improvements. On April 21, 1995, the Corporation entered into a $5 million mortgage on the building. Approximately 11% of the space in the building has been leased to the Corporation for use as its offices and the remaining space is being leased or is available for lease as commercial rental property. Currently approximately 10% of rentable space is available for lease in this building. Results in 1996 increased slightly due to rental of previously vacant space. SUBSIDIARIES In 1987 the Corporation established several wholly-owned subsidiaries and transferred to them the assets and liabilities of formerly unincorporated divisions. The Corporation serves as the parent company of separate subsidiaries operating its cigar, nursery, and land development operations. Imperial Nurseries, Inc., formerly a Division of the Corporation, was incorporated as a separate company in February 1993. See Exhibit 21(A) hereto. In connection with the loan agreements entered into by the Corporation in February 1993 (see Note 6 to the Consolidated Financial Statements) and as at 1996 fiscal year end, the Corporation had pledged the stock of all of its active subsidiaries as collateral for such loans. As a result of the Asset Transfers discussed on page 2 hereof the Corporation in February 1997 became a holding company with substantially no assets other than its ownership of Holdings and CLR. (See Exhibit 21(B) hereto). EMPLOYEES The Corporation employs approximately 4,323 persons (excluding seasonal help employed in wrapper tobacco and nursery operations). NOTE: The brand names mentioned in this Report are trademarks owned by or licensed to the Corporation or its subsidiaries. All rights with respect thereto are reserved. 6 FORM 10 -K 1996 CULBRO CORPORATION ITEM 2 - PROPERTIES LAND HOLDINGS The Corporation is a major landholder in the State of Connecticut and owns some land in the State of Massachusetts, with holdings of approximately 5,600 acres, located principally in the Connecticut River Valley. In addition, the Corporation owns approximately 1,100 acres in Florida, a portion of which is used for Imperial Nurseries' growing operations, and owns sites for Imperial Nurseries' seven sales and service centers. Each such center typically has a warehouse/office facility and 10-15 acres of nursery stock. The book value of undeveloped land holdings, which includes land currently needed for tobacco and nursery operations, owned by the Corporation and Resources in the Connecticut River Valley is approximately $5,000,000. The Corporation believes the fair market value is very substantially in excess of such book value. The Corporation is developing certain of these holdings. (See "Real Estate"). Such development activities have increased the value of the Corporation's adjoining properties. Of the Corporation's land not currently needed for tobacco or nursery operations, only a portion is currently suitable for development. Ownership of certain of these land holdings has changed as a result of the Asset Transfers described on page 2 hereof. 7
FORM 10 -K 1996 CULBRO CORPORATION FACILITIES The table below sets forth the general character and location of certain of the principal facilities of the Corporation and its subsidiaries. It does not include the facilities of Culbro Land Resources, Inc. (See discussion of Real Estate under Item 1 - Business). OWNED APPROXIMATE OR FLOOR SPACE LOCATION LEASED NATURE OF OPERATION (SQUARE FEET) New York, New York Owned Executive Offices -Corporate Operations 25,000 New York, New York Leased Club Macanudo -Cigar Bar 5,000 Kingston, Jamaica, W.I. Owned Cigar Manufacturing 119,000 Dothan, Alabama Leased (1) Cigar Manufacturing & Warehousing 165,000 Hatfield, Massachusetts Owned Tobacco Warehousing & Processing 81,000 Santiago, Dominican Republic Leased (2) Tobacco Processing,& Cigar Manufacturing & Storage 384,242 Granby, Connecticut Owned Executive Offices -Nursery Operations 8,000 Bloomfield, Connecticut Owned Executive Offices -Cigar Operations 11,137 Bloomfield, Connecticut Leased Headquarters -Cigar Operations 12,500 Bloomfield, Connecticut Leased Warehouse 11,644 Chicago, Illinois Leased Club Macanudo Chicago -Cigar Bar 11,000
(1) Industrial Revenue Bond financing lease. The Corporation owns a 52,500 square foot warehouse in Dothan, Alabama that is leased to a third party. (2) The Corporation leases property in Santiago, Dominican Republic for its cigar manufacturing, tobacco processing and tobacco warehousing operations. These operations are conducted in several different facilities which are subject to 12 different leases. The Corporation subleases 70,000 square feet of these facilities to Shade Leaf Processors. (3) Facilities added by the Villazon Acquisition are listed on page 42 of the Prospectus. 8 ITEM 3 - LEGAL PROCEEDINGS The matters required to be discussed in this Item 3 are contained on pages 40 and 41 of the Prospectus under "Legal Proceedings", Tobacco Litigation and Other Litigation. As a result of the Asset Transfers described on page 2 hereof, CLR will acquire the Corporation's 50.1% interest in Eli Witt. In November 1996, Eli Witt filed for protection under Chapter 11 of the Federal Bankruptcy Law. Prior to February 1993, Eli Witt was a wholly-owned subsidiary of the Corporation and filed consolidated tax returns with the Corporation. The Corporation, Eli Witt and other parties engaged in two complex acquisitions and reorganizations in 1993 and 1994, pursuant to which the Corporation received significant distributions from Eli Witt to repay the Corporation's debt, including substantial amounts the Corporation had previously borrowed from unaffiliated third parties to fund Eli Witt's business. The Corporation subsequently loaned $5 million to Eli Witt. It is anticipated that these transactions (including the transfer of funds to the Corporation) will be reviewed by Eli Witt creditors and other parties in interest in connection with the Chapter 11 case. To date, one creditor has written to the unsecured creditors committee proposing an inquiry into this matter. Management does not believe that the above referenced matters will have a material adverse effect upon the financial condition of the Corporation. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS On February 20, 1997 the approximate number of record holders of Common Stock of the Corporation was approximately 840 which does not include beneficial owners whose shares are held of record in the names of brokers or nominees. The closing market price as quoted on the New York Stock Exchange on such date was $79.00 per share. The information appearing (i) under Quarterly Data on Common Shares on page 21 hereof, (ii) in Note 7 to the Consolidated Financial Statements and (iii) in Note 13 to the Consolidated Financial Statements are hereby incorporated by reference. ITEM 6 - SELECTED FINANCIAL DATA The Consolidated Statement of Operations appearing on page 22 hereof and the Selected Financial Data appearing on page 21 hereof are hereby incorporated by reference. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Management's Discussion and Analysis on page 17 hereof is hereby incorporated by reference. 9 FORM 10 -K 1996 CULBRO CORPORATION ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements together with the Report of Independent Accountants are hereby incorporated by reference. ITEM 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE CORPORATION In accordance with General Instruction G-3 to Form 10-K, the information called for in this Item 10 with respect to directors is not presented here since such information is included in the definitive proxy statement which involves the election of directors which will be filed pursuant to Regulation 14A not later than 120 days after the close of the fiscal year, and such information is hereby incorporated by reference from such proxy statement. 10 The following table sets forth the information called for in this Item 10 with respect to executive officers of the Corporation.
NAME OF EXECUTIVE OTHER PRESENT YEAR OTHER POSITIONS OFFICER AND POSITIONS AND SERVICE OR OTHER BUSINESS PRESENT PRINCIPAL OFFICES (2) AS EXECUTIVE EXPERIENCE DURING POSITION (1) (BEGINNING OFFICER PAST FIVE (BEGINNING YEAR) AGE YEAR) BEGAN YEARS (YEARS) EDGAR M. CULLMAN 79 Director 1963 None Chairman of the Board (1961) (1975) EDGAR M. CULLMAN, JR. 50 Director 1983 None President (1984) (1982) JOSEPH C. AIRD 52 None 1987 None Senior Vice President- Controller (1987) JAY M. GREEN 49 Treasurer 1988 None Executive Vice (1988) President Finance & Administration (1988) DAVID M. DANZIGER 31 None 1996 Director of Operational Projects Vice President - The Eli Witt Company Corporate Development (7/95-1/96);Harvard Business (1996) School (MBA) (9/92-6/94); Director Budget and Analysis - NYC Department of Transportation (8/90-7/92) ANTHONY J. GALICI 39 None 1995 None Vice President-Assistant Controller (1995) JANET A. KRAJEWSKI 42 None 1993 None Vice President-Taxes (1993) MARY L. RAFFANIELLO 43 None 1995 None Vice President- Human Resources (1995) A. ROSS WOLLEN 53 Senior Vice 1977 None General Counsel President (1983) (1980) & Secretary (1987)
11 FORM 10 -K 1996 CULBRO CORPORATION All of the Corporation's executive officers are subject to annual reelection. There were and are no understandings or arrangements between any of the Corporation's executive officers and any other person (except directors and officers acting solely in their capacities as such) pursuant to which any executive officer was selected as an officer. Mr. Green has an employment agreement terminating in 1999. See page 53 of the Prospectus. (See Item 14, Exhibit 10(E)). Positions not otherwise identified are with the Corporation. PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements (annexed hereto): There are filed as part of this Report on Form 10-K: the Consent and Report of Independent Accountants; and the Consolidated Financial Statements (including Notes) of the Corporation. See Index To Financial Statements and Additional Financial Data. (a)(2) Schedules (annexed hereto): Financial Statement Schedules required by Item 8 of Form 10-K for the fiscal years ended 1996, 1995 and 1994. See Index To Financial Statements and Additional Financial Data. (a)(3) Exhibits. Certain exhibits are incorporated herein by reference to the Registration Statement of General Cigar Holdings, Inc. on Form S-1 filed December 24, 1996 (No. 333-18791) of which the Prospectus is a part (the "Registration Statement"). (Enumeration corresponds to the Exhibit Table, Item 601, Regulation S-K. Items not enumerated are not applicable). (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. (A) Form of Distribution Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar Holdings, Inc. (Incorporated by reference to Exhibit 2.1 of the Registration Statement). (B) Form of Merger Agreement among Culbro Corporation and General Cigar Holdings, Inc. (Incorporated by reference to Exhibit 2.2 of the Registration Statement). (3) THE ARTICLES OF INCORPORATION AND BY-LAWS OF THE CORPORATION. (A) The Articles of Incorporation, as amended to date (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1984 - (Exhibit 3(A)) and to the definitive proxy statement of Registrant, dated April 11, 1988, for its Annual Meeting of Shareholders held on May 12, 1988). (B) The By-Laws, as amended to date (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1984 - (Exhibit 3(B)) and to the definitive proxy statement of Registrant, dated April 11, 1988, for its Annual Meeting of Shareholders held on May 12, 1988). 12 FORM 10 -K 1996 CULBRO CORPORATION (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. (A) Amended and Restated Note Purchase Agreement among the Corporation and six institutional investors relating to the private placement of $35,000,000 of Senior Notes, dated July 15, 1988 amended and restated as of February 19, 1993, including Exhibits (which have been omitted but will be furnished to the Commission upon request). (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1992). (B) Amended and Restated Credit Agreement, dated February 19, 1993 with several banks and Chemical Bank, as Agent, including Exhibits (which have been omitted but will be furnished to the Commission upon request). (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1992). (C) Credit Agreement among The Eli Witt Company, The Several Lenders from Time to Time Parties Hereto and Chemical Bank, as Agent, Dated as of February 19, 1993. (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1992). (D) Credit Agreement dated as of January 21, 1997 among General Cigar Co., Inc. as Borrower; General Cigar Holdings, Inc., 387 PAS Corp., Club Macanudo, Inc., GCH Transportation, Inc. and Villazon & Company, Inc., as Guarantors; the Lenders from time to time parties thereto; and Chase Securities as arranger, with the Chase Manhattan Bank as Administrative Agent. (Incorporated by reference to Exhibit 10.17 of the Registration Statement). Certain other documents evidencing indebtedness of the Corporation are not filed herewith in reliance upon the exemption provided by Item 601(b)(4)(iii)(A); the Registrant hereby undertakes to furnish a copy of such documents to the Commission upon request. (10) MATERIAL CONTRACTS; EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS. (A) 1992 Stock Plan of Registrant, dated December 10, 1993 (Incorporated by reference to the definitive proxy statement of Registrant, dated March 3, 1993, for its Annual Meeting of Shareholders held on April 8, 1993). (B) Stock Option Plan for Non-employee Directors of Registrant, dated December 10, 1993 (Incorporated by reference to the definitive proxy statement of Registrant, dated March 3, 1993, for its Annual Meeting of Shareholders held on April 8, 1993). (C) 1991 Employees Incentive Stock Option Plan of Registrant (Incorporated by reference to the definitive proxy statement of Registrant, dated April 9, 1991, for its 1991 Annual Meeting of Shareholders held on May 9, 1991). (D) 1983 Employees Incentive Stock Option Plan of Registrant, as amended (Incorporated by reference to the definitive proxy statement of Registrant, dated April 6, 1983, for its Annual Meeting of Shareholders held on May 12, 1983 and to the Appendix filed pursuant to Rule 424(C) under the Securities Act of 1933, as amended, dated March 3, 1987). 13 FORM 10 -K 1996 CULBRO CORPORATION (E) Employment Contract between the Registrant and Jay M. Green (Incorporated by reference to the definitive proxy statement of Registrant, dated March 14, 1994, for its Annual Meeting of Shareholders held April 7, 1994) and amendment dated January 11, 1997 (Incorporated by reference to Exhibit 10.7 of the Registration Statement). (F) Stock Option Plan for Non-employee Directors of Registrant, dated March 7, 1996 (Incorporated by reference to the definitive proxy statement of Registrant, dated March 15, 1996, for its Annual Meeting of Shareholders held on April 11, 1996). (G) Form of 1997 Stock Option Plan of General Cigar Holdings, Inc.(Incorporated by reference to Exhibit 10.8 of the Registration Statement). (H) 1996 Stock Plan of Culbro Corporation, dated as of March 15, 1996 (Incorporated by reference to the definitive proxy statement of Culbro Corporation, dated March 15, 1996, for its Annual Meeting of Shareholders held on April 11, 1996). (10) MATERIAL CONTRACTS; OTHER (I) Shareholders Agreement dated as of April 25, 1994 among Culbro Corporation, MS Distribution, Inc. and The Eli Witt Company (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for fiscal year 1994). (J) Asset Purchase Agreement, dated as of December 20, 1996, among General Cigar Co., Inc., Villazon & Company, Inc. and the Stockholders (as defined therein) (Incorporated by reference to Exhibit 10.1 of the Registration Statement). (K) Stock Purchase Agreement, dated as of December 23, 1996, among General Cigar Co., Inc., Honduras American Tabaco, S.A. de C.V., and the Sellers (as defined therein) (Incorporated by reference to Exhibit 10.2 of the Registration Statement). (L) Form of Tax Sharing Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar Holdings, Inc.(Incorporated by reference to Exhibit 10.3 of the Registration Statement). (M) Form of Benefits and Employment Matters Allocation Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar Holdings, Inc.(Incorporated by reference to Exhibit 10.4 of the Registration Statement). (N) Form of Services Agreement among Culbro Corporation, Culbro Land Resources, Inc. and General Cigar Holdings, Inc.(Incorporated by reference to Exhibit 10.5 of the Registration Statement). (O) Form of Agricultural Lease between Culbro Land Resources, Inc. and General Cigar Holdings, Inc.(Incorporated by reference to Exhibit 10.6 of the Registration Statement). (13) ANNUAL REPORT TO SECURITY HOLDERS. Not applicable. 14 FORM 10 -K 1996 CULBRO CORPORATION (21) SUBSIDIARIES. (A) List of Subsidiaries. (B) Chart of Subsidiaries. (28) UNDERTAKING. For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference to registrant's Prospectus on Form S-8 (Incorporated by reference to Exhibits to Form 10-K of the Corporation filed for the fiscal year 1984 - (Exhibit 28)) and subsequent Form S-8's: Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (99) Prospectus of General Cigar Holdings, Inc., dated February 27, 1997, as filed February 28, 1997 pursuant to Rule 424(b). (b) The Corporation filed reports on Form 8-K on August 29, 1996 and January 21, 1997. (c) See (a)(3) above. (d) See Index to Financial Statements and Additional Financial Data. To receive a copy (while supplies last) of the final Prospectus, dated February 27, 1997, which is part of the General Cigar Holdings, Inc. Registration Statement on Form S-1 (filed December 24, 1996 and subsequently amended, No. 333-18791) send a written request to: GENERAL CIGAR HOLDINGS, INC. 387 Park Avenue South New York, NY 10016-8899 Attention: Secretary 15 FORM 10 -K 1996 CULBRO CORPORATION SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Corporation has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. CULBRO CORPORATION By /s/ JAY M. GREEN ---------------- Jay M. Green Executive Vice President-Finance and Administration Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed by the following persons on behalf of the Corporation and in the capacities indicated as of March 13, 1997. SIGNATURES TITLE /s/ BRUCE A BARNET Director - ------------------ (Bruce A. Barnet) /s/ JOHN L. BERNBACH Director - -------------------- (John L. Bernbach) /s/ EDGAR M. CULLMAN Chairman of the Board - -------------------- (Edgar M. Cullman) and Director /s/ EDGAR M. CULLMAN, JR. President, Director and - ------------------------- (Edgar M. Cullman, Jr.) Chief Executive Officer /s/ FREDERICK M. DANZIGER Director - ------------------------- (Frederick M. Danziger) /s/ JOHN L. ERNST Director - ----------------- (John L. Ernst) /s/ JAY M. GREEN Executive Vice President and - ---------------- (Jay M. Green) Principal Financial Officer /s/ THOMAS C. ISRAEL Director - -------------------- (Thomas C. Israel) /s/ DAN W. LUFKIN Director - ----------------- (Dan W. Lufkin) /s/ GRAHAM V. SHERREN Director - --------------------- (Graham V. Sherren) /s/ PETER J. SOLOMON Director - -------------------- (Peter J. Solomon) /s/ FRANCIS T. VINCENT, JR. Director - --------------------------- (Francis T. Vincent, Jr.) /s/ JOSEPH C. AIRD Senior Vice President and Controller - ------------------ (Joseph C. Aird) 16 Management's Discussion and Analysis Liquidity and Capital Resources In 1996, cash used in operating activities of continuing operations reflected principally higher tobacco inventories at General Cigar Co., Inc. ("General Cigar") to meet the current demand for cigars and to secure certain tobacco supplies to meet the anticipated future demand for cigars. The increase in accounts receivable reflected the increased cigar sales. The decrease in deferred taxes reflected the reversal of excess deferred taxes due to lower than expected taxes on the sale of CMS Gilbreth Packaging Systems, Inc. ("CMS Gilbreth"), and the reclassification to current liabilities of deferred taxes for the reversal of timing differences. These items were partially offset by proceeds from the sale by the Corporation's Connecticut real estate business of an equity investment in a real estate joint venture. Cash provided by investing activities principally included the proceeds from the sale of CMS Gilbreth. The increase in capital expenditures in 1996 versus 1995 related to investment in General Cigar's manufacturing facilities to meet increased demand for premium cigars. In order to increase production, General Cigar recently expanded its manufacturing facilities in the Dominican Republic and Jamaica, and expects to increase production at its facilities in Honduras, which were recently acquired as a result of the acquisition of Villazon (see below). The cash used in financing activities reflects the reduction of debt from the proceeds of the CMS Gilbreth sale. On February 28, 1997, the Corporation's newly formed subsidiary, General Cigar Holdings, Inc. ("GC Holdings"), completed an initial public offering of 6.9 million shares of its Class A Common Stock (the "Offering"), representing approximately 26% of the common equity ownership of GC Holdings. The proceeds from the Offering, after underwriters' discounts and commissions and estimated other expenses, were approximately $113 million, and were used to repay debt, a substantial portion of which was incurred in the acquisition of Villazon (see below). The Corporation owns the remaining equity ownership of GC Holdings in the form of Class B Common Stock. GC Holdings has no operations of its own, and its principal asset is all of the outstanding common stock of General Cigar. Under the terms of a Distribution Agreement entered into on February 27, 1997 among the Corporation, GC Holdings and Culbro Land Resources ("CLR"), the Corporation transferred certain assets and liabilities to GC Holdings and CLR. The Distribution Agreement also provided for the transfer of the assets of the Corporation's non-tobacco businesses and investments, principally the nursery business, Imperial Nurseries, Inc. ("Imperial Nurseries"), most of the New England real estate holdings and the investment in Centaur Communications, Ltd. ("Centaur") to CLR. Subject to certain conditions, the Corporation intends to distribute to its shareholders the common stock of CLR (the "Distribution"). The only significant asset the Corporation will have after the Distribution will be its investment in GC Holdings. The Corporation will then be merged, subject to approval of 66 2/3% of its shareholders, with and into GC Holdings, with the Corporation's shareholders at that time receiving approximately 4.45 shares of Class B Common Stock of GC Holdings in exchange for each share of the Corporation's stock. On January 21, 1997, General Cigar acquired two affiliated companies (collectively "Villazon") for approximately $81.4 million consisting of $90.5 million of purchase price and direct acquisition costs, less $9.1 million of cash acquired. At closing, cash paid to the sellers was $64.6 million and $24.4 million of seller notes were issued. The acquisition of Villazon was 17 financed from the initial borrowings under the General Cigar Credit Agreement (see below), which was repaid from the Offering proceeds. On January 21, 1997, General Cigar entered into a Credit Agreement (the "General Cigar Credit Agreement") which provided financing for the acquisition of Villazon and repayment of the amount outstanding under the Culbro Credit Agreement. The General Cigar Credit Agreement provides financing for GC Holdings and its subsidiaries. In addition, under the terms of the Distribution Agreement, General Cigar transferred $7 million to finance the operations of CLR and its subsidiaries. Subsequent to the Offering, the cash flows of CLR have been segregated from the cash flows of GC Holdings. The Corporation believes that cash flows from operations and credit facilities will be adequate to finance its businesses. Results of Operations 1996 Compared to 1995 In 1996, the Corporation sold its packaging and labeling systems business, CMS Gilbreth, and has reported CMS Gilbreth's results as a discontinued operation. Results of prior years were restated to reflect the current presentation. Income from continuing operations increased from $7.5 million in 1995 to $8.4 million in 1996 due principally to higher operating profit in the cigar business, partially offset by the effect of other expense of $4.5 million (see below) recorded in contemplation of the Offering. Higher profit in the cigar business reflected an increase in net sales of approximately 25%. The increase in net sales reflected principally higher unit sales of premium cigars, and higher prices in all cigar categories. Continued strong sales and prices of premium cigars and higher prices in the mass market category more than offset slightly lower unit volume in certain brands of mass market cigars. Management believes that volume in mass market cigars was adversely affected by repositioning and renaming certain brands. Gross profit in the cigar business increased, reflecting higher prices, benefits from mix due to relatively higher sales of premium cigars, and the increased volume. Operating expense in the cigar business increased due principally to the higher sales volume. The operating results of the Club Macanudo cigar bar which opened in 1996 were not material. Operating profit in the nursery products business, Imperial Nurseries, was substantially unchanged from last year. The effect of higher net sales was offset by lower margins and higher operating expenses. In the Connecticut real estate business, operating results decreased from last year due to lower property sales and a loss of approximately $0.4 million on the sale of an equity interest in a real estate joint venture. The joint venture sale generated proceeds of approximately $4 million. Operating results of the New York City office building increased due to higher rental revenue from leasing previously vacant space. General corporate expense increased by $2.3 million due to other expense of $4.5 million partially offset by lower annual incentive compensation expense in 1996 compared to 1995. The other expense of $4.5 million in 1996 represents the cost of terminating a long-term incentive compensation plan and severance costs for corporate employees, in contemplation of the Offering. 18 Interest expense decreased from 1995 reflecting lower debt levels in 1996 and overall lower interest rates. The loss from discontinued operations reflects the loss on the sale of CMS Gilbreth, partially offset by operating profit prior to the sale. Operating results of CMS Gilbreth declined from last year due principally to lower sales. 1995 Compared to 1994 The income from continuing operations in 1995, compared to a loss from continuing operations in 1994, reflected substantially higher operating profit in the cigar business. The higher profit in the cigar business reflected higher unit volume and higher prices in all cigar categories. Gross profit was higher due to the higher sales and increased gross margins. The increase in gross margins reflected a more favorable mix due to relatively higher sales of premium cigars and lower fixed costs per unit due to the higher volume. Operating expenses in the cigar business increased due to the higher volume. As a percentage of net sales, operating expenses decreased slightly in fiscal 1995 due to expenses increasing at a lower rate relative to the increase in sales. Operating results in the Corporation's nursery products business increased in 1995 due to improved pricing and lower costs, partially offset by the effect of lower volume. Imperial's 1995 results included a charge of $1 million to reserve for excess field grown plant inventories due to projected market conditions. Imperial plans to reduce its investment in field grown plant inventories. In the Corporation's real estate segment, operating results of the Connecticut real estate business increased, reflecting the effect of the $3.6 million charge recorded in 1994 to write off previously expended costs on certain projects that were not being developed as originally planned. Excluding the effect of this one-time charge in 1994, operating results in the Connecticut real estate business in 1995 were substantially unchanged. Conditions in the commercial and residential real estate markets in the greater Hartford area continued to hamper development activities. Although leasing activities were strong in 1995, lower lease rates reflected the soft commercial market. Results in the Corporation's commercial office building in New York City improved slightly due to higher rental income from short-term leases. General corporate expense increased due principally to accruals for management incentive compensation, related to the increased earnings in 1995. Results from the Corporation's equity investments in 1995 reflected a loss at Centaur compared to income in 1994. Centaur's lower results reflected a weakening in the British economy. The Corporation's 1994 results from equity investments included a loss at Eli Witt prior to the deconsolidation of that company in April 1994. In 1995, the Corporation's results included certain nonoperating items, both income and expense, which substantially offset each other. A gain of approximately $2.6 million on an insurance settlement reflected the proceeds received from two of the claims related to a General Cigar office and warehouse facility destroyed by fire in May 1994. Additional claims related to this incident remain outstanding. Included in other nonoperating income, net were approximately $2.2 million of expenses reflecting the Corporation's support of its investment in Eli Witt and expenses related to a terminated transaction for the sale of 51% of General Cigar. 19 Interest expense increased in 1995 because of a full year of interest accrued on the 10% exchangeable subordinated note, as compared to a partial year in 1994. The accrued dividend income and accretion on the Eli Witt Series B Preferred Stock, included in other nonoperating income, net, is equal to the accrued interest expense on the subordinated note. Net income increased in 1995 compared to 1994 due to the higher income from continuing operations and slightly higher results from the discontinued operation, CMS Gilbreth, which was sold in 1996. CMS Gilbreth's results increased as a result of higher sales and cost reduction benefits from closing a facility in 1994, partially offset by higher spending on research and development. 20 Quarterly Data on Common Shares The following are the high and low prices of common shares of Culbro Corporation (the "Corporation") in 1996 and 1995 as traded on the New York Stock Exchange. 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter High Low High Low High Low High Low ] --------------- --------------- --------------- --------------- 1996 67 5/8 46 3/4 76 3/4 52 1/4 62 1/2 43 1/4 60 1/4 49 1/4 1995 14 7/8 11 3/4 29 1/2 14 7/8 36 1/4 26 51 3/4 33 There were no cash dividends declared in 1996 or 1995. Selected Financial Data
(dollars in thousands except per share data) 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------- Net sales and other revenue $ 204,812 $ 168,996 $ 134,335 $ 1,317,680 $ 1,106,914 Operating profit 19,853 18,644 3,153 13,848 12,216 Income (loss) from continuing operations 8,399 7,504 (2,172) (1,218) (31) Income (loss) per common share from continuing operations 1.80 1.69 (0.50) (0.45) (0.01) Net income (loss) 7,856 11,189 1,152 (7,452) 1,868 Net income (loss) per common share 1.68 2.52 0.27 (1.89) 0.43 Dividends per common share -- -- -- -- 0.60 Working capital 95,430 64,671 69,003 120,147 96,542 Property and equipment, net 66,829 61,059 61,894 99,994 83,637 Total assets 243,444 277,818 268,057 419,791 400,609 Long-term debt 49,925 84,089 98,612 174,969 145,163 Shareholders' equity 135,788 124,975 112,037 110,882 119,035 Book value per common share at end of period 30.09 28.47 26.01 25.74 27.63 Weighted average common shares and equivalents outstanding 4,664,000 4,440,000 4,308,000 4,308,000 4,308,000 ========= ========= ========= ========= =========
The 1992 through 1995 information presented above has been restated to reflect CMS Gilbreth as a discontinued operation. The 1996, 1995 and 1994 information reflects the deconsolidation of Eli Witt (see Note 11). 21 Consolidated Statement of Operations and Retained Earnings (dollars in thousands except per share data) - -------------------------------------------------------------------------------- 1996 1995 1994 Net sales and other revenue $ 204,812 $168,996 $134,335 Costs and expenses Cost of goods sold 120,449 98,072 83,085 Selling, general and administrative expenses 60,010 52,280 44,497 Other expense 4,500 -- 3,600 --------- --------- -------- Operating profit 19,853 18,644 3,153 Income (loss) from equity investments, net 303 (153) (1,728) Other nonoperating income, net 1,917 116 1,446 Gain on insurance settlement -- 2,586 -- Gain on sale of Eli Witt common stock -- -- 2,691 Interest expense 8,758 9,242 8,585 --------- --------- -------- Income (loss) before income taxes 13,315 11,951 (3,023) Income tax provision (benefit) 4,916 4,447 (851) --------- --------- -------- Income (loss) from continuing operations 8,399 7,504 (2,172) --------- --------- -------- Discontinued operation: Loss on sale of business, net of tax benefit and reversal of excess deferred taxes of $4,182 (1,311) -- -- Income from operations, net of tax of $527 (1995-$2,580;1994-$2,273) 768 3,685 3,324 --------- --------- -------- (Loss) income from discontinued operation (543) 3,685 3,324 --------- --------- -------- Net income 7,856 11,189 1,152 Retained earnings - beginning of year 110,686 99,497 98,345 --------- --------- -------- Retained earnings - end of year $ 118,542 $110,686 $ 99,497 ========= ========= ======== Income (loss) per common share from continuing operations $ 1.80 $ 1.69 $ (0.50) (Loss) income per common share from discontinued operation (0.12) 0.83 0.77 --------- --------- -------- Net income per common share $ 1.68 $ 2.52 $ 0.27 ========= ========= ========= Weighted average common shares and equivalents outstanding 4,664,000 4,440,000 4,308,000 ========= ========= ========= See Notes to Consolidated Financial Statements. 22 Consolidated Statement of Changes in Common Stock and Capital in Excess of Par Value Capital in Common Common Excess of Stock in (dollars in thousands) Stock Par Value Treasury - -------------------------------------------------------------------------------- Balance November 27, 1993 $4,549 $13,296 $ (5,308) Issuance of treasury stock (226 shares) -- -- 3 ------ ------- -------- Balance December 3, 1994 4,549 13,296 (5,305) Issuance of treasury stock (225 shares) -- -- 5 Exercise of stock options (81,632 shares) -- (20) 1,764 ------ ------- -------- Balance December 2, 1995 4,549 13,276 (3,536) Issuance of treasury stock (60 shares) -- -- 1 Exercise of stock options (121,388 shares) - 326 2,630 ------ ------- -------- Balance November 30, 1996 $4,549 $13,602 $ (905) ====== ======= ======== See Notes to Consolidated Financial Statements. 23 Consolidated Balance Sheet Nov. 30, Dec. 2, (dollars in thousands except per share data) 1996 1995 - -------------------------------------------------------------------------------- Assets Current Assets Cash and cash equivalents $ 5,409 $ 6,523 Receivables, less allowance of $784 (1995-$803) 35,257 28,377 Inventories 81,232 63,774 Deferred income taxes 3,091 -- Other current assets 4,832 4,883 --------- --------- Total current assets 129,821 103,557 Property and equipment, net 66,829 61,059 Real estate held for sale or lease, net 25,218 29,959 Investment in real estate joint ventures 3,403 7,964 Other, including investment in Centaur of $14,695 (1995-$14,392) 18,173 18,049 Investment in Series B Preferred Stock of Eli Witt -- 15,122 Net assets of discontinued operation -- 42,108 --------- --------- Total assets $ 243,444 $ 277,818 ========= ========= Liabilities and Shareholders' Equity Current Liabilities Accounts payable and accrued liabilities $ 27,502 $ 27,363 Income taxes 5,481 2,610 Long-term debt due within one year 1,408 8,913 --------- --------- Total current liabilities 34,391 38,886 Long-term debt 49,925 84,089 Accrued retirement benefits 15,874 16,148 Deferred income taxes -- 5,622 Other noncurrent liabilities and deferred credit 7,466 8,098 --------- --------- Total liabilities 107,656 152,843 --------- --------- Shareholders' Equity Common stock, par value $1 per share Authorized-10,000,000 shares Issued-4,549,190 shares 4,549 4,549 Capital in excess of par value 13,602 13,276 Retained earnings 118,542 110,686 --------- --------- 136,693 128,511 Less-Common stock in Treasury, at cost 37,597 shares (1995-159,045) (905) (3,536) --------- --------- Total shareholders' equity 135,788 124,975 --------- --------- Total liabilities and shareholders' equity $ 243,444 $ 277,818 ========= ========= See Notes to Consolidated Financial Statements. 24 Consolidated Statement of Cash Flows
(dollars in thousands) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- Operating activities: Net income $ 7,856 $ 11,189 $ 1,152 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 5,334 5,157 4,632 Loss (income) from discontinued operation, before tax 4,198 (6,265) (5,597) Gain on insurance settlement -- (2,586) -- Gain on sale of Eli Witt common stock -- -- (2,691) (Income) loss from equity investments, net (303) 153 1,728 Discount and interest on subordinated note 2,167 2,349 1,446 Accretion and dividend income on Series B Preferred Stock of Eli Witt (2,167) (2,349) (1,446) Increase in other noncurrent liabilities from other expense 3,000 -- -- Provision for bad debts 490 278 570 Proceeds from sale of equity interest in a real estate joint venture 4,042 -- -- Changes in assets and liabilities: Decrease in real estate held for sale or lease 1,024 1,414 3,965 (Increase) decrease in inventories (17,458) (1,892) 1,017 Increase in accounts receivable (7,370) (11,161) (690) (Decrease) increase in accounts payable and accrued liabilities (314) 9,179 (1,065) Increase in income taxes payable 2,871 2,311 35 (Decrease) increase in deferred income taxes (8,713) 857 (2,714) Other, net 1,177 (1,432) 1,934 -------- -------- -------- Net cash (used in) provided by operating activities of continuing operations (4,166) 7,202 2,276 Net cash provided by operating activities of discontinued operation 3,547 9,435 10,235 -------- -------- -------- Net cash (used in) provided by operating activities (619) 16,637 12,511 -------- -------- -------- Investing activities: Net proceeds from sale of CMS Gilbreth 35,030 -- -- Additions to property and equipment (11,079) (3,688) (2,509) Investment in Eli Witt subordinated note -- (5,000) -- Proceeds from insurance settlement -- 2,225 500 Proceeds from Eli Witt repayment of a mortgage loan to the Corporation -- -- 8,000 Proceeds from the sale of Eli Witt common stock -- -- 672 Investing activities related to discontinued operation (947) (1,450) (2,317) -------- -------- -------- Net cash provided by (used in) investing activities 23,004 (7,913) 4,346 -------- -------- -------- Financing activities: Payments of long-term debt (25,662) (15,502) (28,662) Increases in long-term debt 475 5,000 16,669 Proceeds from exercise of stock options 1,688 1,363 -- -------- -------- -------- Net cash used in financing activities (23,499) (9,139) (11,993) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (1,114) (415) 4,864 Cash and cash equivalents at beginning of year 6,523 6,938 2,074 -------- -------- -------- Cash and cash equivalents at end of year $ 5,409 $ 6,523 $ 6,938 ======== ======== ========
See Notes to Consolidated Financial Statements. 25 NOTES to CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands except per share data) 1. Significant Accounting Policies Basis of Consolidation The consolidated financial statements of the Corporation include the accounts of all wholly owned subsidiaries. The Corporation accounts for its approximately 25% investment in Centaur on the equity method. Approximately $6,550, representing the excess of the cost of the Corporation's investment over the book value of its equity in Centaur, is being amortized on a straight-line basis over 40 years. The Corporation accounts for its investment in real estate joint ventures on the equity method. Fiscal Year The Corporation's fiscal year ends on the Saturday nearest November 30. Fiscal 1996 and 1995 ended on November 30, 1996 and December 2, 1995, respectively, and contained 52 weeks. Fiscal 1994 ended on December 3, 1994, and contained 53 weeks. Reclassification Certain amounts in the prior years financial statements have been reclassified to conform to the current presentation. Cash and Cash Equivalents Cash and cash equivalents include cash on deposit and bank commercial paper which matures within 90 days of purchase. Inventories Inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") or average cost method. Raw materials include tobacco in the process of aging and landscape nursery stock, a substantial amount of which will not be used or sold within one year. It is the practice in these industries to include such inventories in current assets. Raw materials also include tobacco in bond which is subject to customs duties payable upon withdrawal from bond. Following industry practice, the Corporation does not include such duties in inventories until paid. 26 Property and Equipment Property and equipment are recorded at cost. Depreciation is determined on a straight-line basis over the estimated useful asset lives for financial reporting purposes and principally on accelerated methods for tax purposes. Revenue and Gain Recognition In the consumer products, industrial products and nursery products businesses, sales and the related costs of sales are recognized upon shipment of products. In the real estate business, gains on real estate sales are recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate." Advertising and Promotion Expense Production costs of future media advertising are deferred until the advertising occurs. All other advertising and promotion costs are expensed when incurred. Stock-Based Compensation In 1996, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based Compensation." The Corporation has elected to adopt this new accounting statement through a pro forma disclosure of the effects of using a fair value method to value stock options granted (see Note 7). The Corporation will continue to use the method of accounting for stock options as prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." Therefore, adoption of the disclosure requirements of SFAS No. 123 will have no effect on the Corporation's reported financial position and results of operations. Earnings Per Share Earnings per share of common stock are based on the weighted average number of shares of common stock outstanding, considering the dilutive effect of outstanding stock options. Fair Value of Financial Instruments The amounts included in the financial statements for accounts receivable, accounts payable and accrued liabilities reflect their fair values because of the short-term maturity of these instruments. The fair values of the Corporation's other financial instruments are discussed in Note 6. 27 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for allowance for uncollectible accounts receivable, depreciation and amortization, employee benefit plans, taxes, and other contingencies, among others. 2. Subsequent Events Certain Transactions On February 28, 1997, the Corporation's newly formed subsidiary, General Cigar Holdings, Inc. ("GC Holdings"), completed an initial public offering of 6.9 million shares of its Class A Common Stock (the "Offering"), reflecting approximately 26% of the common equity ownership of GC Holdings. Each share of Class A Common Stock entitles its holder to one vote. The Corporation owns the remaining equity ownership of GC Holdings in the form of Class B Common Stock, which entitles its holder to ten votes for each share. Accordingly, the Corporation holds approximately 97% of the combined voting power of the outstanding common stock of GC Holdings. The proceeds from the Offering, after underwriters' discounts and commissions and estimated other expenses, were approximately $113 million and were used to reduce debt, a substantial portion of which was incurred in connection with a recent acquisition (see below). See Note 4 for the unaudited pro forma effect of the Offering on the Corporations's financial statements. GC Holdings has no operations of its own, and its principal asset is all of the outstanding stock of General Cigar Co., Inc. ("General Cigar"), previously a wholly owned direct subsidiary of the Corporation. Pursuant to a Distribution Agreement entered into on February 27, 1997, among the Corporation, GC Holdings and the Corporation's wholly owned subsidiary, Culbro Land Resources, Inc. ("CLR"), the Corporation transferred certain assets and liabilities to GC Holdings and CLR. The Distribution Agreement also provides for a potential distribution of the stock of CLR to the shareholders of the Corporation (the "Distribution"). The Distribution is contingent upon (i) either a tax ruling or an opinion of counsel satisfactory to the Corporation that the Distribution constitutes a tax free reorganization under Section 335 of the Internal Revenue code and (ii) approval of the Merger (see below) by the Corporation's shareholders. The assets transferred to GC Holdings included principally 1,100 acres of land, all of the outstanding common stock of 387 PAS Corp., Club Macanudo, Inc., and Club Macanudo (Chicago) Inc. The terms of the Distribution Agreement required GC Holdings to assume certain related liabilities and the amount outstanding under the Culbro Credit Agreement (see Note 6). The Distribution Agreement also provided for the assumption of certain employee benefit arrangements of the Corporation by GC Holdings, and for a tax sharing agreement between the Corporation, GC Holdings, and CLR. The assets transferred to CLR included the Corporation's non-tobacco businesses and investments, principally its nursery business, Imperial Nurseries, Inc. ("Imperial"), most of its New England real estate holdings and the investment in Centaur Communications Ltd. ("Centaur"). The Distribution Agreement also required a transfer of $7 million to CLR from GC Holdings on February 27, 1997. 28 Subsequent to the Distribution, the Corporation will have as its only significant asset its investment in GC Holdings. The Corporation will then be merged (the "Merger"), subject to approval of 66 2/3% of its shareholders, into GC Holdings. The Corporation's shareholders at that time will receive approximately 4.45 shares of Class B Common Stock of GC Holdings in exchange for each share of the Corporation's stock. Villazon Acquisition On January 21, 1997, General Cigar completed the acquisitions of two affiliated companies, Villazon & Company, Inc., a U.S. corporation, and Honduras American Tabaco, S.A de C.V., a Honduran corporation (collectively "Villazon"), for approximately $81.4 million consisting of $90.5 million of purchase price and direct acquisition costs less $9.1 million of cash acquired at closing. Cash paid to the sellers was $64.6 million and $24.4 million aggregate principal amount of seller notes were issued (the "Villazon Acquisition"). Both companies are engaged in the cigar business. The Villazon Acquisition will be accounted for using the purchase method of accounting. Cost in excess of net assets acquired, primarily trade names and other intangible assets, is estimated to be approximately $71 million (see unaudited pro forma condensed financial information in Note 4). General Cigar entered into a Credit Agreement (see Note 6) to finance the acquisition. The amounts borrowed under the General Cigar Credit Agreement and $14.4 million of the seller notes were repaid with the proceeds from the Offering. 3. Business Disposition On November 8, 1996, the Corporation completed the sale of its labeling and packaging systems business, CMS Gilbreth Packaging Systems, Inc. ("CMS Gilbreth"). The Corporation received net proceeds, after sale expenses, of approximately $35.0 million and recorded an estimated pretax loss of approximately $5.5 million on the sale, net of operating profit of approximately $1.6 million earned during the phase-out period. The actual loss on sale will be determined when the closing balance sheet of CMS Gilbreth is finalized. The sale proceeds were used to repay debt. CMS Gilbreth is reported as a discontinued operation in the accompanying financial statements. Financial statements of prior periods have been restated to reflect the current presentation. Net sales and other revenue of CMS Gilbreth in 1996 were $43,624 through the date of sale, and $51,048 and $51,080 in 1995 and 1994, respectively. 4. Consolidated Condensed Pro Forma Financial Information (Unaudited) The following consolidated condensed unaudited pro forma financial information reflects the Corporation as if the Villazon Acquisition, including the associated borrowings to finance the acquisition, the sale of CMS Gilbreth, and the Offering had been completed. The unaudited consolidated condensed pro forma statement of operations assumes that these transactions had taken place at the beginning of fiscal 1996. The unaudited consolidated condensed pro forma balance sheet reflects the effect of the acquisition of Villazon and the 29 Offering as if they had taken place at the balance sheet date. The effect of the sale of CMS Gilbreth is reflected in the Corporation's 1996 balance sheet. The unaudited pro forma consolidated condensed financial information presented herein may not necessarily reflect the results of operations and financial position that actually would have been achieved had the transactions discussed above actually taken place at the assumed dates. Consolidated Condensed Pro Forma Statement of Operations (Unaudited) 1996 ---- Net sales $ 246,830 --------- Operating profit 31,934 Other nonoperating items 2,899 Interest expense 4,766 --------- Income before taxes 30,067 Income tax expense 11,449 --------- Income before minority interest 18,618 Minority interest in subsidiary (4,831) --------- Income from continuing operations $ 13,787 ========= Consolidated Condensed Pro Forma Balance Sheet (Unaudited) Nov. 30, 1996 -------- Current assets $151,530 Property and equipment, net 71,179 Intangible assets 71,352 Other assets 49,136 -------- Total assets $343,197 ======== Current liabilities $ 35,824 Long-term debt 28,445 Other noncurrent liabilities 30,140 -------- Total liabilities 94,409 Minority interest in subsidiary 40,463 Shareholders' equity 208,325 -------- Total liabilities, minority interest and shareholders'equity $343,197 ======== 30 5. Industry Segment Information The Corporation's businesses operate in three industry segments: consumer products, nursery products and real estate. The consumer products segment is engaged in the manufacturing and marketing of cigars, growing wrapper tobacco, distributing disposable lighters and operating a cigar bar in New York City, which opened in 1996. The nursery products segment is engaged in growing plants which are sold principally to garden centers, wholesalers, and mass merchandisers and operating sales and service centers which sell principally to landscapers. The real estate segment is engaged in building and managing commercial and industrial properties, developing residential subdivisions on real estate owned by the Corporation in Connecticut and Massachusetts and owning and managing a commercial office building in New York City. Revenue, operating profit and assets of operations outside the United States, and export sales are not material. Capital expenditures and depreciation and amortization presented herein include amounts related to capital leases. 1996 1995 1994 - -------------------------------------------------------------------------------- Net sales and other revenue Consumer Products $154,676 $ 124,033 $ 88,304 Nursery Products 36,759 34,507 34,928 Real Estate 13,377 10,456 11,103 -------- --------- --------- $204,812 $ 168,996 $ 134,335 ======== ========= ========= Operating Profit Consumer Products $ 31,013 $ 26,405 $ 13,532 Nursery Products 1,650 1,732 (604) Real Estate (a) 721 1,719 (1,983) -------- --------- --------- Industry segment totals 33,384 29,856 10,945 General corporate expense (b) 13,531 11,212 7,792 Income (loss) from equity investments, net 303 (153) (1,728) Other nonoperating income, net 1,917 116 1,446 Gain on insurance settlement -- 2,586 -- Gain on sale of Eli Witt common stock -- -- 2,691 Interest expense 8,758 9,242 8,585 -------- --------- --------- Income (loss) before income taxes $ 13,315 $ 11,951 $ (3,023) ======== ========= ========= Identifiable assets Consumer Products $105,714 $ 76,933 $ 64,126 Nursery Products 43,948 42,881 40,636 Real Estate 60,266 69,272 71,215 -------- --------- --------- Industry segment totals 209,928 189,086 175,977 General corporate 33,516 46,624 48,252 Net assets of discontinued operation -- 42,108 43,828 -------- --------- --------- $243,444 $ 277,818 $ 268,057 ======== ========= ========= (a) Real estate segment operating loss in 1994 includes a $3.6 million charge for the write off of development costs expended in earlier years. (b) General corporate expense in 1996 includes expense of $4.5 million for the termination of a compensation plan and severance and other expenses in contemplation of the Offering (see Note 2). 31 Capital Expenditures Depreciation and Amortization 1996 1995 1994 1996 1995 1994 - -------------------------------------------------------------------------------- Consumer Products $ 8,393 $2,499 $1,455 $2,342 $2,037 $1,815 Nursery Products 1,258 789 594 1,116 1,132 912 Real Estate 1,035 248 402 1,101 1,161 1,045 ------- ------ ------ ------ ------ ------ Industry segment totals 10,686 3,536 2,451 4,559 4,330 3,772 General corporate 393 152 58 775 827 860 ------- ------ ------ ------ ------ ------ $11,079 $3,688 $2,509 $5,334 $5,157 $4,632 ======= ====== ====== ====== ====== ====== 6. Long-term Debt Long-term debt includes: Nov. 30, Dec. 2, 1996 1995 - -------------------------------------------------------------------------------- Credit Agreement $36,000 $40,000 Mortgages 11,862 16,013 Senior Notes -- 21,000 Exchangeable Subordinated Note, 10% (face value $15,000) -- 12,700 Obligations under capital leases 3,471 3,289 ------- ------- 51,333 93,002 Less: due within one year 1,408 8,913 ------- ------- Total long-term debt $49,925 $84,089 ======= ======= As of November 30, 1996, the annual payment requirements for the mortgages, for the years 1997 through 2001 are $406, $450, $5,486 , $525 and $568, respectively. On June 5, 1996, the Corporation and its banks entered into the Second Amended and Restated Credit Agreement (the "1996 Culbro Credit Agreement") which replaced the previous Credit Agreement that was scheduled to terminate in December 1996. The 1996 Culbro Credit Agreement provided $65 million for general working capital purposes and $20 million for repayment of the Corporation's Senior Notes. The repayment of the Senior Notes in 1996 included a scheduled payment of $7 million with the balance repaid with a portion of the proceeds from the sale of CMS Gilbreth. On January 21, 1997, General Cigar entered into a $120 million Credit Agreement (the "General Cigar Credit Agreement") with the banks that previously were lenders under the 1996 Culbro Credit Agreement. The initial borrowings under the General Cigar Credit Agreement were used for the Villazon Acquisition and to repay the amount outstanding under the 1996 Culbro Credit Agreement. The General Cigar Credit Agreement is composed of a $60 million term loan and a revolving credit facility of $60 million. The proceeds from the Offering were used to repay the amount outstanding under the term loan and the revolving credit facility of the General Cigar Credit Agreement. Also, the commitment under the revolving credit facility was reduced to $50 million. In accordance with the terms of the General Cigar Credit Agreement, borrowings under the revolving credit facility bear interest at the Eurodollar rate plus 0.75%. General Cigar will pay a commitment fee of 1/4 of 1% on the unused portion of the revolving credit facility. The General Cigar Credit Agreement includes limitations on indebtedness, investments and other significant transactions, as defined. 32 Prior to the Offering, the General Cigar Credit Agreement was guaranteed by the Corporation and provided financing to the Corporation and all of its subsidiaries. Subsequent to the Offering, the General Cigar Credit Agreement will provide financing to General Cigar and the other related subsidiaries of GC Holdings. GC Holdings is financed separately from CLR and its subsidiaries, and the cash flow of GC Holdings is not available to CLR. As part of the Distribution Agreement (see Note 2), GC Holdings transferred cash of $7 million to CLR immediately prior to the Offering. In October 1996, the Corporation's real estate business satisfied a nonrecourse mortgage of approximately $3.8 million on a commercial property by transferring the property to the lender in satisfaction of the outstanding mortgage. The net book value of the property was substantially equal to the mortgage balance. In November 1996, the Corporation exchanged the Series B Preferred Stock of Eli Witt in satisfaction of the $15 million Subordinated Note originally due August 1998. The exchange satisfied the principal and accrued interest on the note. Interest expense in 1996, 1995 and 1994 included $782, $850 and $522, respectively, for amortization of the original issue discount on the subordinated note. In April 1995, the Corporation entered into a $5 million mortgage on its New York City office building. The mortgage bears interest at the Eurodollar rate plus 2%, matures March 31, 1999 and requires periodic payments of interest only until maturity. The proceeds were used by the Corporation for an additional investment in Eli Witt in the form of a subordinated note (see Note 11). The Corporation previously entered into two interest rate swap agreements with major banks as a hedge against interest rate exposure on its variable rate debt. One such agreement, to fix the Corporation's borrowing rate at 4.74% on $30 million of variable rate debt, expired in March 1996. A similar interest rate swap agreement, that fixed the Corporation's borrowing rate at 4.89% on an additional $20 million of variable rate debt, expired in September 1995. The effect of these swap agreements was to decrease 1996 and 1995 interest expense by $75 and $572, respectively, reflecting payments received from the banks under these agreements. Interest expense in 1994 was increased by $370 under these agreements, reflecting the excess of payments made to the banks over payments received. Management believes that because the interest rate on the 1996 Culbro Credit Agreement adjusted to current market rates, this debt, as stated on the November 30, 1996 balance sheet, approximated its fair market value. Management also believes that the amounts reflected on the balance sheet for its other debt facilities reflect their current market values based on market interest rates for comparable risks, maturities and collateral. 7. Shareholders' Equity Employees Stock Option Plans In 1996, the Corporation adopted the 1996 Stock Plan (the "1996 Plan") for officers and key employees, under which 500,000 shares of common stock were made available for purchase at prices equal to the fair market value at date of grant. The 1992 Stock Plan (the "1992 Plan") and the 1991 Employees Incentive Stock Option Plan (the "1991 Plan") for officers and key employees made available 300,000 and 210,000 shares of common stock, respectively, for purchase at prices equal to the fair market value at date of grant. A portion of the options outstanding under these three plans may be exercised as Incentive Stock Options, which under current tax laws do not provide any tax deductions to the Corporation. Options are not exercisable until three years from the date of grant and may be exercised over a period ending not later than ten years (1996 Plan) and eight years (1991 and 1992 Plans) from the date of grant. The exercise period for each grant is determined by the Corporation's Compensation Committee. 33 As of November 30, 1996, a total of 400,000 and 40,300 shares under the 1996 Plan and 1992 Plan, respectively, were available for future grant. There are no shares available for future grant under the 1991 Plan. None of the options outstanding at November 30, 1996 may be exercised as stock appreciation rights. Upon consummation of the Distribution and Merger, the Corporation will convert all employee stock options outstanding under the Employees Stock Option Plans into options to purchase shares of common stock of GC Holdings and shares of common stock of CLR. The number of outstanding options and exercise prices would be adjusted to preserve the value of the options. Transactions under the 1996, 1992 and 1991 Plans are summarized as follows: Number of Shares - ------------------------------------------------------------------------------ Options outstanding at Nov. 27, 1993 280,700 Granted during 1994 88,300 Expired, canceled and exercised (33,400) -------- Options outstanding at Dec. 3, 1994 335,600 Granted during 1995 68,000 Expired, canceled and exercised (92,200) -------- Options outstanding at Dec. 2, 1995 311,400 Granted during 1996 134,400 Expired, canceled and exercised (103,286) -------- Options outstanding at Nov. 30, 1996 342,514 ======== Options prices range between: $ 12.25 and $ 80.00 Options exercisable: December 3, 1994 109,000 December 2, 1995 86,100 November 30, 1996 78,114 Expiration of the 1991 Plan 2001 Expiration of the 1992 Plan 2002 Expiration of the 1996 Plan 2006 Number of option holders at Nov. 30, 1996 13 Nonemployee Directors Stock Option Plans In 1996, the Corporation adopted the 1996 Stock Option Plan for Nonemployee Directors (the "1996 Non-employee Plan"), under which 25,000 shares of common stock were made available for purchase at prices equal to the fair market value at date of grant. The 1992 Stock Option Plan for Nonemployee Directors (the "1992 Nonemployee Plan") made available 45,000 shares of common stock for purchase at prices equal to the fair market value at date of grant. Options canceled become available for future grant. Options are not exercisable until three 34 years from the date of grant and may be exercised over a period ending not later than eight years from the date of grant. As of November 30, 1996, 18,000 options under the 1996 Nonemployee Plan and 3,000 options under the 1992 Nonemployee Plan remain available for future grant. None of the options outstanding at November 30, 1996, may be exercised as stock appreciation rights. Upon consummation of the Distribution and Merger, options granted under the 1996 and 1992 Nonemployee Plans will be converted, after adjustment for dilution, into options to purchase common shares of GC Holdings. Transactions under the 1996 Nonemployee Plan and the 1992 Nonemployee Plan are summarized as follows: Number of Shares - -------------------------------------------------------------------------------- Options outstanding at Nov. 27, 1993 14,000 Granted during 1994 14,000 ------- Options outstanding at Dec. 3, 1994 28,000 Granted during 1995 14,000 ------- Options outstanding at Dec. 2, 1995 42,000 Granted during 1996 7,000 Exercised during 1996 (6,000) ------- Optional outstanding at Nov. 30, 1996 43,000 ======= Option prices range between $ 14.38 and $ 63.81 Number of option holders at Nov. 30, 1996 7 Stock-Based Compensation In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." This statement establishes a fair value method of accounting for, or disclosing, stock-based compensation plans. The Corporation has adopted the disclosure provisions of this standard which require disclosing the pro forma effect on earnings and earnings per share of the fair value method of accounting for stock-based compensation. The Corporation's income from continuing operations and income per common share from continuing operations would have been the following pro forma amounts (unaudited) under the method prescribed by SFAS No. 123. 1996 ---- Income from continuing operations, as reported $ 8,399 Income from continuing operations, pro forma (unaudited) $ 7,964 Income per common share from continuing operations, as reported $ 1.80 Income per common share from continuing operations, pro forma (unaudited) $ 1.71 35 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996; expected volatility of approximately 30%; risk free interest rates of 5.48%-6.61%; expected option term of 6 years and no dividend yield for all options issued. The expected option term was developed based on historical grant and exercise information. Employment Agreement The Corporation entered into a five-year employment agreement in 1994 with a corporate officer which included the issuance of 125,000 stock options. The options are exercisable at a rate of 25,000 per year from 1995 through 1999 at an option price of $4.00 per share. At the time the options were granted, the quoted market price of the Corporation's common stock was $14.69 per share. The difference between this market price and the option price is being reflected as compensation expense over the term of the agreement. Upon consummation of the Distribution and Merger, these options will be converted, after adjustment for dilution, into options to purchase common shares of GC Holdings. Compensation expense was $267, $267 and $170 in 1996, 1995 and 1994, respectively. As of November 30, 1996, 15,000 options had been exercised and 35,000 options were exercisable. Preferred Stock The Corporation has 1,000,000 authorized but unissued shares of preferred stock, par value $1. 36 8. Retirement Benefits Pension Plan The Corporation has a noncontributory defined benefit pension plan covering certain employees. The plan provides benefits based on employees' years of service and compensation. Contributions to the plan are made in accordance with the provisions of the Employee Retirement Income Security Act. Pension expense included in consolidated results of operations was as follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Service costs-benefits earned during the year $ 1,153 $ 962 $ 1,089 Interest on projected benefit obligations 4,053 4,086 3,928 -------- -------- ------- Total benefit expense 5,206 5,048 5,017 -------- -------- ------- Actual return on pension plan's assets (10,935) (12,886) (786) Difference from expected long-term return 6,516 8,439 (3,499) -------- -------- ------- Net expected return (4,419) (4,447) (4,285) -------- -------- ------- Special termination benefits expense 279 -- -- Curtailment gain resulting from sale of CMS Gilbreth (452) -- -- Amortization of net pension obligation at adoption of SFAS No. 87 51 51 51 Other 39 21 21 -------- -------- ------- Net pension expense $ 704 $ 673 $ 804 ======== ======== ======= 37 The status of the Culbro Corporation Pension Plan at November 30, 1996 and December 2, 1995 was as follows:
1996 1995 - ---------------------------------------------------------------------------------- Present value of benefits earned by participants, including vested benefits of $52,095 and $53,730 at Nov. 30, 1996 and Dec. 2, 1995, respectively $ 52,668 $ 54,274 ======== ======== Plan assets at fair value, primarily equities 70,711 64,639 Present value of projected benefit obligations 54,759 56,882 -------- -------- Plan assets in excess of projected benefit obligations 15,952 7,757 Amount included on balance sheet 6,697 5,993 -------- -------- Unrecognized net asset $ 22,649 $ 13,750 ======== ======== Unrecognized net asset includes: Net gain from experience differences and assumption changes $ 23,101 $ 14,190 Changes due to plan amendments (321) (203) Net pension obligation at adoption of SFAS No. 87 (131) (237) -------- -------- Unrecognized net asset $ 22,649 $ 13,750 ======== ========
Discount rates of 7.75% and 7.50% were used to compute the present value of pension benefits at November 30, 1996 and December 2, 1995, respectively. A 5% rate of increase in future compensation levels was used to estimate the projected pension obligations at both November 30, 1996 and December 2, 1995. The expected rate of return on pension plan assets in 1996, 1995 and 1994 was estimated at 9% representing the average long-term rate expected from the investment of plan assets. Other Postretirement Benefits The Corporation provides health and life insurance benefits to certain retired employees. The components of other postretirement benefits expense included in the consolidated statement of operations were as follows: 38 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost-benefits earned during the year $ 122 $105 $110 Interest on accumulated post- retirement benefit obligation 568 636 693 Curtailment gain related to sale of CMS Gilbreth (335) -- -- ----- ---- ---- Total expense $ 355 $741 $803 ===== ==== ==== The liabilities recorded for the actuarial present value of accumulated postretirement benefits, none of which have been funded, for the Corporation at November 30, 1996 and December 2, 1995 were as follows: 1996 1995 - -------------------------------------------------------------------------------- Retirees $4,339 $4,954 Fully eligible active plan participants 1,847 1,890 Other active participants 466 853 Unrecognized net gain from experience differences and assumption changes 1,120 483 ------ ------ Liability for other postretirement benefits $7,772 $8,180 ====== ====== Discount rates of 7.75% and 7.50% were used to compute the accumulated postretirement benefits obligations at November 30, 1996 and December 2, 1995, respectively. Because the Corporation's obligation for retiree medical benefits is fixed, any increase in the medical cost trend would have no effect on the accumulated postretirement benefits obligation, service cost or interest cost. 39 9. Leases The Corporation and its subsidiaries have noncancellable leases relating principally to a manufacturing facility and vehicles. Capital Leases Future minimum lease payments under capital leases and the present value of such payments as of November 30, 1996 were: 1997 $1,344 1998 1,063 1999 820 2000 473 2001 286 ------ Total minimum lease payments 3,986 Less: amount representing interest 515 ------ Present value of minimum lease payments (a) $3,471 ====== (a) Included on the consolidated balance sheet as current liabilities are $1,010 (1995-$814) and as long-term debt $2,461 (1995-$2,475) At November 30, 1996, property and equipment financed with capital leases amounted to $4,649 (1995 - $4,369), net of accumulated depreciation of $4,891 (1995-$4,757). Consolidated depreciation expense relating to capital leases was $911 in 1996 (1995-$892;1994-$969). Operating Leases Future minimum rental payments under noncancellable leases as of November 30, 1996 were: 1997 $1,065 1998 1,012 1999 951 2000 792 2001 569 Later years 2,175 ------ Total minimum lease payments $6,564 ====== Total rental expense for all operating leases in 1996 was $731 (1995-$388; 1994-$231). 40 As lessor, the Corporation's activities consist of the leasing of office and industrial space in Connecticut and New York. Future minimum rentals to be received under noncancellable leases as of November 30, 1996 were: 1997 $ 4,588 1998 4,257 1999 3,679 2000 3,544 2001 2,869 Later years 1,546 ------- Total minimum rental revenue $20,483 ======= Total rental revenue from all leases in 1996 were $5,243 (1995-$5,765;1994-$5,596). 10. Income Taxes The income tax provision (benefit) is summarized as follows: 1996 1995 1994 - -------------------------------------------------------------------------------- Continuing operations: Current federal $ 9,654 $3,078 $(1,078) Current state and local 1,152 743 475 Deferred, principally federal (5,890) 626 (248) ------- ------ ------- Income tax provision (benefit) from continuing operations 4,916 4,447 (851) ------- ------ ------- Discontinued operation: Current federal (553) 2,057 2,374 Current state and local (277) 292 365 Deferred, principally federal (2,825) 231 (466) ------- ------ ------- Income tax (benefit) provision from discontinued operation (3,655) 2,580 2,273 ------- ------ ------- Total income tax provision $ 1,261 $7,027 $ 1,422 ======= ====== ======= Income (loss) from continuing operations before income taxes in 1996, 1995, and 1994 was substantially from domestic U.S. operations. The reasons for the differences between the United States statutory income tax rate and the effective rates for continuing operations are shown in the following table: 41
1996 1995 1994 - -------------------------------------------------------------------------------------- Tax expense (benefit) at statutory rates $ 4,660 $ 4,183 $(1,028) State and local income taxes 749 483 314 Refund of prior years' income taxes and liability adjustments -- (374) (467) Foreign subsidiaries (106) 54 (119) Subsidiary loss accounted for under the equity method -- -- 706 Other (387) 101 (257) ------- ------- ------- $ 4,916 $ 4,447 $ (851) ======= ======= =======
The significant components of the net deferred tax asset (liability) are as follows: 1996 1995 - ------------------------------------------------------------------------------ Depreciation and amortization $(8,405) $(9,929) Postretirement benefit obligations 2,950 3,651 Pension liabilities 2,542 2,601 Inventories 2,328 2,254 Deferred income attributable to deconsolidated subsidiary -- (1,483) Other, principally deferred compensation and benefits in 1996 3,676 (2,716) ------- ------- $ 3,091 $(5,622) ======= ======= 11. Investment in Eli Witt The Corporation owns 50.1% of the outstanding common stock of Eli Witt, a wholesale distribution company. Prior to 1994, Eli Witt was a consolidated subsidiary of the Corporation. In April 1994, as a result of transactions related to an Eli Witt acquisition, the Corporation's ownership percentage of Eli Witt decreased to its present level and the Corporation deconsolidated Eli Witt and accounted for its investment in the common stock of Eli Witt under the equity method of accounting. Through November 30, 1996, Eli Witt was in a common deficit position, and as such, the Corporation has a negative basis in its common equity investment in Eli Witt. Accordingly, the Corporation has not recognized the results of Eli Witt subsequent to its deconsolidation in April 1994. In 1995, the Corporation invested an additional $5 million in Eli Witt in the form of a subordinated note due August 1, 1998. The Corporation applied this additional investment to reduce the negative basis in its common equity investment in Eli Witt from approximately $6.5 million to approximately $1.5 million. 42 In 1996, Eli Witt filed for protection under Chapter 11 of the Bankruptcy Code and entered into a contract to sell all of its operating assets to another wholesale distributor. In January 1997, the sale was approved by the Bankruptcy Court and was completed shortly thereafter. Under the terms of the sale, shareholders of Eli Witt will not receive any proceeds. The Corporation has no investment related to Eli Witt on its 1996 consolidated balance sheet. 12. Supplemental Financial Statement Information Net Sales and Other Revenue Excise taxes are included in net sales and other revenue and cost of goods sold in the consolidated statement of operations. Excise taxes paid on cigars in 1996, 1995 and 1994 were $7,894, $7,035, and $5,555, respectively. Selling, General and Administrative Expenses Included in selling, general and administrative expenses in 1996 were advertising expenses of $4,353 (1995- $2,778;1994-$1,047). Other Expense Other expense of $4,500 in the 1996 consolidated statement of operations reflects accruals for the cost of terminating a long-term compensation plan and severance for certain employees in contemplation of the Offering of common stock of GC Holdings (see Note 2). The other expense of $3,600 in the 1994 consolidated statement of operations reflects a charge in the Connecticut real estate business to write off development costs expended in earlier years for certain discontinued projects which management decided not to proceed with as originally planned. Income (Loss) from Equity Investments, Net In 1996 and 1995, the Corporation's income (loss) from equity investments reflected the results of Centaur. The Corporation's loss from equity investment in 1994 included a net loss of $2,078 from Eli Witt's operations through the April deconsolidation date and $350 of equity in earnings of Centaur. 43 Other Nonoperating Income, Net Included in other nonoperating income, net, in each of the three fiscal years presented is the accrual of dividend and accretion income on the Eli Witt Series B Preferred Stock held by the Corporation, which is equal to the interest expense on the subordinated note, that was satisfied by the exchange of the preferred stock in 1996. In 1995, other nonoperating income, net, also included expenses related to the Corporation's support of the refinancing of Eli Witt and expenses relating to a proposed sale of a 51% interest in General Cigar, which did not occur. Inventories Inventories consist of: Nov. 30, Dec. 2, 1996 1995 ---- ---- Raw materials and supplies $ 44,446 $ 31,163 Work-in-process 19,641 14,236 Finished goods 17,145 18,375 --------- --------- $ 81,232 $ 63,774 ========= ========= Property and Equipment Property and equipment consist of: Nov. 30, Dec. 2, 1996 1995 ---- ---- Land $ 10,161 $ 10,516 Buildings 62,032 58,504 Machinery and equipment 45,807 39,730 --------- --------- 118,000 108,750 Accumulated depreciation (51,171) (47,691) --------- --------- $ 66,829 $ 61,059 ========= ========= Depreciation expense on property and equipment in 1996 was $4,860 (1995-$4,692;1994-$4,242). Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities include trade payables of $11,157 (1995-$ 4,661), accrued salaries, wages and incentive compensation of $7,050 (1995-$ 6,806) and other accrued liabilities of $9,295 (1995-$15,896). 44 Supplemental Cash Flow Information Cash paid during the year for: 1996 1995 1994 ---- ---- ---- Interest $6,846 $7,004 $7,893 ======== ====== ====== Income taxes $5,839 $4,110 $3,642 ======== ====== ====== In 1996, the Corporation's Connecticut real estate business exchanged a commercial property in satisfaction of the outstanding nonrecourse mortgage on that property. Also in 1996, the Corporation exchanged the Series B Preferred Stock of Eli Witt that it held in satisfaction of a subordinated note payable and all accrued interest thereon. There was no cash paid or received in either of these transactions. 13. Quarterly Results of Operations (Unaudited) Summarized quarterly financial data are presented below.
1996 Quarters 1st 2nd 3rd 4th Total - ---------------------------------------------------------------------------------------- Net sales and other revenue $ 32,902 $53,772 $50,831 $67,307 $204,812 Gross profit 14,252 21,416 22,724 25,971 84,363 Income from continuing operations 428 3,105 3,127 1,739 8,399 Income per common share from continuing operations 0.09 0.67 0.67 0.37 1.80 Net income 924 3,377 1,816 1,739 7,856 Net income per common share 0.20 0.73 0.39 0.37 1.68 - ---------------------------------------------------------------------------------------- 1995 Quarters 1st 2nd 3rd 4th Total - ---------------------------------------------------------------------------------------- Net sales and other revenue $ 28,881 $48,636 $43,329 $48,150 $168,996 Gross profit 11,364 18,601 18,918 22,041 70,924 Income (loss) from continuing operations (465) 3,866 2,489 1,614 7,504 Income (loss) per common share from continuing operations (0.11) 0.90 0.55 0.35 1.69 Net income 550 4,962 3,045 2,632 11,189 Net income per common share 0.13 1.15 0.67 0.57 2.52 - ----------------------------------------------------------------------------------------
45 The 1996 fourth quarter includes other expense of $4.5 million reflecting accruals for management long-term incentive compensation and severance in contemplation of transactions described in Note 2. The 1995 fourth quarter includes a charge of $1.0 million to reserve for unsaleable inventories in the nursery products business. 14. Commitments and Contingencies In connection with the sale of Moll Tool & Plastics Corp. ("Moll Tool") in 1991, the Corporation remains liable on a machinery lease obligation of approximately $3.0 million assumed by the purchaser of Moll Tool. A portion of the insurance claims related to the loss of an administration and warehouse facility owned and operated by General Cigar was settled in 1995, but certain claims remain outstanding. The amounts, if any, which may be received for these claims cannot be evaluated at this time. At November 30, 1996 the Corporation's subsidiary, General Cigar, had entered into firm commitments for capital expenditures of approximately $5.7 million for the expansion of its manufacturing and distribution facilities and the addition of machinery and equipment. 46 Report of Independent Accountants To the Shareholders and Directors of Culbro Corporation In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and retained earnings, of cash flows and of changes in common stock and capital in excess of par value present fairly, in all material respects, the financial position of Culbro Corporation and its subsidiaries at November 30, 1996 and December 2, 1995 and the results of their operations and their cash flows for the fiscal years ended November 30, 1996, December 2, 1995 and December 3, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the management of Culbro Corporation; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP New York, New York January 28, 1997 47 Report of Management Management is responsible for the accompanying consolidated financial statements, which are prepared in accordance with generally accepted accounting principles. In management's opinion, the consolidated financial statements present fairly the Corporation's financial position, results of operations and cash flows. The Corporation maintains a system of internal accounting procedures and controls intended to provide reasonable assurance, at appropriate cost, that transactions are executed in accordance with proper authorization, are properly recorded and reported in the financial statements, and that assets are adequately safeguarded. The Corporation's internal audit department continually evaluates the adequacy and effectiveness of this system of controls. The Audit Committee of the Board of Directors is comprised solely of outside directors and is responsible for overseeing and monitoring the quality of the Corporation's accounting and auditing practices. The Audit Committee meets regularly with management, the internal audit department and independent accountants to discuss audit activities, internal controls and financial reporting matters. The internal audit department and the independent accountants have full and free access to the Audit Committee. To foster the conduct of its business in accordance with the highest ethical standards, the Corporation annually disseminates ethical guidelines, the Corporation's compliance with which is monitored by senior management and the Audit Committee. The appointment of Price Waterhouse LLP as the Corporation's independent accountants was recommended and approved by the Audit Committee and the Board of Directors, and was approved by the shareholders. Price Waterhouse's Report is based on an examination conducted in accordance with generally accepted auditing standards, including a review of internal accounting controls and tests of accounting procedures and records. /s/ Edgar M. Cullman EDGAR M. CULLMAN Chairman of the Board /s/ Edgar M. Cullman, Jr. EDGAR M. CULLMAN, JR. President and Chief Executive Officer /s/ Jay M. Green JAY M. GREEN Executive Vice President Chief Financial Officer and Treasurer 48 Corporate Directors and Officers Directors Bruce A. Barnet (2),(3),(6), President and Chief Executive Officer of Cahners Publishing Company, publishing John L. Bernbach (2),(6) Chairman and Chief Executive Officer of The Bernbach Group, Inc. Edgar M. Cullman (1),(4),(5) Chairman of the Board Edgar M. Cullman, Jr. (1),(4),(6) President and Chief Executive Officer Frederick M. Danziger (1),(4) Of counsel to Latham & Watkins, attorneys John L. Ernst (1),(3),(5) Chairman of the Board and President of Bloomingdale Properties, Inc., investments and real estate Chairman of the Compensation and the Nominating Committees of the Corporation Thomas C. Israel (2),(6) Chairman of A.C. Israel Enterprises, Inc., investments Chairman of the Audit Committee of the Corporation Dan W. Lufkin (1),(2),(3),(4),(5) Private investor Co-Chairman of the Finance Committee of the Corporation Graham V. Sherren (6) Chairman and Chief Executive Officer of Centaur Communications Limited, publisher of business magazines Peter J. Solomon (3),(4) Chairman of Peter J. Solomon Company Limited and Peter J. Solomon Securities Company, Limited, investment bankers Co-Chairman of the Finance Committee of the Corporation Francis T. Vincent, Jr. (2),(3),(6) Vincent Enterprises, private investor Directors Emeritus Bernhard L. Kohn Judd L. Pollock Joseph E. Whitwell Officers Edgar M. Cullman Chairman of the Board Edgar M. Cullman, Jr. President and Chief Executive Officer Jay M. Green Executive Vice President Chief Financial Officer and Treasurer Joseph C. Aird Senior Vice President Controller A. Ross Wollen Senior Vice President General Counsel and Secretary David M. Danziger Vice President Corporate Development Anthony J. Galici Vice President Assistant Controller Janet A. Krajewski Vice President Taxes Mary L. Raffaniello Vice President Human Resources (1) Executive Committee (2) Audit Committee (3) Compensation Committee (4) Finance Committee (5) Nominating Committee (6) Strategic Planning Committee 49 Corporate Data The Companies of Culbro Corporation CONSUMER PRODUCTS General Cigar Co., Inc. President - Austin T. McNamara 320 West Newberry Road Bloomfield, Connecticut 06002 Club Macanudo, Inc. President - Edgar M. Cullman, Jr. 387 Park Avenue South New York, New York 10016-8899 NURSERY PRODUCTS Imperial Nurseries, Inc. President - Richard L. Wyckoff 90 Salmon Brook Street Granby, Connecticut 06035 REAL ESTATE Culbro Land Resources, Inc. President - Edgar M. Cullman, Jr. 204 West Newberry Road Bloomfield, CT 06002 Corporate Directory EXECUTIVE OFFICES Culbro Corporation 387 Park Avenue South New York, New York 10016-8899 Tel: (212) 448-3800 INDEPENDENT ACCOUNTANTS Price Waterhouse LLP 1177 Avenue of the Americas New York, New York 10036 SPECIAL COUNSEL Latham & Watkins 885 Third Avenue New York, New York 10022 REGISTRAR AND TRANSFER AGENT ChaseMellon Shareholder Services, LLC 450 West 33rd Street New York, New York 10001 STOCK LISTING New York Stock Exchange, Inc. Symbol CBO SHAREHOLDERS' INFORMATION The Corporation's Annual Report filed with the Securities and Exchange Commission on Form 10-K is available upon written request to: 387 Park Avenue South New York, New York 10016-8899 Attn: Corporate Secretary Note: The brand names of products mentioned in this Report are trademarks owned by Culbro Corporation and its subsidiaries. All rights thereto are reserved. 51 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------------------------- FORM 10-K ----------------------------------------- FOR FISCAL YEAR ENDED NOVEMBER 30, 1996 ITEMS 8 and 14 - INDEX TO FINANCIAL STATEMENTS AND ADDITIONAL FINANCIAL DATA ----------------------------------------- CULBRO CORPORATION ------------------------------------------ CULBRO CORPORATION INDEX TO FINANCIAL STATEMENTS AND ADDITIONAL FINANCIAL DATA The financial statements together with the report thereon of Price Waterhouse LLP dated January 28, 1997, appearing in the accompanying 1996 Annual Report to Shareholders, are incorporated by reference in this Form 10-K Annual Report. With the exception of the aforementioned information and such other information specifically incorporated by reference herein, the 1996 Annual Report to Shareholders is not to be deemed filed or incorporated by reference as part of this report. The following exhibits and additional financial data should be read in conjunction with the financial statements in such 1996 Annual Report to Shareholders. Schedules not included with this additional financial data have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. SCHEDULES PAGE VIII Valuation and Qualifying Accounts and Reserves S-1 XI Real Estate and Accumulated Depreciation S-2/S-3 Exhibit 11 - Statement Re: Computation of Earnings Per Share Exhibit 21(A) - List of Subsidiaries Exhibit 21(B) - Chart of Subsidiaries Exhibit 23 - Report of Independent Accountants on Financial Statement Schedules and Consent of Independent Accountants Exhibit 27 - Financial Data Schedule
CULBRO CORPORATION SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (DOLLARS IN THOUSANDS) BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND OTHER FROM END DESCRIPTION OF YEAR EXPENSES ACCOUNTS RESERVES OF YEAR - --------------------- ------------ ----------- ------------ ----------- --------- FOR FISCAL YEAR ENDED NOVEMBER 30, 1996 --------------------------------------- RESERVES: UNCOLLECTIBLE ACCOUNTS - TRADE 803 490 22 531(1) 784 --------- --------- --------- --------- --------- INVENTORIES 1,000 16 300 351 (2) 965 --------- --------- --------- --------- --------- FOR FISCAL YEAR ENDED DECEMBER 2, 1995 -------------------------------------- RESERVES: UNCOLLECTIBLE ACCOUNTS - TRADE 1,076 279 3 555(1) 803 --------- --------- --------- --------- ---------- INVENTORIES 743 1,007 - 750(2) 1,000 --------- --------- --------- --------- ---------- FOR FISCAL YEAR ENDED DECEMBER 3, 1994 -------------------------------------- RESERVES: UNCOLLECTIBLE ACCOUNTS - TRADE 751 570 22 267(1) 1,076 --------- --------- --------- --------- ---------- INVENTORIES 250 493 - - 743 --------- --------- --------- --------- ----------
NOTES: (1) ACCOUNTS RECEIVABLE WRITTEN-OFF. (2) INVENTORIES DISPOSED. S-1
CULBRO CORPORATION SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION (DOLLARS IN THOUSANDS) COST CAPITALIZED SUBSEQUENT GROSS AMOUNT INITIAL COST TO ACQUISITION AT NOVEMBER 30, 1996 ------------ ----------------- -------------------------- ENCUM- BLDG & CARRYING BLDG & DESCRIPTION BRANCES LAND IMPROVE IMPROVE COSTS LAND IMPROVE TOTAL - ----------- ------- -------- -------- ------- ------- ----- ------- ----- LAND - CT $ $ 2,967 $ - $ 6,976 $ 80 $ 3,047 $ 6,976 $10,023 RESTAURANT BLOOMFIELD, CT 1 - 1,266 - 1 1,266 1,267 RESIDENTIAL DEVELOPMENT WINDSOR, CT 88 - 1,518 2,156 88 3,674 3,762 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT 696 47 - 2,486 - 47 2,486 2,533 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT 3 - 1,815 - 3 1,815 1,818 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT 1 - 1,540 24 1 1,564 1,565 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT 1 - 1,452 23 1 1,475 1,476 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT - - 666 - - 666 666 COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT 5 - 2,938 40 5 2,978 2,983 COMMERCIAL OFFICE BUILDING EAST GRANBY, CT 1,948 74 - 3,182 - 74 3,182 3,256 COMMERCIAL OFFICE BUILDING EAST GRANBY, CT 32 1,723 185 - 32 1,908 1,940 -------- -------- ------ -------- ------- ------- -------- ------ $2,644 $3,219 $1,723 $24,024 $2,323 $3,299 $27,990 $31,289 -------- -------- ------ -------- ------- ------- -------- ------ -------- -------- ------ -------- ------- ------- -------- ------ ACCUM DATE OF DATE OF DEPR DESCRIPTION DEPR CONSTR ACQ LIFE - ----------- ------ ------- ------- ---- LAND - CT $(361) RESTAURANT BLOOMFIELD, CT (510) 1983 40 YRS RESIDENTIAL DEVELOPMENT WINDSOR, CT - COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (1,156) 1977 40 YRS COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (553) 1985 40 YRS COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (314) 1988 40 YRS COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (332) 1988 40 YRS COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (161) 1988 40 YRS COMMERCIAL OFFICE BUILDING BLOOMFIELD, CT (477) 1991 40 YRS COMMERCIAL OFFICE BUILDING EAST GRANBY, CT (1,688) 1978 40 YRS COMMERCIAL OFFICE BUILDING EAST GRANBY, CT ( 519) 1989 40 YRS ---------- ($6,071) ---------- ----------
S-2 CULBRO CORPORATION SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION (dollars in thousands) FISCAL YEAR ENDED NOVEMBER 30, 1996 - ----------------------------------- COST RESERVE --------- --------- Balance at beginning of period $36,138 $(6,179) Changes during the period: Improvements 592 Additions to reserve charged to costs and expense (822) Tranfer to lender for outstanding mortgage (4,648) 930 Cost of sales (793) ------- ------- Balance at end of period $31,289 $(6,071) ------- ------- ------- ------- FISCAL YEAR ENDED DECEMBER 2, 1995 - ---------------------------------- COST RESERVE -------- ---------- Balance at beginning of period $36,491 $(5,118) Changes during the period: Improvements 802 Additions to reserve charged to costs and expense (814) Reclassification (247) Cost of sales (1,155) --------- -------- Balance at end of period $36,138 ($6,179) ------- --------- ------- --------- FISCAL YEAR ENDED DECEMBER 3, 1994 - ---------------------------------- COST RESERVE -------- ----------- Balance at beginning of period $39,676 ($4,338) Changes during the period: Improvements 1,624 Additions to reserve charged to costs and expense (780) Cost of sales (including writeoffs) (4,809) -------- --------- Balance at end of period $36,491 ($5,118) ------- --------- ------- --------- S-3 EX-11 2 COMPUTATION OF EARNINGS EXHIBIT 11 STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE (dollars in thousands, except per share data)
FISCAL YEAR ENDED ------------------------------- Nov. 30, Dec.2, Dec.3, PRIMARY 1996 1995 1994 - ------- ---- ---- ---- Income (loss) from continuing operations $8,399 $7,504 $(2,172) ------ ------ -------- ------ ------ -------- Net income $7,856 $11,189 $1,152 ------ ------ -------- ------ ------ -------- Weighted average common shares outstanding in the 4th quarter 4,512,000 4,385,000 4,308,000 Net effect of dilutive stock options based on the treasury stock method using average market price 174,000 215,000 - -------- -------- -------- Weighted average common shares and equivalents outstanding: 4th quarter 4,686,000 4,600,000 4,308,000 3rd quarter 4,678,000 4,538,000 4,308,000 2nd quarter 4,669,000 4,312,000 4,308,000 1st quarter 4,622,000 4,308,000 4,308,000 --------- --------- --------- 18,655,000 17,758,000 17,232,000 Divided by 4 4 4 ---------- ---------- ---------- Total 4,664,000 4,440,000 4,308,000 ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) per common share from continuing operations $1.80 $1.69 $(0.50) ----- ----- ------- ----- ----- ------- Net income per common share $1.68 $2.52 $0.27 ----- ----- ----- ----- ----- ----- FULLY DILUTED - ------------- Income (loss) from continuing operations $8,399 $7,504 $(2,172) ------ ------ -------- ------ ------ -------- Net income $7,856 $11,189 $1,152 ------ ------- ------ ------ ------- ------ Weighted average common shares outstanding in the 4th quarter 4,512,000 4,385,000 4,308,000 Net effect of dilutive stock options based on the treasury stock method using ending market price 176,000 228,000 - ------- ------- -------- Weighted average common shares and equivalents outstanding: 4th quarter 4,688,000 4,613,000 4,308,000 3rd quarter 4,682,000 4,559,000 4,308,000 2nd quarter 4,669,000 4,312,000 4,308,000 1st quarter 4,646,000 4,308,000 4,308,000 --------- --------- --------- 18,685,000 17,792,000 17,232,000 Divided by 4 4 4 --------- --------- --------- Total 4,671,000 4,448,000 4,308,000 --------- --------- --------- --------- --------- --------- Income (loss) per common share from continuing operations $1.80 $1.69 $(0.50) ----- ----- ------- ----- ----- ------- Net income per common share $1.68 $2.52 $0.27 ----- ----- ----- ----- ----- -----
EX-21.A 3 SUBSIDIARIES OF COMPANY EXHIBIT 21(A) CULBRO CORPORATION STATE/JURISDICTION SUBSIDIARIES (1) OF INCORPORATION General Cigar Co., Inc. (2) Delaware General Cigar Holdings, Inc. Delaware Culbro Land Resources, Inc. (3) Delaware 387 PAS Corp. New York Imperial Nurseries, Inc. Delaware Club Macanudo, Inc. New York GCH Transportation, Inc. Delaware Club Macanudo (Chicago), Inc. Illinois (1) The Corporation also has approximately 7 inactive subsidiaries which considered in the aggregate as a single subsidiary would not constitute a significant subsidiary. The Consolidated Financial Statements of the Corporation include the accounts of all subsidiaries of the Corporation. (2) Includes approximately 8 subsidiaries and 4 operating divisions within which it carries on its cigar manufacturing and distribution business, and approximately 12 assumed names in which it does business. (3) Includes approximately 5 subsidiaries utilized to carry on certain aspects of its real estate development business. EX-21.B 4 ORGANIZATION CHART EXHIBIT 21(B) The following chart illustrates the effect of the Distribution and the Merger. [CHART SHOWING THE STRUCTURE OF THE COMPANY AND THE PARENT FOLLOWING THE OFFERING] [CHART SHOWING THE STRUCTURE OF THE COMPANY AND CLR FOLLOWING THE DISTRIBUTION AND THE MERGER] EX-23 5 RPT OF INDEPENDENT ACCOUNTS PRICE WATERHOUSE LLP Exhibit 23 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Culbro Corporation Our audits of the consolidated financial statements referred to in our report dated January 28, 1997, appearing in the 1996 Annual Report to Shareholders of Culbro Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10K) also included an audit of the Financial Statement Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ Price Waterhouse PRICE WATERHOUSE LLP New York, New York January 28, 1997 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 2 - 94202) of Culbro Corporation of our report dated January 28, 1997 appearing in the 1996 Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedules which appears above. /s/ Price Waterhouse PRICE WATERHOUSE LLP New York, New York March 12, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 12-MOS NOV-30-1996 NOV-30-1996 5,409 0 36,041 (784) 81,232 126,730 118,000 (51,171) 243,444 34,391 49,925 0 0 4,549 131,239 243,444 204,812 204,812 120,449 184,959 0 0 8,758 13,315 4,916 8,399 (543) 0 0 7,856 1.68 1.68
EX-99 7 OLD 424B PROSPECTUS This prospectus is filed under Rule 424(b)(4) and relates to Registration Statement No. 333-18791. PROSPECTUS FEBRUARY 27, 1997 6,000,000 SHARES [LOGO] GENERAL CIGAR CLASS A COMMON STOCK All of the 6,000,000 shares of Class A Common Stock, par value $0.01 per share (the "Class A Common Stock"), offered hereby (the "Offering") are being sold by General Cigar Holdings, Inc. Each share of Class A Common Stock entitles its holder to one vote. Each share of Class B Common Stock, par value $0.01 per share (the "Class B Common Stock" and, together with the Class A Common Stock, the "Common Stock"), of the Company entitles its holder to ten votes. All of the shares of Class B Common Stock are owned by Culbro Corporation (NYSE:CBO) ("Culbro"). Approximately 50% of Culbro's common stock is owned by a group of individuals and trusts (the "Cullman & Ernst Group"). Immediately after consummation of the Offering (assuming no exercise of the over-allotment option granted to the Underwriters), Culbro will beneficially own shares of Class B Common Stock representing approximately 97% of the combined voting power of the outstanding shares of Common Stock. The Company has agreed, subject to certain conditions, to a merger with Culbro (the "Merger"), to occur after the closing of the Offering, pursuant to which Culbro will be merged into the Company and 20,087,182 shares of the Company's Class B Common Stock (subject to adjustment for options exercised after the date hereof) will be issued to the shareholders of Culbro. As a result of the Merger, the Cullman & Ernst Group will beneficially own shares of Class B Common Stock (assuming no exercise of the over-allotment option granted to the Underwriters) representing approximately 48% of the combined voting power of the outstanding shares of Common Stock. Prior to the Offering, there has been no public market for the Class A Common Stock. See "Underwriting" for factors to be considered in determining the initial public offering price. The Class A Common Stock has been approved for listing on the New York Stock Exchange under the symbol "MPP". SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR CERTAIN CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE CLASS A COMMON STOCK. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------------------------------------- PRICE UNDERWRITING PROCEEDS TO THE DISCOUNTS AND TO THE PUBLIC COMMISSIONS (1) COMPANY (2) - --------------------------------------------------------------------------------------------------------------- Per Share................................. $18.00 $1.24 $16.76 Total (3)................................. $108,000,000 $7,440,000 $100,560,000 - -------------------------------------------------------------------------------------------
(1) SEE "UNDERWRITING" FOR INDEMNIFICATION ARRANGEMENTS WITH THE UNDERWRITERS. (2) BEFORE DEDUCTING EXPENSES ESTIMATED AT $1,500,000, WHICH WILL BE PAID BY THE COMPANY. (3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO 900,000 ADDITIONAL SHARES AT THE PRICE TO THE PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS, SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF SUCH OPTION IS EXERCISED IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND COMMISSIONS, AND PROCEEDS TO THE COMPANY WILL BE $124,200,000, $8,556,000 AND $115,644,000, RESPECTIVELY. SEE "UNDERWRITING." The shares are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including their right to reject orders in whole or in part. It is expected that delivery of the share certificates will be made in New York, New York, on or about March 5, 1997. DONALDSON, LUFKIN & JENRETTE SMITH BARNEY INC. SECURITIES CORPORATION [Photographs of the Company's premium and mass market cigars. Photographs of the Company's tobacco leaves, along with photographs of men and women rolling and packaging cigars. Additionally, there is a photograph of Ramon Cifuentes in an advertisement for the Company's Partagas brand cigars.] IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS PROSPECTUS. CERTAIN FINANCIAL AND OPERATING DATA IN THIS PROSPECTUS ARE PRESENTED ON A PRO FORMA BASIS TO GIVE EFFECT TO THE ACQUISITION (THE "VILLAZON ACQUISITION") BY THE COMPANY IN JANUARY 1997 OF SUBSTANTIALLY ALL OF THE ASSETS OF VILLAZON & COMPANY, INC. ("VILLAZON & CO.") AND ALL OF THE STOCK OF ITS AFFILIATE, HONDURAS AMERICAN TABACO, S.A. DE C.V. ("HATSA" AND, TOGETHER WITH VILLAZON & CO., REFERRED TO HEREIN AS "VILLAZON"). ALL REFERENCES TO A PARTICULAR FISCAL YEAR REFER TO THE 12 MONTHS ENDED ON THE SATURDAY NEAREST NOVEMBER 30 OF THE YEAR REFERENCED. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES IN THIS PROSPECTUS TO THE "COMPANY" OR "GENERAL CIGAR" MEAN GENERAL CIGAR HOLDINGS, INC. AND ITS SUBSIDIARIES. THE COMPANY IS A HOLDING COMPANY WITH NO BUSINESS OPERATIONS OF ITS OWN. THE COMPANY'S ONLY MATERIAL ASSETS ARE ALL OF THE OUTSTANDING CAPITAL STOCK OF ITS SUBSIDIARIES, GENERAL CIGAR CO., INC., GCH TRANSPORTATION, INC., CLUB MACANUDO, INC. AND CLUB MACANUDO (CHICAGO), INC. AND ALL OF THE OWNERSHIP INTERESTS IN THE COMPANY'S OFFICE BUILDING IN NEW YORK CITY. THE COMPANY Founded in 1906, General Cigar is the largest manufacturer and marketer in the U.S. in both units and dollar sales of brand name premium cigars (imported, hand-made or hand-rolled cigars made with long filler and all natural tobacco leaf). The Company's MACANUDO and PARTAGAS brands are the two top selling premium cigar brands sold in the U.S. The Company believes that higher priced branded premium cigars constitute the fastest growing segment of the premium cigar market. Approximately 80% of the Company's premium cigar sales in fiscal 1996 were at suggested retail prices of $3.00 or more per unit. The Company's unit sales at or above this price point have increased at approximately a 90% compound annual growth rate ("CAGR") during the past four years. The Company, through its well known brands such as GARCIA Y VEGA, also is a leading participant in the growing mass market cigar segment. From fiscal 1993 to fiscal 1996, the Company's net sales increased from $76.8 million to $154.7 million and operating profit increased from $2.4 million to $20.2 million, representing CAGRs of 26.3% and 104.2%, respectively. After giving effect to the Villazon Acquisition, on a pro forma basis, the Company's net sales and operating profit for fiscal 1996 would have been $196.7 million and $32.3 million, respectively. The Company markets its cigars under a number of well-known brand names. The Company's premium cigars include the MACANUDO, PARTAGAS, TEMPLE HALL, CANARIA D'ORO, CIFUENTES and RAMON ALLONES brands. The Company also owns the rights to market cigars in the U.S. under the names COHIBA and BOLIVAR. The Villazon Acquisition has added a variety of other brand names to the Company's line of premium cigars, including PUNCH, HOYO DE MONTERREY and EL REY DEL MUNDO. The Company, after giving effect to the Villazon Acquisition, owns the U.S. trademark rights to seven of the top ten traditional premium Cuban brand names ranked according to 1995 worldwide sales by all cigar marketers. MACANUDO was rated "best cigar" by ROBB REPORT-Registered Trademark- in 1992, the first year in which ROBB REPORT rated cigars, and "best cigar" again in 1994 and 1995 (the category was not included in the 1993 ROBB REPORT). In 1996, ROBB REPORT chose eight "best cigars," including MACANUDO, PARTAGAS 150 SIGNATURE, HOYO DE MONTERREY EXCALIBUR NO. 2 and COHIBA. The Company's mass market large cigars include GARCIA Y VEGA, WHITE OWL, ROBT. BURNS and WM. PENN. The Company's mass market small cigars include the TIPARILLO and TIJUANA SMALLS brands, as well as smaller sizes of its other mass market brands. The Company does not participate in the market for little cigars, which are cigars that resemble cigarettes. The Company also is the exclusive U.S. distributor of French made DJEEP disposable lighters, and it operates CLUB MACANUDO, a cigar bar located in New York City. The Company believes that increasing demand for cigars continues to offer the Company substantial growth opportunities. Since 1993, cigar smoking has experienced a resurgence resulting in an increase in consumption and retail sales of cigars across all major categories, especially in the premium cigar segment. 3 This growth produced overall retail sales in the U.S. cigar market of an estimated $1.25 billion in 1996, the largest dollar sales in the industry's history. Based on industry estimates of 1996 results, unit sales of premium and mass market cigars (excluding little cigars) in the U.S. have increased at CAGRs of 35.4% and 9.6%, respectively, from 1993 to 1996, while retail dollar sales of both categories have increased more rapidly due to price increases. The Company believes that sales of premium cigars exceeded 270 million units in the U.S. in 1996, an increase of over 60% from 1995 unit sales. The Company believes that this increase in cigar consumption and retail sales is the result of a number of factors, including: (i) the improving image of cigar smoking resulting from increased publicity, including the success of CIGAR AFICIONADO and SMOKE magazines and the increased visibility of cigar smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore and Jack Nicholson); (ii) the emergence of an expanding base of younger, highly educated, affluent adults age 25 to 35 and the growing interest of this group in luxury goods, including premium cigars; (iii) the increase in the number of adults over the age of 40 (a demographic group believed to smoke more cigars than any other demographic group); and (iv) the proliferation of establishments, such as restaurants and clubs, where cigar smoking is encouraged, as well as "cigar smokers" dinners and other special events for cigar smokers. The Company's pro forma financial results, including the effect of the Villazon Acquisition, reflect its strong position within the growing cigar industry. In fiscal 1996, the Company had pro forma net sales of $196.7 million and pro forma operating profit of $32.3 million. The Company's backorders of cigars, excluding Villazon backorders, increased from $21.0 million at wholesale at December 2, 1995 to $78.0 million at wholesale at November 30, 1996. During 1996, the Company discontinued accepting premium cigar orders from its nine largest customers and currently allocates product to such customers as it becomes available. The Company attributes its strong market position to the following competitive strengths: (i) well-known brand names, which in the premium cigar market are the leading brands in their categories; (ii) a broad range of product offerings within both the premium and mass market segments of the U.S. cigar markets; (iii) its positioning as the only cigar manufacturer that is also a major grower and supplier of Connecticut Shade wrapper tobacco, one of the most popular premium wrapper tobaccos in the world; (iv) a commitment to, and reputation for, manufacturing quality cigars; (v) its marketing expertise; (vi) its efficient manufacturing operations; and (vii) a highly experienced management team that includes individuals from families with up to five generations of experience in the U.S. and Cuban cigar/tobacco businesses. The Company believes that its competitive strengths, together with the following strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share: / / INCREASE LEADING MARKET SHARE IN THE U.S. PREMIUM SEGMENT. The Company intends to capitalize on the rapidly growing premium cigar market by: (i) continuing to improve awareness and recognition of its premium cigar brands through extensive advertising, increased penetration of targeted retail outlets and professional sales management; (ii) developing and selling more broadly certain new premium cigars that carry well recognized traditional premium Cuban brand names, such as COHIBA and BOLIVAR; (iii) developing line extensions in higher price categories, such as MACANUDO VINTAGE and PARTAGAS LIMITED RESERVE, that leverage the Company's already established premium brands; and (iv) using the Company's national sales force and extensive channels of distribution to increase sales of the brands acquired in the Villazon Acquisition. / / DEVELOP "PREMIUM" MASS MARKET CIGAR BUSINESS. The Company is seeking to increase revenues and profits in its mass market cigar business by extending its well-known mass market brand names into higher price categories within the mass market segment. The Company believes that the higher-end mass market segment recently has experienced growth similar to that of the premium segment. The Company is attempting to capitalize on this growth by expanding products such as the GARCIA Y VEGA 4 HAND MADE cigars and by developing similar higher-end cigars under several of its other mass market brand names, such as the WHITE OWL SELECT, a natural leaf wrapper mass market cigar. / / EXPAND MASS MARKET CIGAR BUSINESS. The Company believes that the resurgence in the premium segment also has positively affected the demand for traditional mass market cigars. The Company's leading high-end mass market brand, GARCIA Y VEGA, experienced a 27.9% increase in unit growth in 1996 compared to 1995. The Company intends to increase its sales and production of traditional mass market cigars to capitalize on the increasing demand in the mass market segment. / / EXPAND PRODUCTION CAPACITY AND TOBACCO INVENTORY. The Company intends to expand manufacturing capacity in order to meet increasing demand for its products while adhering to its traditionally high quality standards. The Company recently completed the expansion of its manufacturing facilities in the Dominican Republic, has begun to expand its facilities in Jamaica and intends to expand production at the Villazon facilities in Honduras. In addition, the Company has implemented a unique "training center" program at its Dominican Republic facility through which it has been able to train a greater number of cigar rollers in a shorter period of time and attain a higher rate of completion of the training program than had been its experience using traditional training methods. The Company intends to implement a similar program in its Jamaican and Honduran facilities. The Company also has substantially increased its tobacco inventory for making premium cigars. / / SELECTIVELY BROADEN CIGAR DISTRIBUTION CHANNELS. The Company intends to broaden its existing customer relationships and actively develop new channels and methods of distribution. With respect to premium cigars, the Company is pursuing opportunities in a number of developing distribution channels, including cigar bars and clubs, hotel shops, wine shops, restaurants and upscale specialty retail stores (such as Neiman Marcus and Orvis). With respect to mass market cigars, the Company is seeking to enhance relations with existing retailers by acting as the tobacco "category manager," assisting such retailers in increasing their sales of tobacco products. / / EXPAND INTERNATIONAL CIGAR BUSINESS. The Company plans to increase its international presence, particularly with respect to the MACANUDO brand. The Company will focus its efforts in the United Kingdom, Germany, France, Spain, China and certain countries in South America, as well as duty free markets worldwide. The Company intends to implement this strategy in a variety of ways, including building on its existing relationships with major international distributors and entering into joint ventures. / / DEVELOP SALES OF BRANDED SMOKING ACCESSORIES AND LIFESTYLE PRODUCTS. The Company intends to become a leading marketer and licensor of high-quality branded smoking accessories, such as humidors and cigar cutters, and branded luxury lifestyle products, such as leather goods and apparel. The Company believes such expansion will improve brand recognition among premium cigar consumers. The Company also may open additional CLUB MACANUDO locations, including one location in Chicago expected to open in the spring of 1997. CLUB MACANUDO promotes the Company's premium brands as well as cigar smoking as part of the luxury lifestyle. The Winter 1996/97 issue of CIGAR AFICIONADO called CLUB MACANUDO New York City's "preeminent cigar lounge," and SMOKE magazine recently said of CLUB MACANUDO, "this place is pure 'cigar.' " The Company's executive offices are located at 387 Park Avenue South, New York, New York 10016-8899, and the telephone number is (212) 448-3800. Its website is http://cigarworld.com. Information on the Company's website is not deemed to be a part of or incorporated by reference into this Prospectus. THE VILLAZON ACQUISITION On January 21, 1997 the Company acquired Villazon for approximately $81.4 million, including certain direct acquisition costs and net of $9.1 million of cash. The acquisition was funded in part by the issuance of $24.4 million aggregate principal amount of notes (the "Seller Notes"). Through the Villazon 5 Acquisition, the Company acquired facilities in Tampa, Florida, San Pedro Sula and Danli, Honduras, and Upper Saddle River, New Jersey, as well as the U.S. trademark rights to several traditional Cuban trademarks and widely recognized names in the premium cigar industry, including PUNCH, HOYO DE MONTERREY and EL REY DEL MUNDO. The acquisition of Villazon gives the Company a broader taste spectrum in cigars, substantially increases its manufacturing capacity and provides access to new sources of tobacco for all of its product offerings. The addition of cigars made in Honduras, one of the fastest-growing countries of origin for cigars worldwide, complements the Company's Dominican and Jamaican made cigars in addition to diversifying its manufacturing base across three countries. Management believes that Villazon's operations complement the Company's and will enable the Company to leverage, over time, its cost structure, its sales and distribution networks and its marketing expertise, resulting in improved growth and profitability. THE ASSET TRANSFERS, THE DISTRIBUTION AND THE MERGER Culbro has completed certain asset transfers (the "Asset Transfers"), pursuant to which (i) all of Culbro's assets and liabilities relating to the cigar business, including approximately 1,100 acres of land used in the tobacco growing operations and CLUB MACANUDO, and certain other assets and liabilities, including Culbro's corporate headquarters, were transferred to the Company, and (ii) substantially all of Culbro's non-tobacco related assets and liabilities, including all of its assets and liabilities relating to its nursery business and real estate business, together with Culbro's 25% interest in Centaur Communications Limited ("Centaur") and its interests in The Eli Witt Company ("Eli Witt") and related liabilities, were transferred to Culbro Land Resources, Inc. ("CLR"). As a result of the Asset Transfers, Culbro is a holding company with substantially no assets other than its ownership interests in the Company and CLR. See "The Asset Transfers, the Distribution and the Merger." Subsequent to the Offering, Culbro intends to effect a distribution (the "Distribution") to the shareholders of Culbro of all issued and outstanding shares of common stock of CLR. The Distribution will be contingent principally upon (i) either a tax ruling or an opinion of counsel satisfactory to Culbro that the Distribution constitutes a tax-free reorganization under Section 355 of the Internal Revenue Code and (ii) the approval by the holders of 66 2/3% of Culbro's common stock of the Merger. The Company will be the surviving corporation in the Merger and will issue to the holders of the common stock of Culbro 4.44557 shares of Class B Common Stock for each share of the Culbro common stock outstanding on the date of the Merger, or approximately 20,087,182 shares of Class B Common Stock in the aggregate, subject to adjustment for any options exercised prior to the Merger. The shareholders of Culbro will not vote with respect to the adoption of the Merger until May 1997. The members of the Cullman & Ernst Group, however, who collectively hold approximately 50% of Culbro's common stock, have indicated that they will vote their shares of Culbro common stock in favor of the Merger and will not sell or otherwise transfer any of their shares of Culbro common stock prior to the earlier to occur of 180 days after the date of this Prospectus or the consummation of the Merger. The Merger has been approved by Culbro as the sole stockholder of the Company and, consequently, the holders of the Class A Common Stock offered hereby will not vote in connection with the Merger. The Merger will not take place until August 1997 without the prior written consent of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"). The pro forma information on pages 21 to 24 hereof gives effect to the Asset Transfers, the Villazon Acquisition and the Offering. See page 57 for a chart illustrating the effect of the Distribution and the Merger. ------------------------ Macanudo-Registered Trademark-, Partagas-Registered Trademark-, Punch-Registered Trademark-, Hoyo De Monterrey-Registered Trademark-, Cohiba-Registered Trademark-, Excalibur-Registered Trademark-, Ramon Allones-Registered Trademark-, Temple Hall-Registered Trademark-, El Rey Del Mundo-Registered Trademark-, Canaria d'Oro-Registered Trademark-, Cifuentes-Registered Trademark-, Bolivar-Registered Trademark-, Garcia y Vega-Registered Trademark-, White Owl-Registered Trademark-, Tiparillo-Registered Trademark-, Robt. Burns-Registered Trademark-, Tijuana Smalls-Registered Trademark-, Wm. Penn-Registered Trademark-, Bances-Registered Trademark-, Belinda-Registered Trademark-, Lord Beaconsfield-Registered Trademark-, Villa De Cuba-TM-, Pedro Iglesias-Registered Trademark-, Top Stone-Registered Trademark- and Villazon Deluxe-Registered Trademark- are trademarks of the Company. The Djeep-TM- trademark included in this Prospectus is owned by Societe Industrielle Du Briquet Jetable. 6 THE OFFERING Class A Common Stock offered................. 6,000,000 shares Common Stock outstanding after the 6,000,000 shares of Class A Common Stock (1) Offering................................... 20,087,182 shares of Class B Common Stock (2) 26,087,182 total shares of Common Stock Voting rights................................ The Class A Common Stock and Class B Common Stock vote as a single class on all matters, except as otherwise required by law, with each share of Class A Common Stock entitling its holder to one vote and each share of Class B Common Stock entitling its holder to ten votes. All of the shares of Class B Common Stock are owned by Culbro. Immediately after consummation of the Offering, Culbro will beneficially own shares of Class B Common Stock representing approximately 97% of the combined voting power of the outstanding shares of Common Stock. After giving effect to the Merger, all shares of Class B Common Stock will be held by the holders of the Common Stock of Culbro (including the Cullman & Ernst Group). Use of proceeds.............................. The Company intends to use approximately $84.7 million of the net proceeds from the Offering to reduce outstanding indebtedness under the Credit Facility ($67.1 million of which was incurred in connection with the closing of the Villazon Acquisition and $17.6 million of which resulted from the Liability Assumption (as defined) portion of the Asset Transfers) and $14.4 million of the net proceeds will be used to repay a portion of the Seller Notes. See "Use of Proceeds." New York Stock Exchange symbol............... MPP (3)
See "Risk Factors" beginning on page 10 for a discussion of certain risks that should be considered in connection with an investment in the Class A Common Stock offered hereby. - ------------------------ (1) Excludes 3,300,000 shares of Class A Common Stock reserved for issuance under the 1997 Stock Option Plan, 570,555 of which will be subject to options issued upon consummation of the Offering and 2,162,818 of which are reserved for issuance upon exercise of outstanding options under Culbro's option plans. See "Certain Employee Benefit Matters--1997 Stock Option Plan." (2) Each share of Class B Common Stock is convertible at any time into one share of Class A Common Stock and converts automatically into one share of Class A Common Stock upon a sale to any person other than a Permitted Transferee (as defined herein). Issuance of all Class B Common Stock to the shareholders of Culbro as a result of the Merger is not a transfer but will constitute an issuance to a Permitted Transferee. See "Description of Capital Stock." (3) Selected as representative of the Company's MACANUDO, PARTAGAS and PUNCH brands. 7 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA The summary historical data for fiscal 1992 have been derived from the unaudited combined financial statements of the Company. The summary historical data for fiscal 1993 have been derived from the audited combined financial statements of the Company. The summary historical data for fiscal 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Combined Financial Statements of the Company included elsewhere in this Prospectus. The summary unaudited combined pro forma statement of operations data for fiscal 1996 and the summary pro forma balance sheet data as of November 30, 1996 give effect to (i) the liability portion of the Asset Transfers pursuant to which the Company acquired, among other assets, the stock of General Cigar Co. Inc., Club Macanudo, Inc., 387 PAS Corp., GCH Transportation, Inc. and Club Macanudo (Chicago), Inc., (ii) the Villazon Acquisition and (iii) the Offering. The pro forma adjustments are based upon available information and certain assumptions that the management of the Company believes are reasonable. The summary unaudited combined pro forma data do not purport to represent the results of operations or the financial position of the Company that actually would have occurred had the liability portion of the Asset Transfers, the Villazon Acquisition and the Offering occurred as of the dates indicated nor do they project the financial position or results of the Company for any future date. The following summary historical financial data should be read in conjunction with "Selected Combined Financial Data," "Unaudited Pro Forma Combined Financial Statements," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements of the Company and Notes thereto included elsewhere in this Prospectus.
FISCAL YEAR ------------------------------------------------------------------- 1996 ---------------------- PRO 1992 1993 1994 1995 ACTUAL FORMA(1) --------- --------- --------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 77,131 $ 76,825 $ 89,538 $ 124,033 $ 154,676 $ 196,694 Cost of goods sold................................... 48,651 49,165 54,285 69,683 86,240 107,650 --------- --------- --------- ---------- ---------- ---------- Gross profit......................................... 28,480 27,660 35,253 54,350 68,436 89,044 Selling, general and administrative expenses......... 27,059 25,282 27,210 36,726 44,593 53,120 Other nonrecurring expense........................... -- -- -- -- 3,600 3,600 --------- --------- --------- ---------- ---------- ---------- Operating profit..................................... 1,421 2,378 8,043 17,624 20,243 32,324 Interest expense..................................... 327 264 607 1,049 951 3,782 Income before income taxes........................... 1,393 2,248 7,413 18,564 20,145 30,074 Net income (loss) (2)................................ 814 (3,049) 4,550 11,324 12,407 18,463 Pro forma earnings per share (3)..................... $ 0.70 Pro forma number of weighted average shares outstanding (3).................................... 26,528
FOOTNOTES APPEAR ON THE FOLLOWING PAGE 8
NOV. 30, 1996 ----------------------------------------- PRO FORMA AS ADJUSTED ACTUAL PRO FORMA (4) (5) ---------- ------------- -------------- (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Working capital....................................................... $ 65,121 $ 9,493 $ 83,863 Total assets.......................................................... 145,042 244,795 244,795 Long-term debt........................................................ 11,079 72,029 47,339 Culbro investment/stockholders' equity................................ 93,719 45,258 144,318
FISCAL YEAR ---------------------------------------------------------------------- 1996 ------------------------- 1992 1993 1994 1995 ACTUAL PRO FORMA (1) --------- --------- ---------- --------- ---------- ------------- (DOLLARS IN THOUSANDS) OTHER DATA: Gross margin....................................... 36.9% 36.0% 39.4% 43.8% 44.2% 45.3% Operating margin................................... 1.8% 3.1% 9.0% 14.2% 13.1% 16.4% EBITDA (6)(7)...................................... $ 5,541 $ 5,923 $ 11,291 $ 23,163 $ 24,909 $ 40,454 EBITDA margin (7)(8)............................... 7.2% 7.7% 12.6% 18.7% 16.1% 20.6% Net cash provided by (used in) operating activities....................................... $ 8,224 $ (3,835) $ 12,683 $ 9,536 $ (4,919) -- Net cash used in investing activities.............. (4,435) (1,691) (1,384) (616) (9,701) -- Net cash (used in) provided by financing activities....................................... (3,799) 5,526 (10,865) (9,062) 14,707 -- Capital expenditures............................... 4,435 1,691 1,884 2,841 9,701 $ 10,014
- ------------------------ (1) As adjusted to give effect to the liability portion of the Asset Transfers, the Villazon Acquisition and the Offering. (2) Includes a $4.4 million charge, net of related taxes, to reflect the adoption of SFAS No. 106 in 1993. Includes a pre-tax gain of $2.6 million in fiscal 1995 to reflect an insurance settlement. (3) The pro forma number of weighted average shares outstanding includes all of the outstanding shares of Class A Common Stock and Class B Common Stock expected to be outstanding after the Offering. The total number of weighted average shares outstanding used in the computation of pro forma earnings per share also includes the dilutive effect of additional shares issuable upon exercise of all Culbro stock options outstanding at the Offering date. See "Certain Employee Benefit Matters--Culbro Employee Benefit Plans to be Assumed by the Company--Culbro Stock Option Plans." (4) As adjusted to give effect to the liability portion of the Asset Transfers and the Villazon Acquisition. (5) As adjusted to give effect to the Offering. (6) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See the Combined Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. (7) In fiscal 1995 the Company had a $2.6 million gain from an insurance settlement. Excluding this gain, EBITDA would have been $20.6 million and EBITDA margin would have been 16.6%. In fiscal 1996, the Company had a nonrecurring expense of $3.6 million. Excluding this expense, EBITDA would have been $28.5 million ($44.1 million on a pro forma basis) and EBITDA margin would have been 18.4% (22.4% on a pro forma basis). (8) EBITDA margin represents EBITDA as a percentage of net sales. EBITDA margin is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA margin should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See the Combined Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. 9 RISK FACTORS PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY SHOULD CONSIDER CAREFULLY ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS AND, IN PARTICULAR, SHOULD EVALUATE THE FOLLOWING RISKS IN CONNECTION WITH AN INVESTMENT IN THE CLASS A COMMON STOCK. DECLINING MARKET FOR CIGARS THROUGH 1993 According to industry sources, the cigar industry experienced declining unit sales between 1964 and 1993 at a compound annual rate of 3.3%. The Company experienced similar trends in the unit volume of its cigars during such period. While the cigar industry has experienced significantly better trends in unit sales since 1993, there can be no assurance that the recent positive trends will continue. Management believes that a considerable percentage of the recent increase in cigar unit sales, especially with respect to premium cigars, is attributable to new cigar smokers attracted by the improving image of cigar smoking and the increased visibility of cigar smoking by celebrities. There can be no assurance that recent increases in cigar unit sales are indicative of long-term trends or that these new customers will continue to smoke cigars in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Market Overview." EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS Cigar manufacturers, like other producers of tobacco products, are subject to regulation at the federal, state and local levels. The recent trend is toward increasing regulation of the tobacco industry, and the recent increase in popularity of cigars could lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would have (i) prohibited the advertising and promotion of all tobacco products or restricted or eliminated the deductibility of such advertising expenses, (ii) increased labeling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins, (iii) shifted regulatory control of tobacco products and advertisements from the U.S. Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration (the "FDA"), (iv) increased tobacco excise taxes and (v) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Hearings have been held on certain of these proposals; however, to date, none of such proposals have been passed by Congress. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. In addition, the majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by requiring designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the sales or operations of the Company. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. Although federal law has required health warnings on cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars carry such warnings. California, however, requires "clear and reasonable" warnings to consumers who are exposed to chemicals determined by the state to cause cancer or reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Although similar legislation has been introduced in other states, no action has been taken. There can be no assurance that such legislation introduced in other states will not be passed in the future or that other states will not enact similar legislation. Consideration at both the federal and state level also has been given to consequences of tobacco smoke on others who are not currently smoking (so called "second-hand" smoke). There can be no assurance that regulation relating to second hand smoke will not be adopted or that such regulation or related litigation would not have a material adverse effect on the Company's results of operations or financial condition. 10 Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. There can be no assurance as to the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. See "Business--The Tobacco Industry--Regulation." TOBACCO INDUSTRY LITIGATION The tobacco industry has experienced and is experiencing significant health-related litigation involving tobacco and health issues. Plaintiffs in such litigation have sought and are seeking compensatory and, in some cases, punitive damages, for various injuries claimed to result from the use of tobacco products or exposure to tobacco smoke. The Company has in the past been named in certain health-related litigation. There can be no assurance that there would not be an increase in health-related litigation against the cigarette and smokeless tobacco industries or similar litigation in the future against cigar manufacturers. The costs to the Company of defending prolonged litigation and any settlement or successful prosecution of any material health-related litigation against manufacturers of cigars, cigarettes or smokeless tobacco or suppliers to the tobacco industry could have a material adverse effect on the Company's results of operations or financial condition. The recent increase in the sales of cigars and the publicity such increase has received may have the effect of increasing the probability of legal claims. Also, a recent study published in the journal SCIENCE reported that a chemical found in tobacco smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and, thereby, directly links lung cancer to smoking. The National Cancer Institute also has announced that it will issue a report in 1997 describing research into cigars and health. This study and this report could affect pending and future tobacco regulation or litigation. See "--Extensive and Increasing Regulation of Tobacco Products" and "Business--The Tobacco Industry--Litigation." RISKS RELATING TO THE FAILURE TO CONSUMMATE THE MERGER AND THE DISTRIBUTION The Merger is contingent upon (i) consummation of the Distribution, which in turn is contingent principally upon either a tax ruling or an opinion of counsel satisfactory to Culbro that the Distribution constitutes a tax free reorganization under Section 355 of the Internal Revenue Code and (ii) the prior approval of the Merger by the shareholders of Culbro, which approval will not have been obtained at the time of consummation of the Offering. See "The Asset Transfers, the Distribution and the Merger." If the Distribution is not consummated, the Merger will not be consummated. There can be no assurance that the failure to consummate the Merger and the Distribution would not have a material adverse effect on the holders of the Class A Common Stock. If the Merger and the Distribution were not consummated, the Company would continue to be an approximately 77% owned subsidiary of Culbro, and therefore Culbro would continue to control approximately 97% of the votes on all matters submitted to stockholders of the Company. Because Culbro would continue to be a publicly held company, the market value of the Class A Common Stock offered hereby might be adversely affected by changes in the market value of Culbro's common stock. The interests of Culbro may differ substantially from those of the Company's other stockholders. For example, Culbro would engage in activities that are unrelated to the cigar business, including CLR, and that could adversely affect the Company's business or liquidity, and Culbro may cause the Company to adopt dividend policies (for example, to fund such unrelated activities) that are different from those that would have been adopted by the Board of Directors of the Company had the Merger and the Distribution taken place. In addition, there could be a material adverse effect on the liquidity of the Class A Common Stock if the Merger and the Distribution are not consummated. RELATIONS WITH CUBA Cuba historically has had, and continues to have, the highest reputation for premium cigars in the world. Many of the Company's premium cigar brand names are of Cuban origin. The Company acquired 11 some of these brand names from their Cuban owners in the aftermath of Castro's revolution and registered others with the U.S. Patent and Trademark Office. The Company's rights to many of these brand names generally are limited to sales in the U.S. It is expected that, if and when normalization of relations between the U.S. and Cuba occurs, manufacturers of Cuban cigars, either alone or in combination with other manufacturers or distributors of tobacco products, will attempt to enter the U.S. market. The entry of Cuban premium cigars into the U.S. market could increase competition in the Company's core premium cigar market and could have a material adverse effect on the Company's premium cigar business. EFFECTS OF INCREASES IN EXCISE TAXES Cigars have long been subject to federal, state and local excise taxes, and such taxes frequently have been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives. In particular, there have been proposals by the federal government in the past to reform health care through a national program to be funded principally through increases in federal excise taxes on tobacco products. Enactment of new or significant increases in existing federal, state or local excise taxes could result in decreased unit sales of cigars which could have a material adverse effect on the Company's business. See "Business--The Tobacco Industry--Excise Taxes." RISKS RELATING TO DEMAND FOR CIGARS The Company's ability to increase its production of premium and mass market cigars to meet increases in demand has been, and in the future may be, constrained by a shortage of properly aged and blended tobacco ready for manufacturing. In general, the aging process for filler tobacco requires that tobacco be purchased up to three years in advance of actual use in the manufacturing process. An important part of the manufacturing process for premium cigars involves blending flavors of different tobacco leaves, a process that takes approximately 16 weeks. During 1996, the Company discontinued shipping Macanudo cigars for a two month period as excessive demand led to a shortage of properly aged and blended tobacco. Accordingly, there can be no assurance that increases in demand beyond the Company's current expectations would not result in similar tobacco shortfalls and thereby adversely affect the Company's ability to manufacture its products. The Company's ability to increase its production of premium cigars also may be limited by a shortage of skilled laborers. Although the Company is hiring and training new skilled laborers, the training process can take up to one year and not all trainees are able to complete the Company's training program. While the Company is pursuing measures to increase its production of premium cigars, there can be no assurance that these measures will enable the Company to meet any future level of demand for its premium cigars. Any material inability of the Company to fill its premium cigar orders in a timely manner could have a material adverse effect on the Company's business, including the loss of sales by the Company and the potential loss of future sales to other brands which consumers purchase in the absence of available supplies of the Company's brands. See "--Social, Political and Economic Risks Associated with Foreign Operations and International Trade" and "Business--Backorders." While the cigar industry, including the Company, has experienced increasing demand for cigars during the last several years, there can be no assurance that such trends will continue. In the event anticipated industry growth does not continue or the Company experiences a reduction in demand, the Company may experience excess inventory or production capacity which could have an adverse effect on the Company's business or results of operations. SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND INTERNATIONAL TRADE A substantial portion of the manufacturing operations of the Company (including all of the Company's manufacturing operations for its premium cigars) is located in territories and countries outside of 12 the U.S., including the Dominican Republic, Jamaica and Honduras. In addition, the Company buys tobacco directly from a large number of suppliers located in territories and countries outside the U.S., including Brazil, Cameroon, the Central African Republic, Germany, Italy, Turkey, the Dominican Republic, the Philippines, Indonesia, Honduras, Ecuador and Mexico. The Company is exposed to the risk of changes in social, political and economic conditions inherent in foreign operations and international trade, including changes in the laws and policies that govern foreign investment and international trade in territories and countries where it currently has operations and conducts international trade, as well as, to a lesser extent, changes in U.S. laws and regulations relating to foreign investment and trade. Any such social, political or economic changes could pose, among other things, the risk of finished product and raw material supply interruption or significant increases in finished product and raw material prices. In particular, political or labor unrest in the Dominican Republic, Honduras or Jamaica could result in interruptions in production of the Company's premium cigars, which would cause an immediate halt in shipments by the Company due to its lack of inventory of manufactured cigars. Accordingly, there can be no assurance that any such changes in social, political or economic conditions will not have a material adverse effect on the Company's business. RISKS RELATED TO DEBT ASSUMPTION The Company has assumed debt from Culbro, estimated to be approximately $43.8 million as of the date of the Offering, in connection with the Liability Assumption portion of the Asset Transfers. This debt has not been reflected in the historical financial statements of the Company and was not originally incurred by the Company. However, the Company will be required to service this debt from its operations in the future. RESTRICTIONS IMPOSED BY THE TERMS OF THE COMPANY'S INDEBTEDNESS The terms and conditions of the Credit Facility impose, and the terms and conditions of future debt instruments of the Company or its subsidiaries may impose, restrictions on the Company and its subsidiaries that affect, among other things, their ability to incur debt, pay dividends or make distributions, make acquisitions, create liens, sell assets, and make certain investments. The terms of the Credit Facility require General Cigar Co., Inc., the wholly owned subsidiary of the Company through which the Company conducts its material operations, to maintain specified financial ratios and satisfy certain tests, including maximum leverage ratios and minimum interest coverage ratios. In addition, the Credit Facility restricts the ability of the Company to pay dividends except under certain circumstances. As of November 30, 1996, after giving effect to the Offering and the use of proceeds thereof, there would have been approximately $26.3 million outstanding under the Credit Facility, excluding $9.1 million of cash acquired in the Villazon Acquisition, a portion of which would have been available to reduce such borrowings. The Credit Facility will have a borrowing capacity of approximately $50.0 million following the Offering. See "Description of the Credit Facility," "Capitalization," "Unaudited Pro Forma Combined Financial Statements," "Use of Proceeds" and Note 7 to the Combined Financial Statements. The ability of the Company and its subsidiaries to comply with the terms of their respective debt instruments can be affected by events beyond their control, including events such as changes in prevailing economic conditions, changes in consumer preferences and changes in the competitive environment, which could impair the Company's operating performance. There can be no assurance that the Company and its subsidiaries will be able to comply with the provisions of their respective debt instruments, including compliance by General Cigar Co., Inc. with the financial ratios and tests contained in the Credit Facility. Breach of any of these covenants or the failure to fulfill the obligations thereunder and the lapse of any applicable grace periods would result in an event of default under the applicable debt instruments, and the holders of such indebtedness could declare all amounts outstanding under their debt instruments to be due and payable immediately. Any such declaration under a debt instrument is likely to result in an event of default under one of the other debt instruments of the Company and its subsidiaries. There can be no 13 assurance that the assets or cash flows of the Company or its subsidiaries would be sufficient to repay in full borrowings under their respective outstanding debt instruments, whether upon maturity or in the event of acceleration upon an event of default, or upon a required repurchase in the event of a change of control, or that the Company would be able to refinance or restructure the payments on such indebtedness. See "-- Impact of Holding Company Structure" and "Description of the Credit Facility." IMPACT OF HOLDING COMPANY STRUCTURE The Company is a holding company with no business operations of its own. The Company's only material assets are all of the outstanding capital stock of its subsidiaries, General Cigar Co., Inc., GCH Transportation, Inc., Club Macanudo, Inc. and Club Macanudo (Chicago), Inc., and all of the ownership interests in the Company's office building in New York City. Accordingly, the Company is dependent upon the earnings and cash flows of, and dividends and distributions from, the Company's subsidiaries to pay its expenses and meet its obligations, and to pay any cash dividends or distributions on the Common Stock that may be authorized by the Board of Directors of the Company. There can be no assurance that General Cigar Co., Inc. or any other subsidiary will generate sufficient earnings and cash flows to pay dividends or distribute funds to the Company to enable the Company to pay its expenses and meet its obligations or that applicable state law and contractual restrictions, including negative covenants contained in the debt instruments of the Company's subsidiaries then in effect, will permit such dividends or distributions. See "--Restrictions Imposed by the Terms of the Company's Indebtedness." RISKS RELATING TO TRADEMARKS The Company's success and ability to compete are dependent to a significant degree on its brand names. The Company relies primarily on trademark law to protect its brand names. Although the Company vigorously defends its trademarks against infringement by others, including counterfeiters, policing unauthorized use of the Company's trademarks is difficult. The illegal use of the Company's trademarks may have an adverse effect on the Company's business, financial condition and operating results. The Company has registered its trademarks in the U.S. and certain foreign countries and will continue to do so as new trademarks are developed or acquired. The laws of countries outside of the U.S. may afford the Company little or no effective protection of certain of its trademarks. Moreover, the Company does not hold the right to use certain of its well-known trademarks and brand names, including Partagas and Cohiba, in most foreign markets. Empresa Cubana Del Tabaco, d.b.a. Cubatabaco ("Cubatabaco") filed a petition on January 15, 1997 in the United States Patent and Trademark Office ("USPTO") to cancel the Company's two United States trademark registrations of the name Cohiba for use in connection with cigars. Cubatobaco's petition was filed in response to the USPTO's anticipated rejection of its attempt to register its Cohiba trademark in the United States. If Cubatabaco were successful in this proceeding, then the Company's U.S. registrations of the name Cohiba for use in connection with cigars would be cancelled. Under certain circumstances, the results of this proceeding could be used in a subsequent action to enjoin use of the name Cohiba by the Company. See "Business--The Tobacco Industry--Litigation." The Company in the future may receive notices of claims of infringement of other parties' trademarks. There can be no assurance that claims for infringement or invalidity, or claims for indemnification resulting from infringement claims, will not be asserted or prosecuted against the Company. Any such claims, with or without merit, could be time-consuming to defend, result in costly litigation and divert management's attention and resources. MANAGEMENT OF GROWTH The Company has experienced rapid growth over the last several years and plans further production expansion in an effort to meet increases in demand for premium and mass market cigars. The Company's 14 rapid growth and planned expansion present numerous operational challenges to the Company's senior management and employees. The Company faces similar challenges with respect to the integration of Villazon into the Company's operations. The Company's growth has placed, and will continue to place, significant demands on the Company's management, working capital and financial management control systems. The Company also has contracted to upgrade its information management systems to provide for better tracking of inventories used in manufacturing. There can be no assurance, however, that such improvements will be adequate as demand continues to increase. In addition, the integration of such new systems may cause disruptions in manufacturing that could adversely affect the Company's business. RISKS RELATING TO THE DISTRIBUTION AND THE MERGER Pursuant to the terms of the Distribution Agreement, Tax Sharing Agreement and Employee Benefits Allocation Agreement, certain liabilities of Culbro are being assumed by CLR, including liabilities relating to the real estate business and the nursery business, liabilities relating to Eli Witt (including potential claims relating to transfer of funds to Culbro and other claims relating to Eli Witt's Chapter 11 filing), certain specified tax liabilities and liabilities relating to employees of CLR. Although as a result of the Asset Transfers and the Distribution CLR will assume such liabilities, Culbro (and the Company following the Merger) may continue to be liable to third parties with respect to certain of such liabilities and claims. CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER EFFECTS OF DUAL CLASSES OF STOCK; OTHER ANTI-TAKEOVER PROVISIONS Upon consummation of the Offering, 20,087,182 shares of Class B Common Stock, constituting 77% of the issued and outstanding Common Stock and approximately 97% of the combined voting power of the outstanding Common Stock, will be held by Culbro, and 2,237,147 shares of Culbro common stock, constituting approximately 50% of the issued and outstanding shares of Culbro common stock, will be held by the Cullman & Ernst Group. Following the Merger, 9,945,393 shares of Class B Common Stock, constituting 38% of the issued and outstanding Common Stock, will be held by the Cullman & Ernst Group. The Cullman & Ernst Group has sole voting and investment power with respect to shares of Culbro common stock held by it and will have sole voting and investment power with respect to the 9,945,393 shares of Class B Common Stock that it will hold following the Merger. Each share of Class B Common Stock has ten votes with respect to matters requiring the approval of the holders of Common Stock, while each share of the Class A Common Stock, including shares offered hereby, has one vote on such matters. As a result, the Cullman & Ernst Group will have substantial control over the Company and may have the power to elect all of its directors and to approve any action requiring stockholder approval, including adopting amendments to the Company's certificate of incorporation and approving mergers or sales of all or substantially all of the Company's assets. The Schedule 13D filed by the Cullman & Ernst Group with the Securities and Exchange Commission (the "SEC") with respect to its holdings in Culbro states that there is no undertaking other than an informal understanding that the members of the Cullman & Ernst Group will hold and vote their shares together. In the normal course of business the members of the Cullman & Ernst Group have acted together with respect to their shares of Culbro common stock. Such control by the Cullman & Ernst Group, together with certain provisions of the Company's certificate of incorporation and by-laws as well as certain provisions of the Delaware General Corporation Law (the "DGCL"), could increase the difficulty of effecting a change of control of the Company without their approval. See "Description of Capital Stock." DILUTION Purchasers of the Class A Common Stock will experience immediate and substantial dilution of $15.27 in net tangible book value per share of Common Stock from the initial public offering price of $18.00. See "Dilution." 15 NO PRIOR MARKET FOR CLASS A COMMON STOCK; DETERMINATION OF PUBLIC OFFERING PRICE Prior to the Offering, there has been no public market for the Class A Common Stock. There can be no assurance as to the development or liquidity of any trading market for the Class A Common Stock following the Offering or that investors in the Class A Common Stock will be able to resell their shares at or above the initial public offering price. The initial public offering price for the shares of Class A Common Stock was determined through negotiations between the Company and the representatives of the Underwriters, and may not be indicative of the market price of the Class A Common Stock after the Offering. In addition, the market price of the Class A Common Stock may be affected by the market price of Culbro's common stock prior to the consummation of the Merger. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE Upon consummation of the Offering, 6,000,000 shares of Class A Common Stock and 4,518,472 shares of Culbro common stock (which are expected to be exchanged for 20,087,182 shares of Class B Common Stock in the Merger) will be outstanding. The 6,000,000 shares of Class A Common Stock sold in the Offering will be freely transferable without restriction under the Securities Act of 1933, as amended (the "Securities Act"), except for shares acquired in the Offering by "affiliates" of the Company, as that term is defined in Rule 144 promulgated under the Securities Act. All of the 4,518,472 shares of Culbro common stock outstanding are freely transferable without restriction under the Securities Act, except for shares held by affiliates of Culbro. All of the 20,087,182 shares of Class B Common Stock that will be outstanding upon consummation of the Merger will be freely transferable without restriction under the Securities Act, except for shares held by affiliates of the Company. Transfers of shares of Common Stock and Culbro common stock by affiliates of the Company and Culbro, respectively, are subject to the volume restrictions of Rule 144. Subject to certain exceptions, the Company, the executive officers and directors of the Company, Culbro and certain stockholders of Culbro (who in the aggregate hold 2,276,112 shares of Culbro common stock, or 2,722,623 shares, assuming exercise of outstanding options held by such persons) each have agreed that they will not, without the prior written consent of DLJ, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or Culbro common stock or any securities convertible into or exercisable or exchangeable for such Common Stock or Culbro common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such Common Stock or Culbro common stock for a period of 180 days from the date of this Prospectus. At the expiration of the 180-day period described above and upon consummation of the Merger, or earlier with the written consent of DLJ, the holders of 6,000,000 shares of Class A Common Stock will continue to have, and holders of 20,087,182 shares of Class B Common Stock for the first time will have the right to sell such shares without restriction under the Securities Act, except that transfers by affiliates of the Company will be subject to the volume limitations of Rule 144. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the issuance of 3,300,000 shares of Class A Common Stock reserved for issuance upon the exercise of options, including 570,555 shares of Class A Common Stock issuable upon exercise of options to be issued upon consummation of the Offering under the 1997 Stock Option Plan and 2,162,818 shares of Class A Common Stock issuable upon exercise of Culbro options following the Merger. As a result, any shares of Class A Common Stock issued upon exercise of such stock options will be available, subject to special rules for affiliates and applicable lock-up arrangements, for resale in the public market. See "Certain Employee Benefit Matters." No prediction can be made as to the effect, if any, that future sales of Common Stock, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Class A Common Stock (including shares issued upon the exercise of stock options or upon conversion of shares of Class B Common Stock), or the perception that such sales could occur, could adversely affect prevailing market prices for the Class A Common Stock. 16 USE OF PROCEEDS The net proceeds to be received by the Company from the sale of the Class A Common Stock offered hereby, after deducting underwriting discounts and commissions and estimated offering expenses, are estimated to be approximately $99.1 million. The Company intends to use approximately $84.7 million of such net proceeds to reduce outstanding indebtedness under the Credit Facility ($67.1 million of which was incurred in connection with the closing of the Villazon Acquisition and $17.6 million of which resulted from the Liability Assumption portion of the Asset Transfers) and $14.4 million of such net proceeds will be used to repay a portion of the Seller Notes incurred in connection with the Villazon Acquisition. The indebtedness to be repaid under the Credit Facility currently bears interest at a rate of approximately 7.44% (the Eurodollar Rate plus 2%, adjusted monthly) and $60.0 million of such indebtedness matures in January 1998 and is required to be prepaid at the time of, and with a portion of the proceeds from, the Offering, while the remaining $24.7 million matures in January 2000. The portion of the Seller Notes to be repaid with the proceeds from the Offering bears interest at a rate of 8.75% and matures on the earlier of thirty days following consummation of the Offering or April 2, 1997. DIVIDEND POLICY The Company, as a holding company with no business operations of its own, is dependent on dividends and distributions from its subsidiaries to pay any cash dividends or distributions on the Common Stock. The terms of the Credit Facility limit the payment of dividends or distributions by the Company. Subject to such restrictions, any future declaration of cash dividends will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Board of Directors of the Company. See "Risk Factors--Restrictions Imposed by the Terms of the Company's Indebtedness" and "Description of Credit Facility." The Company has never declared or paid a cash dividend on the Common Stock. Although Culbro historically has paid cash dividends, the Company currently intends during 1997 to retain its earnings to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in 1997. Thereafter, the payment of cash dividends will be considered by the Board of Directors of the Company based upon its results of operations, cash flows, financial condition and liquidity. 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of November 30, 1996 and the pro forma capitalization of the Company as of November 30, 1996, as adjusted to reflect (i) the Villazon Acquisition and the liability portion of the Asset Transfers and (ii) the sale by the Company of the 6,000,000 shares of Class A Common Stock offered hereby. This table should be read in conjunction with the Combined Financial Statements of the Company included elsewhere in this Prospectus.
AS OF NOVEMBER 30, 1996 ----------------------------------------- PRO FORMA AS ADJUSTED ACTUAL PRO FORMA (1) (2) ---------- ------------- -------------- (DOLLARS IN THOUSANDS) Cash.................................................................. $ 409 $ 9,469(3) $ 9,469(3) ---------- ------------- -------------- ---------- ------------- -------------- Short-term debt: Credit Facility (4)................................................. $ 60,000 $ -- Seller Notes (5).................................................... 14,370 -- Current portion of long-term obligations............................ $ 1,131 1,131 1,131 ---------- ------------- -------------- Total short-term debt............................................. $ 1,131 $ 75,501 $ 1,131 ---------- ------------- -------------- ---------- ------------- -------------- Long-term debt: Credit Facility (4)................................................. $ 50,950 $ 26,260 Seller Notes (5).................................................... 10,000 10,000 Long-term debt...................................................... $ 11,079 11,079 11,079 ---------- ------------- -------------- Total long-term debt.............................................. 11,079 72,029 47,339 ---------- ------------- -------------- Culbro investment/stockholders' equity: Culbro investment................................................... 93,719 45,258 Class A Common Stock, $0.01 par value, 50,000,000 shares authorized, 0 and 6,000,000 shares issued and outstanding actual and pro forma as adjusted, respectively (6)..................................... 60 Class B Common Stock, $0.01 par value, 25,000,000 shares authorized, 0 and 20,087,182 shares issued and outstanding actual and pro forma as adjusted, respectively................................... 201 Additional paid-in capital.......................................... 144,057 Retained earnings................................................... 0 ---------- ------------- -------------- Total Culbro investment/stockholders' equity...................... 93,719 45,258 144,318 ---------- ------------- -------------- Total capitalization............................................ $ 104,798 $ 117,287 $ 191,657 ---------- ------------- -------------- ---------- ------------- --------------
- ------------------------ (1) Gives effect to the liability assumption portion of the Asset Transfers and the Villazon Acquisition. (2) Gives effect to the Offering and the use of the net proceeds thereof. See "Use of Proceeds." (3) Gives effect to approximately $9.1 million of cash acquired in the Villazon Acquisition, a portion of which would have been available to reduce borrowings under the Credit Facility. (4) Upon consummation of the Villazon Acquisition, $60.0 million of the indebtedness under the Credit Facility consisted of borrowings under the short-term facility and $51.0 million consisted of borrowings under the revolving credit facility. See "Description of the Credit Facility." (5) Seller Notes consist of (i) $14.4 million payable to the sellers of Villazon within 30 days of the closing of the Offering (but no later than April 2, 1997) and (ii) $10.0 million payable to certain sellers of Villazon in 2002. (6) Excludes 3,300,000 shares of Class A Common Stock reserved for issuance under the 1997 Stock Option Plan, 570,555 of which will be subject to options issued upon consummation of the Offering and 2,162,818 of which are reserved for issuance upon exercise of outstanding options under Culbro's option plans. See "Certain Employee Benefit Matters--1997 Stock Option Plan." 18 DILUTION As of November 30, 1996, after giving effect to the Asset Transfers and the Villazon Acquisition, the Company had a pro forma deficit in net tangible book value of $27.9 million or $1.39 per share of Common Stock. "Pro forma net tangible book value" per share of Common Stock represents the pro forma total amount of tangible assets of the Company, less the pro forma total amount of liabilities of the Company, divided by the number of shares of Class B Common Stock outstanding. Without taking into account any changes in pro forma net tangible book value after November 30, 1996, other than to give effect to the sale by the Company of the shares of Class A Common Stock offered hereby, the pro forma net tangible book value of the Common Stock as of November 30, 1996 would have been $71.2 million, or $2.73 per share. This represents an immediate dilution of $15.27 per share to new stockholders. The following table illustrates this per share dilution: Initial public offering price per share................. $ 18.00 Pro forma net tangible book value per share before the Offering................................... $ (1.39) Increase per share attributable to new investors........ 4.12 --------- Pro forma net tangible book value per share after the Offering.................................... $ 2.73 --------- Dilution per share to new investors..................... $ 15.27 --------- ---------
The following table sets forth, on a pro forma basis at November 30, 1996, the difference between the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing holders of Common Stock and by the new investors before deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company.
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- --------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------------ ----------- -------------- ----------- ------------- Existing stockholders............................. 20,087,182 77.0% $ 45,258,000 29.5% $ 2.25 New investors..................................... 6,000,000 23.0 108,000,000 70.5 $ 18.00 ------------ ----- -------------- ----- Total......................................... 26,087,182 100.0% $ 153,258,000 100.0% ------------ ----- -------------- ----- ------------ ----- -------------- -----
The foregoing table (i) assumes no exercise of the Underwriters' over-allotment option, (ii) does not reflect an aggregate of 3,300,000 shares of Class A Common Stock reserved for issuance under the 1997 Stock Option Plan (see "Certain Employee Benefit Matters--1997 Stock Option Plan") and (iii) reflects the Liability Assumption portion of the Asset Transfers on a pro forma basis. 19 SELECTED COMBINED FINANCIAL DATA The Selected Combined Financial Data for fiscal 1992 have been derived from the unaudited combined financial statements of the Company. The Selected Combined Financial Data for fiscal 1993 have been derived from the audited Combined Financial Statements of the Company. The Selected Combined Financial Data for fiscal 1994, fiscal 1995 and fiscal 1996 have been derived from the audited Combined Financial Statements of the Company included elsewhere in this Prospectus. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements of the Company and Notes thereto included elsewhere in this Prospectus.
FISCAL YEAR ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Net sales............................................... $ 77,131 $ 76,825 $ 89,538 $ 124,033 $ 154,676 Cost of goods sold...................................... 48,651 49,165 54,285 69,683 86,240 --------- --------- --------- --------- --------- Gross profit............................................ 28,480 27,660 35,253 54,350 68,436 Selling, general and administrative expenses............ 27,059 25,282 27,210 36,726 44,593 Other nonrecurring expense.............................. -- -- -- -- 3,600 --------- --------- --------- --------- --------- Operating profit........................................ 1,421 2,378 8,043 17,624 20,243 Gain on insurance settlement............................ -- -- -- 2,586 -- Other nonoperating income (expense)..................... 299 134 (23) (597) 853 Interest expense........................................ 327 264 607 1,049 951 --------- --------- --------- --------- --------- Income before income taxes.............................. 1,393 2,248 7,413 18,564 20,145 Income tax provision.................................... 579 941 2,863 7,240 7,738 --------- --------- --------- --------- --------- Income before cumulative effect of accounting change.... 814 1,307 4,550 11,324 12,407 Cumulative effect of accounting change for post- retirement benefits, net of tax provision............. -- (4,356) -- -- -- --------- --------- --------- --------- --------- Net income (loss)....................................... $ 814 $ (3,049) $ 4,550 $ 11,324 $ 12,407 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- OTHER DATA: Gross margin............................................ 36.9% 36.0% 39.4% 43.8% 44.2% Operating margin........................................ 1.8% 3.1% 9.0% 14.2% 13.1% EBITDA (1)(2)........................................... $ 5,541 $ 5,923 $ 11,291 $ 23,163 $ 24,909 EBITDA margin (2)(3).................................... 7.2% 7.7% 12.6% 18.7% 16.1% Net cash provided by (used in) operating activities..... $ 8,224 $ (3,835) $ 12,683 $ 9,536 $ (4,919) Net cash used in investing activities................... (4,435) (1,691) (1,384) (616) (9,701) Net cash (used in) provided by financing activities..... (3,799) 5,526 (10,865) (9,062) 14,707 Capital expenditures.................................... 4,435 1,691 1,884 2,841 9,701 BALANCE SHEET DATA (AT END OF PERIOD): Working capital......................................... $ 35,673 $ 45,001 $ 41,176 $ 43,632 $ 65,121 Total assets............................................ 98,908 104,551 100,974 113,655 145,042 Long-term debt.......................................... 3,292 2,901 6,998 11,352 11,079 Culbro investment....................................... 75,874 78,740 68,160 66,095 93,719
- ------------------------ (1) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA is not intended to represent cash flows for the period, nor has it been presented as an alternative to operating income as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See the Combined Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. (2) In fiscal 1995 the Company had a $2.6 million gain from an insurance settlement. Excluding this gain, EBITDA would have been $20.6 million and EBITDA margin would have been 16.6%. In fiscal 1996 the Company had a nonrecurring expense of $3.6 million. Excluding this expense, EBITDA would have been $28.5 million and EBITDA margin would have been 18.4%. (3) EBITDA margin represents EBITDA as a percentage of net sales. EBITDA margin is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance. EBITDA margin should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See the Combined Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. 20 UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS In January 1997, Culbro transferred to the Company the stock of General Cigar Co., Inc., Club Macanudo, Inc., 387 PAS Corp., Club Macanudo (Chicago), Inc. and GCH Transportation, Inc., and General Cigar Co., Inc. acquired Villazon. In addition, Culbro transferred approximately 1,100 acres of real estate holdings in the Connecticut River Valley to the Company. Culbro has transferred to the Company certain additional assets and operations of Culbro, and the Company has assumed the related obligations of Culbro and substantially all of its consolidated debt. These asset transfers and debt assumption are referred to as the Asset Transfers. Related to the Asset Transfers are transfers of the remaining assets of Culbro (other than the Common Stock) to CLR, the Distribution and the Merger. See "The Asset Transfers, the Distribution and the Merger." The Distribution and the Merger do not affect the Unaudited Pro Forma Combined Financial Statements. The Unaudited Pro Forma Combined Statement of Operations for fiscal 1996 and the Unaudited Pro Forma Combined Balance Sheet at November 30, 1996 were prepared to reflect (i) the liability portion of the Asset Transfers (the "Liability Assumption"), (ii) the Villazon Acquisition and (iii) the Offering. The column designated Company Historical reflects the results of operations and the assets and liabilities, as appropriate, of General Cigar Co., Inc., Club Macanudo, Inc., 387 PAS Corp., Club Macanudo (Chicago), Inc. and GCH Transportation, Inc. on an historical combined basis. The "Pro Forma for Liability Assumption" columns adjust the Company Historical results of operations or financial condition, as appropriate, for the assumption of debt by the Company pursuant to the Liability Assumption portion of the Asset Transfers. The Villazon Historical column includes Villazon's audited results for the ten months ended October 31, 1996 and its unaudited results for the two months ended December 31, 1996. The "Pro Forma for Villazon Acquisition" columns adjust for the Villazon Acquisition. The "Pro Forma As Adjusted for the Offering" columns give effect to the Offering. In the opinion of management, all adjustments necessary to fairly present this pro forma information have been made. The Unaudited Pro Forma Combined Financial Statements are based upon, and should be read in conjunction with, the Combined Financial Statements of the Company and Notes thereto included elsewhere in this Prospectus. The pro forma information does not purport to be indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of the Company's future results if the aforementioned transactions are completed. The Company cannot predict whether the consummation of the Asset Transfers, the Villazon Acquisition or the Offering will conform to the assumptions used in the preparation of the Unaudited Pro Forma Combined Financial Statements. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR FISCAL 1996
PRO FORMA AS ADJUSTED PRO FORMA FOR PRO FORMA FOR FOR THE LIABILITY ASSUMPTION VILLAZON ACQUISITION OFFERING(17) COMPANY -------------------------- VILLAZON -------------------------- ------------- HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL(16) ADJUSTMENTS PRO FORMA ADJUSTMENTS ----------- ------------- ----------- --------------- ------------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net sales...................... $ 154,676 $ 154,676 $ 42,018 $ 196,694 Cost of goods sold............. 86,240 86,240 21,410 107,650 ----------- ------------- ----------- ------- ------------- ----------- ------------- Gross profit................... 68,436 68,436 20,608 89,044 Selling, general and administrative expenses...... 44,593 44,593 6,004 $ 2,523(3) 53,120 Other nonrecurring expense..... 3,600 3,600 3,600 ----------- ------------- ----------- ------- ------------- ----------- ------------- Operating profit............... 20,243 20,243 14,604 (2,523) 32,324 Other nonoperating income, net.......................... 853 853 679 1,532 Interest expense............... 951 $ 3,258(1) 4,209 552 6,908(4) 11,669 $ (7,887)(5) ----------- ------------- ----------- ------- ------------- ----------- ------------- Income before income taxes..... 20,145 (3,258) 16,887 14,731 (9,431) 22,187 7,887 Income tax provision........... 7,738 (1,270)(2) 6,468 2,067(2) 8,535 3,076(2) ----------- ------------- ----------- ------- ------------- ----------- ------------- Net income..................... $ 12,407 $ (1,988) $ 10,419 $ 14,731 $ (11,498) $ 13,652 $ 4,811 ----------- ------------- ----------- ------- ------------- ----------- ------------- ----------- ------------- ----------- ------- ------------- ----------- ------------- Earnings per share............. Number of weighted average shares outstanding...........
PRO FORMA ----------- Net sales...................... $ 196,694 Cost of goods sold............. 107,650 ----------- Gross profit................... 89,044 Selling, general and administrative expenses...... 53,120 Other nonrecurring expense..... 3,600 ----------- Operating profit............... 32,324 Other nonoperating income, net.......................... 1,532 Interest expense............... 3,782 ----------- Income before income taxes..... 30,074 Income tax provision........... 11,611 ----------- Net income..................... $ 18,463 ----------- ----------- Earnings per share............. $ 0.70(6) Number of weighted average shares outstanding........... 26,528(6)
See Notes to Unaudited Pro Forma Combined Financial Statements. 21 UNAUDITED PRO FORMA COMBINED BALANCE SHEET AS OF NOVEMBER 30, 1996
PRO FORMA FOR PRO FORMA FOR PRO FORMA LIABILITY ASSUMPTION VILLAZON ACQUISITION FOR THE OFFERING(17) COMPANY ------------------------ VILLAZON ------------------------ ------------------------ HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL(16) ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- (IN THOUSANDS) ASSETS Cash................. $ 409 $ 409 $ 9,060 $ $ 9,469 $ $ 9,469 Accounts receivable, net................ 31,295 31,295 6,620 37,915 37,915 Inventories.......... 53,702 53,702 5,153 58,855 58,855 Other current assets............. 3,673 3,673 876 4,549 4,549 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total current assets............. 89,079 89,079 21,709 110,788 110,788 Property and equipment, net..... 52,507 52,507 1,350 3,000(8) 56,857 56,857 Intangible assets.... 156 71,196(9) 71,352 71,352 Other assets......... 3,456 3,456 1,342 1,000 (10 5,798 5,798 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total assets......... $ 145,042 $ -- $ 145,042 $ 24,557 $ 75,196 $ 244,795 $ -- $ 244,795 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- LIABILITIES AND CULBRO INVESTMENT/ STOCKHOLDERS' EQUITY Accounts payable and accrued liabilities........ $ 22,827 $ 1,534(7) $ 24,361 $ 1,433 $ 25,794 $ 25,794 Current portion of long-term debt..... 1,131 1,131 $ 74,370 (11 75,501 $ (74,370) 15) 1,131 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total current liabilities........ 23,958 1,534 25,492 1,433 74,370 101,295 (74,370) 26,925 Long-term debt....... 11,079 43,800(7) 54,879 4,370 12,780 (12 72,029 (24,690) 15) 47,339 Other noncurrent liabilities........ 16,286 3,127(7) 19,413 6,800 (13 26,213 26,213 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total liabilities.... 51,323 48,461 99,784 5,803 93,950 199,537 (99,060) 100,477 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Culbro investment.... 93,719 (48,461)(7) 45,258 45,258 (45,258) 15) Common stock......... 2,318 (2,318) 14) 261 (15 261 Additional paid in capital............ 224 (224) 14) 144,057 (15 144,057 Retained earnings.... 16,212 (16,212) 14) ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total Culbro investment/ stockholders' equity............. 93,719 (48,461) 45,258 18,754 (18,754) 45,258 99,060 144,318 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- Total liabilities and Culbro investment/ stockholders' equity............. $ 145,042 $ -- $ 145,042 $ 24,557 $ 75,196 $ 244,795 $ -- $ 244,795 ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- -----------
See Notes to Unaudited Pro Forma Combined Financial Statements. 22 NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (1) Reflects estimated interest expense on approximately $43.8 million of Culbro debt assumed by the Company in connection with the Liability Assumption portion of the Asset Transfers. Interest expense under the Company's Credit Facility is based on the Eurodollar rate plus 2%, which is assumed to be 7.44%. (2) Reflects Federal income tax (35%) and state income tax of approximately 4%, which is net of Federal tax benefits. (3) Reflects estimated amortization expense of intangible assets to be recorded in connection with the Villazon Acquisition and additional depreciation expense related to the estimated increase in Villazon's property and equipment as a result of purchase accounting adjustments. Intangible assets of $71.2 million include trademarks and goodwill, if any, which the Company anticipates will be amortized over 30 years on a straight line basis. The additional depreciation expense is based on an increase of $3.0 million to the historical cost of Villazon's property and equipment, depreciated on a straight line basis over an average useful life of 20 years. The period used for goodwill amortization is based on a preliminary estimate of the reasonable period for which such costs are expected to be recovered and is based in part on the earnings and history of the entities acquired. (4) Reflects (i) amortization of fees relating to the Credit Facility and (ii) estimated interest expense on $91.5 million of indebtedness (consisting of $24.4 million of Seller Notes and $67.1 million of indebtedness incurred under the Credit Facility) used to finance the Villazon Acquisition, excluding interest on $4.4 million of Seller Notes which was previously included on the Villazon historical balance sheets as long-term debt due to owners. The Credit Facility and the Seller Notes bear interest at the Eurodollar rate plus 2% (7.44%) and prime plus 1/2% (8.75%), respectively. If interest rates on such debt were to increase (decrease) by 1/8 of 1%, net income would (decrease) increase by less than $0.1 million. See "Description of the Credit Facility." (5) Reflects a decrease in interest expense as a result of assumed net proceeds of $99.1 million from the Offering applied towards the repayment of (i) $84.7 million of indebtedness under the Credit Facility bearing interest at the Eurodollar rate plus 2% (7.44%) and (ii) $14.4 million of indebtedness reflecting a portion of the Seller Notes bearing interest at a rate of prime plus 1/2% (8.75%). The Credit Facility provides for a reduction of interest rates on borrowings under the Credit Facility to the Eurodollar rate plus 3/4% upon receiving a minimum of $70.0 million of net proceeds from the Offering. Accordingly, the assumed interest rate on the remaining $26.3 million of outstanding indebtedness under the Credit Facility would be reduced from 7.44% to 6.19%. (6) The pro forma number of weighted average shares outstanding includes all of the outstanding shares of Class A Common Stock and Class B Common Stock expected to be outstanding after the Offering. The total number of weighted average shares outstanding used in the computation of pro forma earnings per share also includes the dilutive effect of additional shares issuable upon exercise of all Culbro stock options outstanding at the Offering date. See "Certain Employee Benefit Matters--Culbro Employee Benefit Plans to be Assumed by the Company--Culbro Stock Option Plans." (7) Reflects the assumption of certain liabilities by the Company. The liabilities include principally the estimated Culbro debt assumed, certain accrued retirement obligations and other items. (8) Reflects purchase accounting adjustments to increase property and equipment to its estimated fair value. Based on a preliminary allocation of the purchase price of $90.5 million (including an estimate of $1.5 million for acquisition costs), Villazon's historical basis of property and equipment was increased by $3.0 million representing management's preliminary determination of estimated fair value which was based upon current prices of comparable assets. (9) Reflects the excess of the purchase price paid for Villazon over the fair value of net assets acquired, primarily trademarks and goodwill, if any. As these acquisitions were recently finalized the Company has not yet formally allocated costs between trademarks and goodwill, if any. The Company will finalize all purchase accounting adjustments as soon as practicable. (10) Reflects financing fees paid to the Company's banks in connection with the Credit Facility used to finance the Villazon Acquisition. (11) Reflects issuance of short-term Seller Notes of $14.4 million, including the assumption of $4.4 million of long-term debt due to owners as previously included on Villazon's historical balance sheet and debt of $60.0 million incurred under the Credit Facility in connection with the Villazon Acquisition. See Note 4 to the Unaudited Pro Forma Combined Financial Statements above. (12) Reflects (i) the issuance of the long-term Seller Notes of $10.0 million, (ii) borrowings under the Credit Facility of $7.1 million, less (iii) the $4.4 million of long-term debt due to owners previously included on Villazon's historical balance sheet. See Note 4 to the Unaudited Pro Forma Combined Financial Statements above. (13) Reflects deferred taxes related to purchase accounting adjustments to the historical basis of assets acquired in the Villazon Acquisition. (14) Reflects elimination of shareholders' equity of Villazon. (15) Reflects net proceeds of $99.1 million applied towards the repayment of (i) $74.4 million of short-term term debt consisting of $60.0 million under the Credit Facility and $14.4 of Seller Notes, and (ii) $24.7 million of long term debt outstanding under the Credit Facility. 23 (16) Represents the combined totals of both Villazon & Co. and HATSA. The unaudited pro forma combining statement of operations for 1996 and balance sheet as of December 31, 1996 are presented below and reflect the elimination of sales, cost of goods sold, receivables, payables and profit in ending inventory. UNAUDITED PRO FORMA COMBINING STATEMENT OF OPERATIONS YEAR ENDING DECEMBER 31, 1996
HATSA VILLAZON AND CO. ELIMINATIONS COMBINED --------- ----------------- ------------ ----------- Net sales.............................................. $ 11,520 $ 41,442 $ (10,944) $ 42,018 Cost of goods sold..................................... 6,936 25,118 (10,644) 21,410 --------- ------- ------------ ----------- Gross profit........................................... 4,584 16,324 (300) 20,608 Selling, general and administrative expenses........... 665 5,339 6,004 --------- ------- ------------ ----------- Operating profit....................................... 3,919 10,985 (300) 14,604 Other nonoperating income, net......................... 679 679 Interest expense....................................... 552 552 --------- ------- ------------ ----------- Income before income taxes............................. 3,919 11,112 (300) 14,731 Net income............................................. $ 3,919 $ 11,112 $ (300) $ 14,731 --------- ------- ------------ ----------- --------- ------- ------------ -----------
UNAUDITED PRO FORMA COMBINING BALANCE SHEET AS OF DECEMBER 31, 1996
HATSA VILLAZON AND CO. ELIMINATIONS COMBINED ----------- ----------------- ------------- ----------- Cash.................................................... $ 175 $ 8,885 $ 9,060 Accounts receivable, net................................ 1,708 6,200 $ (1,288) 6,620 Inventories............................................. 2,830 2,623 (300) 5,153 Other current assets.................................... 876 876 ----------- ------- ------------- ----------- Total current assets.................................... 4,713 18,584 (1,588) 21,709 Property and equipment, net............................. 426 924 1,350 Intangible assets....................................... 1 155 156 Other assets............................................ 18 1,324 1,342 ----------- ------- ------------- ----------- Total assets............................................ $ 5,158 $ 20,987 $ (1,588) $ 24,557 ----------- ------- ------------- ----------- ----------- ------- ------------- ----------- Accounts payable and accrued liabilities................ $ 34 $ 2,687 $ (1,288) $ 1,433 Current portion of long-term debt....................... ----------- ------- ------------- ----------- Total current liabilities............................... 34 2,687 (1,288) 1,433 Long-term debt.......................................... 4,370 4,370 ----------- ------- ------------- ----------- Total liabilities....................................... 34 7,057 (1,288) 5,803 ----------- ------- ------------- ----------- Common stock............................................ 2,105 213 2,318 Additional paid in capital.............................. 224 224 Retained earnings....................................... 3,019 13,493 (300) 16,212 ----------- ------- ------------- ----------- Stockholders' equity.................................... 5,124 13,930 (300) 18,754 ----------- ------- ------------- ----------- Total liabilities and stockholders' equity.............. $ 5,158 $ 20,987 $ (1,588) $ 24,557 ----------- ------- ------------- ----------- ----------- ------- ------------- -----------
(17) Subsequent to the Offering, substantially all of Culbro's assets will be its investments in the Company and CLR. In the Distribution, Culbro will distribute all of its ownership interests in CLR to Culbro's shareholders. The Merger will be effected by the issuance to Culbro shareholders of all of the Company's Class B shares and the cancellation of all of the outstanding shares of Culbro and accordingly, the Merger will have no effect on the Unaudited Pro Forma Combined Financial Statements. 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Combined Financial Statements and the related Notes thereto included elsewhere in this Prospectus. OVERVIEW The Company was formed on December 12, 1996. The Company is a holding company with no business operations of its own. The Company's only material assets are all of the outstanding capital stock of its subsidiaries, General Cigar Co., Inc., GCH Transportation, Inc., Club Macanudo, Inc. and Club Macanudo (Chicago), Inc. and all of the ownership interests in the Company's office building in New York City, all of which assets were acquired in the Asset Transfers effected prior to the date of the Offering. The Company's results in each of the periods presented include allocations to the Company of Culbro corporate overhead of $5.5 million, $8.8 million, and $7.2 million in fiscal 1994, fiscal 1995 and fiscal 1996, respectively. These allocations may not necessarily reflect the additional expenses the Company would have incurred as a separate stand-alone entity. The combined financial statements include interest expense on debt specifically incurred by the Company. The Company assumed an estimated $43.8 million of Culbro debt prior to the Offering as part of the Culbro obligations assumed under the Liability Assumption portion of the Asset Transfers. This debt was not an obligation of the Company in earlier periods and the Company generally has been a net cash provider to Culbro. Accordingly, this debt and related interest expense were not part of the Company's capital structure in the combined financial statements for any of the periods presented. These results therefore should be read in conjunction with the unaudited combined pro forma results of operations in Note 4 of the Combined Financial Statements and the Unaudited Pro Forma Combined Financial Statements included elsewhere in this Prospectus. Since 1993, cigar smoking has experienced a resurgence resulting in an increase in consumption and retail sales of cigars across all major categories, especially in the premium cigar segment. This growth produced overall retail sales in the U.S. cigar market of an estimated $1.25 billion in 1996, the largest dollar sales in the industry's history. Industry unit sales of premium and mass market cigars have increased at CAGRs of 35.4% and 9.6%, respectively, from 1993 to 1996, while retail dollar sales in both categories have increased more rapidly due to price increases. The Company believes that sales of premium cigars exceeded 270 million units in the U.S. in 1996, an increase of over 60% from 1995 unit sales. Historically, the Company has not utilized deep discounts to generate additional volume, and does not anticipate the use of such discounts in the forseeable future. RESULTS OF OPERATIONS The discussion set forth below relates to the financial condition and results of operations of the Company as of and for fiscal 1996, fiscal 1995 and fiscal 1994. 25 Following are certain data related to the results of operations of the Company, calculated as a percentage of net sales:
FISCAL YEAR ------------------------------- 1994 1995 1996 --------- --------- --------- Net sales..................................................... 100.0% 100.0% 100.0% Cost of goods sold............................................ 60.6 56.2 55.8 Gross profit.................................................. 39.4 43.8 44.2 Selling, general and administrative expenses.................. 30.4 29.6 28.8 Other nonrecurring expense.................................... -- -- 2.3 Operating profit.............................................. 9.0 14.2 13.1 Interest expense.............................................. 0.7 0.8 0.6 Income before income tax...................................... 8.3 15.0 13.0 Net income.................................................... 5.1 9.1 8.0
FISCAL 1996 COMPARED TO FISCAL 1995 Net sales increased 24.7%, or $30.6 million, to $154.7 million in fiscal 1996 compared to $124.0 million in fiscal 1995. This increase in net sales reflected principally higher unit sales of premium cigars, and higher prices in all cigar categories. Continued strong sales and prices of premium cigars, and higher prices in the mass market cigar category more than offset slightly lower unit volume in certain brands of mass market cigars. Nearly all of such increase resulted from increased sales to existing customers. In response to a shortage of properly aged and blended tobacco caused by excessive demand, the Company elected to stop shipping MACANUDO cigars for two months in fiscal 1996 rather than risk compromising its quality standards. Management believes that volume in mass market cigars was adversely affected by repositioning and renaming certain brand names. Gross profit increased 25.9%, or $14.1 million, to $68.4 million in fiscal 1996 compared to $54.4 million in fiscal 1995. Gross margin increased to 44.2% in fiscal 1996 from 43.8% in fiscal 1995. The increase in gross margin reflected higher prices, benefits from mix due to relatively higher sales of premium cigars, and lower fixed costs per unit due to the higher volume and improved manufacturing efficiencies. Selling, general and administrative expenses increased 21.4%, or $7.9 million, to $44.6 million in fiscal 1996 from $36.7 million for fiscal 1995. Selling, general and administrative expenses in fiscal 1996 include approximately $1.9 million of legal expenses incurred in connection with certain legal proceedings. See "Legal Proceedings--Other Litigation." As a percentage of net sales, selling, general and administrative expenses decreased to 28.8% in fiscal 1996, from 29.6% in fiscal 1995. The decrease in selling, general and administrative expenses as a percentage of net sales in fiscal 1996 is due principally to these expenses increasing at a lower rate than the increase in sales. Other nonrecurring expense of $3.6 million in fiscal 1996 includes the allocation to the Company of charges recorded by Culbro in connection with the termination of a management long-term incentive compensation plan which was based on Culbro's stock price, and the acceleration of the vesting of benefits under the plan in anticipation of the Offering. Additionally, the other nonrecurring expense item includes accruals for severance and related expenses in connection with a headcount reduction at the Culbro corporate office. The Company's allocable share of these expenses was determined substantially on the same basis as the allocation of Culbro's general and administrative expenses and is considered to be reasonable. See Note 5 to the Combined Financial Statements of the Company included elsewhere herein. Operating profit increased 14.9%, or $2.6 million, to $20.2 million for fiscal 1996 from $17.6 million for fiscal 1995. Including the effect of the other nonrecurring expense referred to above, operating margin decreased to 13.1% during fiscal 1996 from 14.2% during fiscal 1995. 26 Net income increased 9.6%, or $1.1 million, to $12.4 million in fiscal 1996 from $11.3 million in fiscal 1995. Income in fiscal 1995 included $2.6 million of pre-tax income from an insurance settlement. FISCAL 1995 COMPARED TO FISCAL 1994 Net sales in fiscal 1995 increased 38.5%, or $34.5 million, to $124.0 million compared to $89.5 million in fiscal 1994. This increase reflected higher unit volume and higher prices in all cigar categories. The increase in premium cigar sales was higher than the increase in the mass market category and accounted for approximately 53.0% of the Company's total increase in sales in fiscal 1995. Nearly all of such increase resulted from increased sales to existing customers. Gross profit increased 54.2%, or $19.1 million, in fiscal 1995 to $54.4 million compared to $35.3 million in fiscal 1994. Gross margin increased to 43.8% from 39.4% in fiscal 1994. The increase in gross profit and margin reflected higher unit sales and prices, a more favorable mix due to relatively higher sales of premium cigars, and lower fixed cost per unit due to the higher volume. Selling, general and administrative expenses increased 35.0%, or $9.5 million, to $36.7 million in fiscal 1995, from $27.2 million in fiscal 1994. As a percentage of net sales, selling, general and administrative expenses decreased from 30.4% in fiscal 1994 to 29.6% in fiscal 1995. The decrease was primarily due to selling, general and administrative expenses increasing at a lower rate relative to the increase in net sales. Operating profit increased 119.1%, or $9.6 million, to $17.6 million in fiscal 1995 compared to $8.0 million in fiscal 1994. Operating margin increased to 14.2% during fiscal 1995 from 9.0% in fiscal 1994. Net income increased 148.9%, or $6.8 million, to $11.3 million in fiscal 1995 from $4.6 million in fiscal 1994. Income in fiscal 1995 included approximately $2.6 million of pre-tax income resulting from the collection on an insurance claim in connection with a fire at a Connecticut tobacco warehouse and administrative office in 1994, partially offset by other nonoperating expenses. Higher interest expense in fiscal 1995 related to interest under a mortgage on 387 Park Avenue South. The mortgage was incurred in fiscal 1995. PRO FORMA FISCAL 1996 COMPARED TO ACTUAL FISCAL 1995 The Unaudited Pro Forma Combined Statement of Operations reflects higher sales and operating profit from Villazon, partially offset by higher interest expense from the acquisition debt and debt assumed from Culbro remaining outstanding after the application of the net proceeds from the Offering. The Unaudited Pro Forma Combined Balance Sheet reflects the effects of the Villazon Acquisition, principally the acquisition of trademarks and goodwill, if any, and the capitalization of the Company with the equity from the Offering, as well as debt incurred under the Credit Facility and the Seller Notes. LIQUIDITY AND CAPITAL RESOURCES Net cash flows used in operating activities were $4.9 million for fiscal 1996 compared to net cash flows provided by operating activities of $9.5 million in fiscal 1995. The use of cash in fiscal 1996 compared to cash flow generated in fiscal 1995 reflected substantially higher inventory purchases to meet the current demand for cigars and to secure certain tobacco supplies to meet the anticipated future demand for cigars, and a greater reduction in accounts payable due to the timing of the payment dates of certain liabilities. The Company anticipates purchasing and carrying increased levels of tobacco inventory over the next several years. Net cash flows provided by operating activities were $12.7 million in fiscal 1994. In fiscal 1995, cash flows provided by operations were lower compared to fiscal 1994 due to the net increase in working capital related to the higher sales. The increase in working capital in fiscal 1995 partially offset benefits of higher net income. 27 The Company will fund its capital projects using internal cash flow and, if needed, borrowings under the Credit Facility. The capital expenditures in fiscal 1994 and fiscal 1995 relate primarily to investments in cigar manufacturing equipment and are part of the normal replacement and upgrading of the Company's manufacturing equipment and facilities. The capital expenditures in fiscal 1996 primarily relate to investment in the Company's manufacturing facilities to meet the increased demand for the Company's premium cigars. In order to increase production to meet demand, the Company recently completed expansion of its manufacturing facilities in the Dominican Republic, has begun to expand its facilities in Jamaica and expects to increase production at its facilities in Honduras. The Company expects that it will make capital expenditures of approximately $10.3 million in fiscal 1997, $5.0 million of which will be made in connection with the expansion of these facilities. The Company has increased substantially its inventory of long filler tobacco needed for making premium cigars. Cash flow provided by financing activities in fiscal 1996 was $14.7 million, and in fiscal 1995 and fiscal 1994 cash flow used in financing activities was $9.1 million and $10.9 million, respectively. In each fiscal year, the cash flows from financing activities reflected principally the transfer of the Company's net cash flow to Culbro or net cash transfers from Culbro to fund the Company's operations. The net cash transfers from Culbro in fiscal 1996 reflected the Culbro funding of the increased tobacco purchases. During each of the fiscal years presented in the accompanying combined financial statements, the cash management and treasury activities of the Company were integrated with those of Culbro. The Company's cash receipts were transferred daily into Culbro's cash account and the Company's cash disbursement accounts were reimbursed by Culbro on a daily basis. Culbro maintained credit facilities which it utilized to finance transactions relating to the Company and Culbro's other subsidiaries. The Company did not maintain its own separate credit facilities and the accompanying financial statements do not reflect any allocation of Culbro's debt to the Company. The Company maintained an intercompany account with Culbro in which its net cash flow and other intercompany transactions with Culbro were recorded. See Note 5 to the Combined Financial Statements. The intercompany account with Culbro and the Company's retained earnings and historical capital accounts are included in the Combined Financial Statements as "Culbro Investment." On January 21, 1997, the Company entered into the Credit Facility to finance the Villazon Acquisition, to fund the estimated $43.8 million of debt included in the Liability Assumption portion of the Asset Transfers and to fund working capital and other general business requirements. The Company intends to fund its working capital requirements and capital expenditures with cash flow from operations and borrowings under the Credit Facility. Management believes that expected net cash flows from future operations and the availability of borrowings, when necessary, will be sufficient to fund its working capital and capital expenditures for the foreseeable future. As of November 30, 1996, after giving effect to the Offering and the use of proceeds therefrom, there would have been $23.7 million available under the Credit Facility, excluding $9.1 million of cash acquired in the Villazon Acquisition, a portion of which would have been available to reduce borrowings under the Credit Facility. There can be no assurance, however, that the Company's estimate of cash flows prior to the consummation of the Offering will be realized; accordingly, the actual amount available under the Credit Facility upon consummation of the Offering may vary from the projected availability. BACKORDERS The increased demand for premium cigars has caused the Company's backorders of premium cigars, exclusive of Villazon, to increase from $21.0 million at wholesale at December 2, 1995 to $78.0 million at wholesale at November 30, 1996. Currently, the Company does not accept orders from its nine largest customers for premium cigars, but instead allocates to each of them a portion of its production. Therefore, the Company's backorder figure at November 30, 1996 excludes any orders from its nine largest premium cigar customers, although the figure at December 2, 1995 includes such customers' orders. The Company 28 believes that a portion of the backorders reflects the practice of certain customers to order more premium cigars than needed in anticipation of a reduction in the number of cigars included in the order when filled due to short supplies. Accordingly, backorder figures may not reflect actual lost sales for any of the periods shown. Although the Company has taken measures to reduce the amount of backorders for its cigars, there can be no assurance that such measures will be adequate. INFLATION The Company has historically been able to pass inflationary increases for raw materials and other costs onto its customers through price increases and anticipates that it will be able to do so in the future. SEASONALITY The Company's business is generally not seasonal. Cigar unit volume, however, is usually higher in the fourth quarter during the Christmas shopping season and slightly lower in the first quarter following the Christmas season. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain intangibles held and used by a business entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continually reviews its long-lived assets and intangible assets, considering future performance of those assets in assessing the need for adjustments to their carrying values. The Company will perform such reviews in the future in accordance with the methods prescribed by SFAS No. 121. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." This Statement establishes a fair value method of accounting for, or disclosing, stock-based compensation plans. The Company intends to adopt the disclosure provisions of this standard which require disclosing the pro forma effect on net income and earnings per share of the fair value method of accounting for stock-based compensation. The adoption of the disclosure provisions will not affect combined financial condition, results of operations or cash flows. 29 BUSINESS GENERAL Founded in 1906, General Cigar is the largest manufacturer and marketer in the U.S. in both units and dollar sales of brand name premium cigars (imported, hand-made or hand-rolled cigars made with long filler and all natural tobacco leaf). The Company's MACANUDO and PARTAGAS brands are the two top selling premium cigar brands sold in the U.S. The Company believes that higher priced branded premium cigars constitute the fastest growing segment of the premium cigar market. Approximately 80% of the Company's premium cigar sales in fiscal 1996 were at suggested retail prices of $3.00 or more per unit. The Company's unit sales at or above this price point have increased at approximately a 90% CAGR during the past four years. The Company, through its well known brands such as GARCIA Y VEGA, also is a leading participant in the growing mass market cigar segment. From fiscal 1993 to fiscal 1996, the Company's net sales increased from $76.8 million to $154.7 million and operating profit increased from $2.4 million to $20.2 million, representing CAGRs of 26.3% and 104.2%, respectively. After giving effect to the Villazon Acquisition, on a pro forma basis, the Company's net sales and operating profit for 1996 would have been $196.7 million and $32.3 million, respectively. In 1906, the Company's direct predecessor, United Cigar Manufacturers ("UCM"), incorporated, sold its stock to the public and listed on the New York Stock Exchange. The public offering notice with respect to that offering listed the expert appraiser of UCM's cigar tobacco leaf as Joseph Cullman, the grandfather and great grandfather, respectively, of the Company's current Chairman and President. The Cullman family's interest and expertise in tobacco and the cigar industry have developed for over a century and continue today. The Company markets its cigars under a number of well-known brand names. The Company's premium cigars include the MACANUDO, PARTAGAS, TEMPLE HALL, CANARIA D'ORO, CIFUENTES and RAMON ALLONES brands. The Company also owns the rights to market cigars in the U.S. under the names COHIBA and BOLIVAR. The Villazon Acquisition has added a variety of other brand names to the Company's line of premium cigars, including PUNCH, HOYO DE MONTERREY and EL REY DEL MUNDO. The Company, after giving effect to the Villazon Acquisition, owns the U.S. trademark rights to seven of the top ten traditional premium Cuban brand names ranked according to 1995 worldwide sales by all cigar marketers. MANCANUDO was rated "best cigar" by ROBB REPORT in 1992, the first year in which ROBB REPORT rated cigars, and "best cigar" again in 1994 and 1995 (the category was not included in the 1993 ROBB REPORT). In 1996, ROBB REPORT chose eight "best cigars," including MACANUDO, PARTAGAS 150 SIGNATURE, HOYO DE MONTERREY EXCALIBUR NO. 2 and COHIBA. The Company's mass market large cigars include GARCIA Y VEGA, WHITE OWL, ROBT. BURNS and WM. PENN. The Company's mass market small cigars include the TIPARILLO and TIJUANA SMALLS brands, as well as smaller sizes of its other mass market brands. The Company does not participate in the market for little cigars, which are cigars that resemble cigarettes. The Company also is the exclusive U.S. distributor of French made DJEEP disposable lighters, and it operates CLUB MACANUDO, a cigar bar located in New York City. MARKET OVERVIEW The cigar market is divided into three principal categories: premium cigars, mass market cigars (large and small) and little cigars. After declining from its peak in 1964, unit sales of cigars in the U.S. increased to 4.4 billion units in 1996 from 3.4 billion units in 1993. Unit sales of premium cigars, which had remained essentially flat since 1981 despite continued declines in mass market cigar unit sales, increased at a CAGR of approximately 35.4% from 1993 to 1996. Led by growth in premium cigars, the U.S. cigar market has grown at a CAGR of 8.7% from 1993 to 1996, while retail dollar sales have grown at a CAGR of 19.9% over the same period. The Company believes that this increase in cigar consumption and retail sales is the result of a number of factors, including: (i) the improving image of cigar smoking resulting from increased publicity, including 30 the success of CIGAR AFICIONADO and SMOKE magazines and the increased visibility of cigar smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore and Jack Nicholson); (ii) the emergence of an expanding base of younger, highly educated, affluent adults age 25 to 35 and the growing interest of this group in luxury goods, including premium cigars; (iii) the increase in the number of adults over the age of 40 (a demographic group believed to smoke more cigars than any other demographic group); and (iv) the proliferation of establishments, such as restaurants and clubs, where cigar smoking is encouraged, as well as "cigar smokers" dinners and other special events for cigar smokers. CATEGORIES OF CIGARS PREMIUM CIGARS. Premium cigars are imported, hand-made or hand-rolled cigars made with long filler and all natural tobacco leaf. Unit sales of premium cigars in the U.S. increased by 10.7% in 1993, by 14.5% in 1994, by 30.5% in 1995 and by an estimated 66.2% in 1996. The Dominican Republic, Honduras and Jamaica collectively accounted for approximately 84.0% of premium cigars imported into the U.S. in 1995. Many of the finest premium cigars sold in the U.S. trace their roots to pre-Castro Cuba and the Cuban emigres who continued making premium cigars in Jamaica, the Dominican Republic, Honduras and Florida. See "--Making a General Cigar Premium Cigar." MASS MARKET CIGARS. Mass market cigars generally are domestic, machine-made cigars that use less-expensive short filler tobacco and are made with homogenized tobacco binders and either homogenized sheet wrappers or natural leaf wrappers. Unit sales of mass market cigars in the U.S. decreased by 4.3% in 1993, increased by 9.0% in 1994, increased by 8.6% in 1995 and increased by an estimated 11.4% in 1996. Unit sales of more expensive mass market cigars, using natural leaf wrappers, grew by 12.9% in 1995, as consumers appear to have migrated to more expensive, higher quality mass market cigars. LITTLE CIGARS. Little cigars are the lowest priced cigars. Little cigars weigh less than three pounds per 1,000, are similar in size to cigarettes and typically have filters. Little cigars are domestic, machine made cigars that use short filler tobacco and homogenized sheet wrapper. Little cigars are not made with binders. Unit sales of little cigars in the U.S. decreased by 1.1% in 1993, increased by 6.1% in 1994, increased by 2.2% in 1995 and increased by an estimated 3.8% in 1996. The Company does not participate in the market for little cigars. The following table sets forth certain data with respect to U.S. cigar unit sales and retail sales for the premium, mass market and little cigar markets for the periods shown:
1993 1994 1995 1996E CAGR --------- --------- --------- --------- ----------- (IN MILLIONS) Unit sales: Premium.................................................. 110.0 125.9 164.3 273.0 35.4% Mass market.............................................. 2,028.0 2,211.1 2,400.7 2,673.3 9.6 Little cigars............................................ 1,288.0 1,367.0 1,397.0 1,450.5 4.0 --------- --------- --------- --------- Total.................................................. 3,426.0 3,704.0 3,962.0 4,396.8 8.7 --------- --------- --------- --------- --------- --------- --------- --------- Retail sales............................................... $ 725.0 $ 898.0 $ 1,054.0 $ 1,250.0 19.9% --------- --------- --------- --------- --------- --------- --------- ---------
- ------------------------ Source: Bureau of Alcohol, Tobacco and Firearms; Cigar Association of America ("CAA") Annual Survey of Cigars. 1996 figures are based on CAA estimates. Retail sales are based in part on the Company's estimate of sales of little cigars. Data for 1996 are based in part on the Company's estimates. 31 CIGAR TOBACCOS Tobacco is grown around the world, but production of the finest cigar tobaccos is concentrated in the Tropics, especially Cuba, Cameroon, Central West Africa, the Dominican Republic, Ecuador, Honduras, Indonesia, Mexico and Nicaragua. The Connecticut River Valley, however, produces some of the finest wrapper tobacco in the world. Connecticut Shade wrapper tobacco is grown under a gauze shade to produce a finer, thinner leaf with smaller veins than that of sun-grown tobaccos. Some wrapper tobacco, as well as all high-quality binder and filler tobacco, is exposed to the full strength of the sun throughout the growing season, producing a thicker leaf with stronger flavors and darker colors. Premium binder and long filler tobaccos sell for approximately $4 to $7 per pound, while premium cigar wrapper tobaccos sell for approximately $20 to $40 per pound and the best Connecticut Shade wrapper tobaccos sell for approximately $42 to $44 per pound. Tobacco is grown from seeds that are germinated in greenhouses in raised seedbeds. After six weeks, the healthiest seedlings are transplanted to fields. Commencing six weeks after transplanting, the leaves are picked, starting with the bottom of the stalk, three leaves at a time, once a week over a six week period. Once harvested, the tobacco goes through a period of curing and fermentation. In the curing stage, the wrapper tobacco is hung in tobacco sheds for approximately five weeks to remove moisture and cause the green leaves to turn into the desired golden brown color. In the fermentation stage, workers carefully build slightly moistened tobacco into piles weighing approximately 3,000 pounds known as "bulks." Temperatures inside the bulks reach as high as 120 DEG.F as the tobacco "sweats" in the early stages of fermentation. The tobacco is turned multiple times before fermentation is complete. Workers then sort the tobacco, first according to color and clarity and then according to size. Sorted leaves are then tied into "hands," each consisting of 40 leaves. The hands are then "mulled," or softly fermented in cases weighing up to 130 pounds, and packed in bales, usually surrounded by burlap, to age. Premium cigar tobaccos generally age for approximately one to three years, although "vintage" premium tobaccos may age for up to ten years. The Company purchases premium cigar wrapper tobacco from growers throughout the world, including Cameroon (for use in making the PARTAGAS and RAMON ALLONES cigars), Ecuador (for use in making the PUNCH and HOYO DE MONTERREY cigars) and Mexico (for use in making the CANARIA D'ORO cigar). The Company is a grower and supplier of Connecticut Shade tobacco used in making the MACANUDO and TEMPLE HALL cigars. The Connecticut Shade tobacco used for wrapper on the Company's cigars is sent to the Dominican Republic from Connecticut for curing and fermentation, after which it is shipped back to the U.S. for aging in a process known as a "winter sweat." After aging for one year, the bales of Connecticut Shade are returned to the Dominican Republic for an additional period of fermentation, and are then sent back to the U.S. a second time for additional aging before being shipped to the Company's cigar manufacturing facilities in the Dominican Republic and Jamaica. The Company purchases all of its binder and long filler tobaccos from growers throughout the world, primarily the Dominican Republic, Mexico and other countries. The binder tobacco is purchased in leaf form, while the long filler tobacco is purchased in "frog" strip form, with half of the stem removed. The Company procures commitments for binder and long filler tobacco two years in advance of delivery. These tobaccos grow for one year and are fermented for one year, after which they are baled and delivered to warehouses in Pennsylvania for aging. Binder and long filler tobacco generally is aged from one to two years. Throughout the growing and fermenting process, representatives of the Company periodically inspect tobacco for which the Company has received a sale commitment. MAKING A GENERAL CIGAR PREMIUM CIGAR To assure that its premium cigars are consistently of the highest quality, the Company employs a painstaking, labor-intensive process, requiring the skilled judgment of experienced master cigar-makers and numerous intricate steps on the part of trained craftsmen. A tobacco leaf used in the manufacture of 32 any of the Company's premium cigars may be touched as many as 100 times before it is smoked as part of a finished cigar. THE WRAPPER. After sufficient aging, baled wrapper tobacco is opened and examined for quality. The hands of wrapper tobacco are moistened in a process known as "casing." Then each individual tobacco leaf is "stripped" to remove the stem, and the half leaves are selected according to the length appropriate for each cigar size. Finally, the sorted half leaves are counted into "pads" of 50 and sent to the cigar floor. THE BINDER AND LONG FILLER. After aging, the binder and long filler tobacco leaves are sent to one of the Company's cigar factories. There, the binder tobacco is cased, stripped, sized and sorted into pads of 50 in a process similar to that used in preparing the wrapper tobacco and is then sent to the cigar floor. The long filler leaves are placed in a moistening hot room in order to separate the individual leaves. The long filler leaves are then blended by hand by placing leaf upon leaf and boxing them in cedar boxes for storage in cedar storage rooms for three to five weeks in a process designed to marry the various aromas of the leaves in order to create a uniform taste. Following this blending process, the long filler tobacco is sent to the cigar floor. MAKING THE CIGAR. Bunchers, working side by side with wrapper-rollers, take leaves from filler boxes and, taking care to maintain the appropriate mixture of light and heavy tobaccos, roll them by hand inside a dark, supple binder leaf. The bunch is then placed in a wooden mold that shapes it to the specific length and ring gauge of a particular cigar size. After approximately 30 minutes, the bunch is removed from the mold for wrapping. The wrapper-roller places the wrapper leaf upside down on a cutting board so that the smooth, unveined side of the leaf will appear on the outside of the cigar and uses a "Cuban knife" to trim each wrapper to the correct shape for a particular cigar size. The wrapper-roller then wraps the shaped bunch in the wrapper and seals the head of the cigar with a natural, flavorless gum from the tragacanth tree. The finished cigars are then "bundled" in lots of 50 and inspected for weight and firmness, as well as size, density, uniformity and texture. Finished cigars are aged for three to 12 weeks in a cedar room. Trained selectors arrange the finished cigars in separate groups chosen by subtle color differences. Master cigar-makers smoke samples to assure quality. Cigars then are individually banded and cellophaned or tubed and placed in handcrafted cigar boxes to be shipped to the Company's customers. BUSINESS STRATEGY The Company believes that its competitive strengths, together with the following strategies, will enable the Company to continue its growth, increase its profitability and enhance its market share: / / INCREASE LEADING MARKET SHARE IN THE U.S. PREMIUM SEGMENT. The Company intends to capitalize on the rapidly growing premium cigar market by: (i) continuing to improve awareness and recognition of its premium cigar brands through extensive advertising, increased penetration of targeted retail outlets and professional sales management; (ii) developing and selling more broadly certain new premium cigars that carry well recognized traditional premium Cuban brand names, such as COHIBA and BOLIVAR; (iii) developing line extensions in higher price categories, such as MACANUDO VINTAGE and PARTAGAS LIMITED RESERVE, that leverage the Company's already established premium brands; and (iv) using the Company's national sales force and extensive channels of distribution to increase sales of the products acquired in the Villazon Acquisition. / / DEVELOP "PREMIUM" MASS MARKET CIGAR BUSINESS. The Company is seeking to increase revenues and profits in its mass market cigar business by extending its well-known mass market brand names into higher price categories within the mass market segment. The Company believes that the higher-end mass market segment recently has experienced growth similar to that of the premium segment. The Company is attempting to capitalize on this growth by expanding products such as the GARCIA Y VEGA 33 HAND MADE cigars and by developing similar higher-end cigars under several of its other mass market brand names, such as the WHITE OWL SELECT, a natural leaf wrapper mass market cigar. / / EXPAND MASS MARKET CIGAR BUSINESS. The Company believes that the resurgence in the premium segment also has positively affected the demand for traditional mass market cigars. The Company's leading high-end mass market brand, GARCIA Y VEGA, experienced a 27.9% increase in unit growth in 1996 compared to 1995. The Company intends to increase its sales and production of traditional mass market cigars to capitalize on the increasing demand in the mass market segment. / / EXPAND PRODUCTION CAPACITY AND TOBACCO INVENTORY. The Company intends to expand manufacturing capacity in order to meet increasing demand for its products while adhering to its traditionally high quality standards. The Company recently completed the expansion of its manufacturing facilities in the Dominican Republic, has begun to expand its facilities in Jamaica and intends to expand production at the Villazon facilities in Honduras. In addition, the Company has implemented a unique "training center" program at its Dominican Republic facility through which it has been able to train a greater number of cigar rollers in a shorter period of time and attain a higher rate of completion of the training program than had been its experience using traditional training methods. The Company intends to implement a similar program in its Jamaican and Honduran facilities. The Company also has substantially increased its tobacco inventory for making premium cigars. / / SELECTIVELY BROADEN CIGAR DISTRIBUTION CHANNELS. The Company intends to broaden its existing customer relationships and actively develop new channels and methods of distribution. With respect to premium cigars, the Company is pursuing opportunities in a number of developing distribution channels, including cigar bars and clubs, hotel shops, wine shops (excluding jurisdictions where selling tobacco products in businesses possessing retail liquor licenses is prohibited by law), restaurants and upscale specialty retail stores (such as Neiman Marcus and Orvis). With respect to mass market cigars, the Company is seeking to enhance relations with existing retailers by acting as the tobacco "category manager," assisting such retailers in increasing their sales of tobacco products. / / EXPAND INTERNATIONAL CIGAR BUSINESS. The Company plans to increase its international presence, particularly with respect to the MACANUDO brand. The Company will focus its efforts in the United Kingdom, Germany, France, Spain, China and certain countries in South America, as well as duty free markets worldwide. The Company intends to implement this strategy in a variety of ways, including building on its existing relationships with major international distributors and entering into joint ventures. / / DEVELOP SALES OF BRANDED SMOKING ACCESSORIES AND LIFESTYLE PRODUCTS. The Company intends to become a leading marketer and licensor of high-quality branded smoking accessories, such as humidors and cigar cutters, and branded luxury lifestyle products, such as leather goods and apparel. The Company believes such expansion will improve brand recognition among premium cigar consumers. The Company also may open additional CLUB MACANUDO locations, including one location in Chicago expected to open in the spring of 1997. CLUB MACANUDO promotes the Company's premium brands as well as cigar smoking as part of the luxury lifestyle. The Winter 1996/97 issue of CIGAR AFICIONADO called CLUB MACANUDO New York City's "preeminent cigar lounge," and SMOKE magazine recently said of CLUB MACANUDO, "this place is pure 'cigar.' " 34 BACKORDERS The increased demand for premium cigars has caused the Company's backorders of premium cigars, exclusive of Villazon, to increase from $21.0 million at wholesale at December 2, 1995 to $78.0 million at wholesale at November 30, 1996. Currently, the Company does not accept orders from its nine largest customers for premium cigars, but instead allocates to each of them a portion of its production. Therefore, the Company's backorder figure at November 30, 1996 excludes any orders from its nine largest premium cigar customers, although the figure at December 2, 1995 includes such customers' orders. The Company believes that a portion of the backorders reflects the practice of certain customers to order more premium cigars than needed in anticipation of a reduction in the number of cigars included in the order when filled due to short supplies. Accordingly, backorder figures may not reflect actual lost sales for any of the periods shown. Although the Company has taken measures to reduce the amount of backorders for its cigars, there can be no assurance that such measures will be adequate. See "Risk Factors--Constraints on Ability to Satisfy Demand." SALES AND MARKETING The Company believes that it is recognized as one of the most successful marketers of cigars in the U.S., having achieved ADVERTISING AGE's 1996 "Top Marketing 100" award for the MACANUDO brand. The Company believes that it spends considerably more on consumer advertising than its nearest competitor, even in times when it is experiencing significant backorders. The Company sells its cigar products throughout the U.S. to over 1,300 customers, consisting of wholesale distributors, direct buying chains (including food, drug, mass merchant and convenience store chains), tobacconists, specialty retailers (such as Neiman Marcus and Orvis) and consumer catalogue retailers. No single customer accounts for more than 10% of the Company's total sales. The Company recently has created a full-time, in-house sales analysis group, which reviews cigar industry consumption reports prepared by national sales audit firms, as well as sales information provided by retailers with respect to which the Company acts as category manager. The Company also employs a direct sales force to develop and service its sales to wholesalers, distributors, direct buying chains and tobacconists. The Company's sales force, which has increased by 60% since 1994, is composed of two groups, one group responsible for the sale of all the Company's products and a separate group of "premium specialists" focusing on the sale and promotion of premium cigars with tobacconists, cigar clubs, restaurants, premium cigar distributors and other specialty retailers. Both sales groups utilize a fact-based approach to category selling designed to optimize category performance for the Company's retail customers and improve the performance of the Company's brands. The Company believes that the utilization of a separate premium selling group positions it to maintain a high degree of focus on its premium product category while enabling the sales force to serve a broad mass market customer base. The Company's sales force operates nationally with account coverage structured geographically to provide for close relationships with local customers. The Company actively pursues innovative outlets for marketing its premium cigars to the luxury goods consumer, such as golf pro shops and upscale wine shops. The Company also has developed a program through which it markets cigars and cigar menus directly to restaurants. With respect to its mass market brands, the Company has adopted a program to promote its brands with certain retailers, such as CVS and Walmart/McLane, by acting as tobacco "category manager." The Company also provides a wide variety of cigar merchandising fixtures and point-of-sales support to its retailers. These fixtures help to maintain an attractive in-store product presentation and to improve shelf space and positioning of the Company's brands. The Company advertises its premium cigar products in magazines, such as CIGAR AFICIONADO and SMOKE, as well as magazines targeted to an upscale audience such as ROLLING STONE, FORBES and GOLF DIGEST and in newspapers and on radio. The Company advertises its mass market cigar products primarily through 35 newspapers, sports magazines and similar publications. In addition, the Company's website, "cigarworld.com," was selected one of the best cigar product websites by YAHOO magazine. The Company has substantially increased its marketing and advertising expenditures in order to continue to build the brand recognition of its leading premium cigar brands, as well as to support new product introductions. Since 1993, the Company has brought to market a broad array of new products and brand extensions primarily in connection with its brand-oriented cigar marketing, including limited edition cigars under the PARTAGAS 150 and multi-year MACANUDO VINTAGE offerings, MACANUDO and PARTAGAS branded fashion apparel and branded cigar smoking accessories. Sales of the Company's cigar products outside of the U.S. currently are not material, although the Company plans to increase its international presence, particularly with respect to the MACANUDO brand. The Company will focus its efforts in the United Kingdom, Germany, France, Spain, China and certain countries in South America, as well as duty free markets worldwide. The Company recently became the only U.S. cigar maker to receive approval from the government of China to market and sell its products in that country. The Company already has begun distributing premium and mass market cigars in China. TRADEMARKS The Company's success and ability to compete are dependent to a significant degree on its trademarks. The Company generally owns the trademarks under which its products are sold. The Company has registered its trademarks in the U.S. and many other countries and will continue to do so as new trademarks are developed or acquired. The Company holds the right to use the MACANUDO trademark and brand name for cigars in many countries worldwide. The Company does not, however, hold or own the right to use certain of its well-known trademarks and brand names, including PARTAGAS and COHIBA, in certain foreign markets. The Company's ability to expand into such markets by capitalizing on the strength of its brand names in the U.S. may be limited by its inability to use or acquire such brand names in those foreign markets. The Company pays royalties to the prior owners of certain of its trademarks. Such payments are not material. The Company owns the U.S. trademarks listed below:
PREMIUM CIGAR BRANDS MASS MARKET CIGAR BRANDS - ------------------------------------- ------------------------------------- MACANUDO GARCIA Y VEGA PARTAGAS WHITE OWL PUNCH TIPARILLO HOYO DE MONTERREY ROBT. BURNS COHIBA TIJUANA SMALLS EXCALIBUR WM. PENN RAMON ALLONES LORD BEACONSFIELD TEMPLE HALL VILLA DE CUBA EL REY DEL MUNDO PEDRO IGLESIAS CANARIA D'ORO TOP STONE CIFUENTES VILLAZON DELUXE BOLIVAR BELINDA BANCES
The Company vigorously defends its trademarks from their improper use by others, including the manufacturers of counterfeit cigars. 36 RAW MATERIALS The Company has strong relationships with tobacco suppliers and is expanding its commercial and technical ties with local growers to secure a variety of sources for raw materials, ensure the quality of its raw materials and maximize cost savings. The most important material in the manufacture of cigars is properly aged tobacco. Arrangements for the procurement of tobacco typically are made at the time the tobacco is planted, approximately three to four years before the tobacco will be manufactured into cigars. The Company buys tobacco directly from a large number of suppliers worldwide and does not believe that it is dependent on any single source for tobacco. During 1996, the Company discontinued shipping MACANUDO cigars for a two month period as excessive demand led to a shortage of properly aged and blended tobacco. The Company has experienced shortages in Cameroon-grown natural wrapper tobacco, which is used in making PARTAGAS cigars, due to the increase in demand for high quality natural wrapped cigars. Because the Company is a leading grower and supplier of Connecticut Shade tobacco, which is used in making MACANUDO cigars, the Company has not experienced similar shortages with respect to Connecticut Shade. The increase in demand has caused the price of natural wrapper and premium cigar tobaccos to increase. The Company has an extensive seed development program to improve the wrapper tobacco characteristics. The Company lost certain seed samples and records in a fire in 1994. See "Risk Factors--Constraints on Ability to Satisfy Demand," "Risk Factors--Social, Political and Economic Risks Associated with Foreign Operations and International Trade" and "--Backorders." COMPETITION The Company is the largest manufacturer and marketer in the U.S. in both units and dollar sales of brand name premium cigars. The Company's main competitors in the branded and private label premium markets include Davidoff, Fuente, Consolidated Cigar Holdings Inc. and Nestor Plasencia. In addition, the increased demand for cigars and the relatively low barriers to entry have led to many new entrants in the premium cigar manufacturing business. The Company's main competitors in the mass market cigar market are Swisher International Group Inc., Consolidated Cigar Holdings, Inc., and Havatampa/Phillies Cigar Corporation. THE TOBACCO INDUSTRY REGULATION Cigar manufacturers, like other producers of tobacco products, are subject to regulation at the federal, state and local levels. Federal law has recently required states, in order to receive full funding for federal substance abuse block grants, to establish a minimum age of 18 years for the purchase of tobacco products, together with an appropriate enforcement program. The recent trend is toward increasing regulation of the tobacco industry, and the recent increase in popularity of cigars could lead to an increase in regulation of cigars. A variety of bills relating to tobacco issues have been introduced in the U.S. Congress, including bills that would have (i) prohibited the advertising and promotion of all tobacco products or restricted or eliminated the deductibility of such advertising expenses, (ii) increased labeling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins, (iii) shifted regulatory control of tobacco products and advertisements from the FTC to the FDA, (iv) increased tobacco excise taxes and (v) required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Hearings have been held on certain of these proposals; however, to date, none of such proposals have been passed by Congress. Future enactment of such proposals or similar bills may have an adverse effect on the results of operations or financial condition of the Company. 37 In August 1996, the FDA published a final rule on tobacco in the Federal Register. Specifically, the rule prohibits a variety of activities relating to the sale of cigarettes and smokeless tobacco, including the distribution of non-tobacco items, such as hats and tee shirts, that carry cigarette logos. These regulations are not currently applicable to cigars; however, there can be no assurance that these regulations will not be extended to include cigars in the future. A significant portion of the Company's Djeep lighter sales is to cigarette manufacturers who sell or give away such lighters with their cigarettes. These regulations, if effective in this respect despite numerous court challenges, would have a material adverse effect on the Company's Djeep lighter business. In addition, the majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Local legislative and regulatory bodies also have increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by requiring designated "smoking" areas. Further restrictions of a similar nature could have an adverse effect on the sales or operations of the Company. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. California, for example, requires "clear and reasonable" warnings to consumers who are exposed to chemicals determined by the state to cause cancer or reproductive toxicity, including tobacco smoke and several of its constituent chemicals. In addition, legislation recently introduced in Massachusetts would, if enacted, require warning labels on cigar boxes. Although similar legislation has been introduced in other states, no action has been taken. Although federal law has required health warnings on cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars carry such warnings. There can be no assurance that such legislation introduced in other states will not be passed in the future or that other states will not enact similar legislation. Consideration at both the federal and state level also has been given to consequences of tobacco smoke on non-smokers (so called "second-hand" smoke). There can be no assurance that regulations relating to second-hand smoke will not be adopted or that such regulations or related litigation would not have a material adverse effect on the Company's results of operations or financial condition. The Company has received complaints from neighbors with respect to cigar smoke emanating from its Club Macanudo establishment in New York City. There can be no assurance that such complaints will not lead to fines, regulation and/or litigation that could adversely affect Club Macanudo. The U.S. Environmental Protection Agency (the "EPA") published a report in January 1993 with respect to the respiratory health effects of second-hand smoke, which concluded that widespread exposure to environmental tobacco smoke presents a serious and substantial public health concern. Issuance of the report, which is based primarily on studies of passive cigarette smokers, may lead to further legislation designed to protect non-smokers. Also, a study recently published in the journal SCIENCE reported that a chemical found in cigarette smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and, thereby, directly links lung cancer to smoking. The National Cancer Institute also has announced that it will issue a report in 1997 describing research into cigars and health. The study and these reports could affect pending and future tobacco regulation and litigation. See "--Litigation." Increased cigar consumption and the publicity such increase has received may increase the risk of additional regulation. There can be no assurance as to the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body, and there can be no assurance that any such legislation or regulation would not have a material adverse effect on the Company's business. LITIGATION Historically, the cigar industry has experienced less health-related litigation than the cigarette and smokeless tobacco industries have experienced. 38 Litigation against the cigarette industry historically has been brought by individual cigarette smokers. In 1992, the United States Supreme Court in Cipollone v. Liggett Group, Inc. ruled that federal legislation relating to cigarette labeling requirements preempts claims based on failure to warn consumers about the health hazards of cigarette smoking, but does not preempt claims based on express warranty, misrepresentation, fraud or conspiracy. To date, individual cigarette smokers' claims against the cigarette industry generally have been unsuccessful. A jury in Florida, however, recently determined that a cigarette manufacturer was negligent in the production and sale of its cigarettes and sold a product that was unreasonably dangerous and defective, awarding the plaintiffs a total of $750,000 in damages. Current tobacco litigation generally falls within one of three categories: class actions, individual actions or actions brought by individual states generally to recover Medicaid costs allegedly attributable to tobacco-related illnesses. The pending actions allege a broad range of injuries resulting from the use of tobacco products or exposure to tobacco smoke and seek various remedies, including compensatory and, in some cases, punitive damages together with certain types of equitable relief such as the establishment of medical monitoring funds and restitution. The major tobacco companies vigorously are defending these actions. In May 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco, et al. reversed a Louisiana district court's certification of a nationwide class consisting essentially of nicotine dependent cigarette smokers. Notwithstanding the dismissal, new class actions asserting claims similar to those in Castano recently have been filed in certain states. To date, two pending class actions against major cigarette manufacturers have been certified. The first case is limited to Florida citizens allegedly injured by their addiction to cigarettes; the other is limited to flight attendants allegedly injured through exposure to secondhand smoke. See "--Legal Proceedings." Cubatabco filed a petition on January 15, 1997 in the USPTO to cancel the Company's two United States trademark registrations of the name Cohiba for use in connection with cigars. Cubatobaco's petition was filed in response to the USPTO's anticipated rejection of its attempt to register its Cohiba trademark in the United States. The Company believes its Cohiba registrations were properly issued by the USPTO and are valid. The Company first filed for registration of the Cohiba trademark in the United States in 1978, which it believes was prior to Cubatabaco's first commercial use of the mark. The Company will vigorously defend its registrations in this proceeding, which could be pending for a number of years. If Cubatabaco were successful in this proceeding, then the Company's U.S. registrations of the name Cohiba for use in connection with cigars would be cancelled and, under certain circumstances, the results of this proceeding could be used in a subsequent action to enjoin use of the name Cohiba by the Company. The Company's sales of Cohiba cigars represent a very small percentage of its premium cigar sales. EXCISE TAXES Cigars long have been subject to federal, state and local excise taxes, and such taxes frequently have been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives. The federal excise tax rate on large cigars (weighing more than three pounds per thousand cigars) is 12.75% of the manufacturer's selling price, net of the federal excise tax and certain other exclusions, capped at $30.00 per thousand cigars. In the past, there have been various proposals by the federal government to fund legislative initiatives through increases in federal excise taxes on tobacco products. In 1993, the Clinton Administration proposed a significant increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco products to fund the Clinton Administration's health care reform program. The Company believes that the volume of cigars sold would have been dramatically reduced if excise taxes were enacted as originally proposed as part of the Clinton Administration's health care reform program. Future enactment of significant increases in excise taxes, such as those initially proposed by the Clinton Administration or other proposals not linked specifically to health care reform, would have a material adverse effect on the 39 business of the Company. The Company is unable to predict the likelihood of the passage or the enactment of future increases in tobacco excise taxes. Tobacco products also are subject to certain state and local taxes. Deficit concerns at the state level continue to exert pressure to increase tobacco taxes. The number of states that impose excise taxes on cigars is 42. State cigar excise taxes are not subject to caps similar to the federal cigar excise tax. From time to time, the imposition of state and local taxes has had some impact on sales regionally. The enactment of new state excise taxes and the increase in existing state excise taxes are likely to have an adverse effect on regional sales as cigar consumption generally declines. LEGAL PROCEEDINGS TOBACCO LITIGATION The Company is a party to lawsuits incidental to its business. The Company, together with a variety of other tobacco product manufacturers and retailers, has been named in eight suits in Florida since 1995; however, it has been served in only five of these lawsuits and in four such cases was voluntarily dismissed as a defendant (without prejudice in each such dismissed case). One of the suits in which the Company has been named but not served is a putative class action, filed on or about August 30, 1996, brought against the Company and 13 other defendants on behalf of Florida residents alleged to be addicted to nicotine and injured as a result of smoking cigarettes. In addition, the Company and 13 others were named as defendants in two "form" complaints that identified no plaintiffs, filed in August 1996, apparently in contemplation of filing additional complaints on behalf of individual plaintiffs. The Company has not been served with complaints in any such cases. The Company believes that the outcome of such legal proceedings as are pending will not in the aggregate have a material adverse effect on the Company's consolidated financial position. The Company carries general liability insurance but has no health hazard policy, which, to the best of the Company's knowledge, is consistent with industry practice. There can be no assurance, however, that there will not be an increase in health-related litigation against the cigarette and smokeless tobacco industries or similar litigation in the future against cigar manufacturers. The costs to the Company of defending prolonged litigation and any settlement or successful prosecution of any material health-related litigation against manufacturers of cigars, cigarettes or smokeless tobacco or suppliers to the tobacco industry could have a material adverse effect on the Company's business. The recent increase in the consumption of cigars and the publicity such increase has received may have the effect of increasing the probability of legal claims. OTHER LITIGATION In the spring of 1995, the Company discovered and immediately notified U.S. Customs officials that packages of marijuana were passing through its Dothan, Alabama plant, apparently secreted by persons still unknown in cigar shipping cartons originating from the Company's Kingston, Jamaica plant. The Company has since fully cooperated with U.S. Customs and other federal and state officials throughout their investigation of this alleged drug trafficking. As a result of investigating the drug shipments, the Company uncovered information which led to the conviction of one of its senior managers on 25 counts of mail fraud. The employee is awaiting sentencing and his accomplices now are serving prison sentences. The employee brought suit for wrongful termination and alleged a number of illegal activities by General Cigar Co., Inc., including payments to officials of foreign governments, pricing practices and election campaign contribution violations. The alleged improper campaign contributions, aggregating $11,000, have been refunded by such campaigns and the Company is seeking a conciliation agreement with respect thereto with the Federal Election Commission. Subsequently, General Cigar Co., Inc. was served with a U.S. Grand Jury subpoena in Connecticut relating to the allegations in the lawsuit filed by the former employee. This investigation has since been terminated. 40 In May 1995, the SEC began an informal investigation into trading in Culbro common stock in the period prior to Culbro's announcement of an agreement in principle to sell a 51% interest in General Cigar Co., Inc. The SEC staff was provided with numerous documents they requested and they interviewed several officers of Culbro and the Company. The Company does not know the status of the investigation, but it has received no communication from the SEC in several months. Pursuant to the terms of a Distribution Agreement between Culbro and CLR, CLR will acquire Culbro's 50.1% interest in Eli Witt. In November 1996, Eli Witt filed for protection under Chapter 11 of the Federal Bankruptcy Law. Prior to February 1993, Eli Witt was a wholly-owned subsidiary of Culbro and filed consolidated tax returns with Culbro. Culbro, Eli Witt and other parties engaged in two complex acquisitions and reorganizations in 1993 and 1994, pursuant to which Culbro received significant distributions from Eli Witt to repay Culbro debt, including substantial amounts Culbro had previously borrowed from unaffiliated third parties to fund Eli Witt's business. Culbro subsequently loaned $5 million to Eli Witt. It is anticipated that these transactions (including the transfer of funds to Culbro) will be reviewed by Eli Witt creditors and other parties in interest in connection with the Chapter 11 case. To date, one creditor has written to the unsecured creditors committee proposing an inquiry into this matter. The Company believes that any such proceedings are not likely to have a material adverse effect on the Company's business, financial condition or results of operations. EMPLOYEES The Company employs approximately 5,000 persons, which includes 1,000 seasonal employees. At present, employees at the Company's Kingston, Jamaica location are represented by two unions, the Trade Union Congress ("TUC"), which represents production and maintenance workers, and the Bustamante International Trade Union ("BITU"), which represents supervisors and office and clerical employees. The Company's contract with TUC expires in March 1999, and its contract with BITU expires in December 1997. On occasion, work stoppages have occurred during the negotiation of new union contracts in Jamaica, and there can be no assurance that such a stoppage will not occur in connection with the negotiation of any new contract. In addition, employees at the Company's Tampa, Florida facility are represented by the Cigar Makers' Union Local 533 of the Retail, Wholesale and Department Store Union AFL-CIO-CLC. No other employees of the Company are represented by unions. The Company believes that its relations with its employees are satisfactory. Recently, the increased demand for cigars has led to increased demand for cigar rollers, and a number of these employees have taken advantage of employment opportunities with competitors and new market entrants. PROPERTIES LAND HOLDINGS The Company owns approximately 1,100 acres of land in the Connecticut River Valley used in its tobacco growing operations. In addition, the Company will lease for a ten-year period approximately 500 acres of arable land in Connecticut. CLR at its option may terminate the lease as to 100 acres annually. 41 PRINCIPAL PROPERTIES As of February 25, 1997, the principal properties owned or leased by the Company for use in its business included:
OWNED LEASE OR EXPIRATION APPROXIMATE LOCATION LEASED DATE NATURE OF OPERATION FLOOR SPACE(1) - ------------------------------ ---------- ------------- ------------------------------ ---------------------- New York, New York Owned N/A Executive Offices 210,000(2) -New York Headquarters New York, New York Leased 8/31/05 Club Macanudo 5,000 -Cigar Bar Kingston, Jamaica, W.I. Owned N/A Cigar Manufacturing 119,000 Dothan, Alabama Leased(3 ) 11/1/01 Cigar Manufacturing & 165,000 Warehousing Hatfield, Massachusetts Owned N/A Tobacco Warehouse 81,000 Santiago, Dominican Leased(4 ) 10/31/01 Tobacco Processing, Cigar 384,243 Republic Manufacturing & Storage Dominican Republic Leased 9/15/01 Tobacco Growing 80 acres Bloomfield, Connecticut Leased 8/30/06 General Cigar Co., Inc. 11,137 Executive Offices Bloomfield, Connecticut Leased 10/17/06 General Cigar Co., Inc. 12,500 Bloomfield Headquarters Bloomfield, Connecticut Leased 11/30/97 Warehouse 11,644 Ellington, Connecticut Owned N/A Tobacco Growing 202 acres Granby, Connecticut Owned N/A Tobacco Growing 449.3 acres Suffield, Connecticut Owned N/A Tobacco Growing 204.8 acres San Pedro Sula, Owned N/A Manufacturing & 6.9 acres(7) Honduras Distribution San Pedro Sula, Leased 3/31/99 Offices 421 square meters Honduras Danli, Honduras Owned N/A Manufacturing & 5,500 square meters Distribution Tampa, Florida Owned N/A Executive Offices, 57,500 Manufacturing & Distribution Upper Saddle River, New Jersey Leased(5 ) 12/31/00 Sales & Distribution 21,500 Chicago, Illinois Leased 9/30/01(6) Club Macanudo 11,000 -Cigar Bar
- ------------------------ (1) In square feet, except where indicated. (2) The Company uses approximately 25,000 square feet. The balance is leased or available for lease. (3) Industrial Revenue Bond financing lease. The Company owns a 52,500 square foot warehouse in Dothan, Alabama that is leased to a third party. (4) The Company leases property in Santiago, Dominican Republic for its cigar manufacturing, tobacco processing and tobacco warehousing operations. These operations are conducted in several different facilities which are subject to 11 different leases. The leases have expiration dates ranging from 1998 to 2001 and each is subject to a renewal option. The Company subleases 70,000 square feet of these facilities to Shade Leaf Processors. (5) Subject to a two-year renewal at the Company's option. The Company also has agreed to lease an additional 6,000 square feet at this facility, on the same terms as the premises currently leased, from the earlier of July 22, 1997 and departure of the current tenant of such additional space. (6) Subject to a five-year renewal at the Company's option. (7) Entire area of site. 42 In addition, the Company is planning to construct a new warehouse in Bloomfield, Connecticut. The Company believes that its existing manufacturing facilities and distribution centers are adequate for the current level of the Company's operations. The Company is, however, in the process of expanding its operations to meet increasing demand. The Company recently completed the expansion of its manufacturing space at its Dominican Republic facilities, and has begun to expand its manufacturing space in Jamaica, through a combination of new construction and reconfiguration of existing space at those facilities to increase the overall square footage devoted to the manufacturing process. The Company expects that it will make capital expenditures of approximately $5.0 million in fiscal 1997 in connection with the expansion of these facilities. As a result of these measures, as well as additional training and the introduction of double-shifting at certain facilities, the Company believes that its manufacturing facilities will be capable of meeting expected demand for cigars by the end of 1997. The Company believes that additional facilities, if necessary, would be readily available on a timely basis on commercially reasonable terms. Further, the Company believes that the leased space that houses its existing manufacturing and distribution facilities is not unique and could be readily replaced, if necessary, at the end of the terms of its existing leases on commercially reasonable terms. The Company believes that its facilities are well maintained and in substantial compliance with environmental laws and regulations. 43 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth certain information with respect to the Company's executive officers, directors and certain other key employees.
NAME AGE POSITION - ------------------------------ --------- -------------------------------------------------------------------------- Edgar M. Cullman 79 Chairman of the Board and Director Edgar M. Cullman, Jr. 50 President, Chief Executive Officer and Director Jay M. Green 49 Executive Vice President, Chief Financial Officer and Treasurer Austin T. McNamara 42 Executive Vice President and Chief Operating Officer A. Ross Wollen 53 General Counsel, Senior Vice President and Secretary Joseph C. Aird 52 Senior Vice President--Controller Robert Loftus 46 Vice President and Assistant Controller Alfons Mayer 70 Senior Vice President of Tobacco of General Cigar Co., Inc. Benjamin F. Menendez 60 Senior Vice President of Premium Special Projects of General Cigar Co., Inc. Angel Daniel Nunez 45 Senior Vice President of Tobacco Growing and Processing of General Cigar Co., Inc. John M. Rano 50 Senior Vice President of Marketing and Product Development of General Cigar Co., Inc. Frank Fina, Jr. 54 Senior Vice President of New Business Development of General Cigar Co., Inc. Raymond Hansen 47 Senior Vice President of Operations of General Cigar Co., Inc. W. Brent Currier 36 Vice President of Sales and Field Marketing of General Cigar Co., Inc. Bruce A. Barnet 51 Director John L. Bernbach 52 Director John L. Ernst 56 Director Thomas C. Israel 52 Director Dan W. Lufkin 65 Director Graham V. Sherren 59 Director Peter J. Solomon 58 Director Francis T. Vincent, Jr. 58 Director
EDGAR M. CULLMAN has been the Chairman of the Board of the Company since December 1996. From 1962 to 1996 he served as Chief Executive Officer of Culbro. Mr. Cullman has served as a Director of Culbro since 1961 and has been Chairman of Culbro since 1975. He also is a Director of Centaur Communications Limited, Bloomingdale Properties, Inc. and Eli Witt. Eli Witt filed for relief from its creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996. Edgar M. Cullman is the father of Edgar M. Cullman, Jr. and the uncle of John L. Ernst. EDGAR M. CULLMAN, JR. is the President and Chief Executive Officer of both Culbro and the Company, and he also is a Director of both Culbro and the Company. Mr. Cullman was elected President and Chief Executive Officer of the Company in December 1996. He was elected Chief Executive Officer of Culbro in 44 1996 after serving as the Chief Operating Officer of Culbro for 12 years. He has been President of Culbro since 1984 and has been a Director of Culbro since 1982. In 1992, 1993 and 1995 he was President of Culbro Land Resources, Inc. Mr. Cullman is also a Director of First Financial Caribbean Corporation, Bloomingdale Properties, Inc. and Eli Witt. Eli Witt filed for relief from its creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996. JAY M. GREEN is the Executive Vice President, Chief Financial Officer and Treasurer of both the Company and Culbro. He was appointed to this position with the Company in December 1996 and has served in the same capacity with Culbro since 1988. Mr. Green is a director of Eli Witt. Eli Witt filed for relief from its creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996. AUSTIN T. MCNAMARA has been the Executive Vice President and Chief Operating Officer of the Company since December 1996 and has been the President of General Cigar Co., Inc. since 1994. He was the Senior Vice President of Sales and Marketing of General Cigar Co., Inc. from 1993 to 1994. Prior to joining General Cigar Co., Inc. in 1993, he was the Group Vice President, General Manager in the Process Foods Division of Chiquita Brands International and held several Brand Management positions at Procter & Gamble. A. ROSS WOLLEN is the General Counsel, the Senior Vice President and Secretary of both the Company and Culbro. He was elected in this capacity at the Company in December 1996 and has served Culbro as General Counsel since 1980, as Senior Vice President since 1983 and as Secretary since 1987. JOSEPH C. AIRD is the Senior Vice President--Controller of both the Company and Culbro. He was named to that position at the Company in December 1996, and he assumed that office with Culbro in 1995. Mr. Aird has served as a Vice President of Culbro since 1987. He also is a director of Eli Witt. Eli Witt filed for relief from its creditors under Chapter 11 of the Federal Bankruptcy Code in November 1996. ROBERT LOFTUS has been the Vice President and Assistant Controller of the Company since December 1996. He has been the Vice President, Finance of General Cigar Co., Inc. since 1993. From 1988 until 1993 Mr. Loftus served as the Controller of General Cigar Co., Inc. ALFONS MAYER is the Senior Vice President of Tobacco of General Cigar Co., Inc. Throughout his 44 year tenure with General Cigar Co., Inc., he has held positions of increasing responsibility, mostly related to the world-wide purchasing and processing of tobacco for which he has received industry-wide recognition, including being named Tobacco Personality of the year by the Tobacco Journal International in 1992. Prior to his employment with General Cigar Co., Inc., he participated in a family-owned tobacco leaf processing company in Argentina (1945-1952). BENJAMIN F. MENENDEZ is the Senior Vice President of Premium Special Projects at General Cigar Co., Inc. He has held his office at General Cigar Co., Inc. since July 1995. Previously Mr. Menendez had served as Vice President of Caribbean Group Operations division of General Cigar Co., Inc. from 1994 to 1995 and as Vice President of Premium Cigar Manufacturing from 1985 to 1994. Mr. Menendez is a member of the well-known cigar family of Menendez and Garcia, the producers of Montecristo and H. Upmann cigars in Cuba prior to Castro's revolution. After leaving Cuba he lived in the Canary Islands and Brazil and continued to manufacture cigars. ANGEL DANIEL NUNEZ was appointed Senior Vice President of Tobacco Growing and Processing of General Cigar Co., Inc. in 1992. Mr. Nunez began his tenure with General Cigar Co., Inc. in 1980 as Manager of Culbro Vega Leaf Tobacco in the Dominican Republic. In 1986, he was transferred to General Cigar Dominicana (a division of the Company) as Assistant to the General Manager, assumed the title of Assistant General Manager in 1988, and was promoted to General Manager in 1989. He was promoted in 1990 to Vice President of Operations for the Dominican Republic facility. JOHN M. RANO is the Senior Vice President of Marketing and Product Development for General Cigar Co., Inc. He was appointed to his post at General Cigar Co., Inc. in November 1994. Previously, Mr. Rano 45 had served as Vice President of Marketing General Cigar Co., Inc. from 1992 to 1994 and as Sales Development Manager from 1984 to 1992. FRANK FINA, JR. is the Senior Vice President of New Business Development for General Cigar Co., Inc. He has served in his capacity at General Cigar Co., Inc. since January 1994. Mr. Fina previously served as Vice President of Domestic Sales at General Cigar Co., Inc. from 1982 to 1994. He has been with the Company since 1963. RAYMOND HANSEN was appointed Senior Vice President of Operations of General Cigar Co., Inc. in September of 1996. Mr. Hansen is responsible for General Cigar Co., Inc.'s Operations Department, including cigar manufacturing operations in Alabama, Jamaica and the Dominican Republic, as well as purchasing and facilities engineering. Prior to joining General Cigar Co., Inc., Mr. Hansen was the Senior Vice President of Corporate Operations at ADVO, Inc., where he had responsibility for nationwide operations. In addition, Mr. Hansen worked as a senior executive for Mission Foods, Van DeKamp's Holland Dutch Bakers, Lamour Corporation, Max Factor & Company and Clairol, Inc. W. BRENT CURRIER is the Vice President of Sales and Field Marketing of General Cigar Co., Inc. He has been in his current position at General Cigar Co., Inc. since June 1994. Prior to joining General Cigar Co., Inc., Mr. Currier served as Vice President--Eastern Zone for E.J. Brach Corporation from 1988 to 1994, where he managed direct and broker sales forces in 17 states. BRUCE A. BARNET is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1990. He is the President and Chief Executive Officer of Cahners Publishing Company, a magazine publishing company. He was the President and Chief Executive Officer of Cowles Enthusiast Media from March 1993 until March 1996, and was a private investor from 1991 to 1992. Mr. Barnet is also a director of Reed Elsevier, Inc., Batteries, Batteries Inc., Mainspring Communications and the American Business Press. JOHN L. BERNBACH is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1988. He has been the Chairman and Chief Executive Officer of The Bernbach Group, Inc., a consulting company, since 1994. Mr. Bernbach was the Chairman and Chief Executive Officer of North American Television, Inc. (television production and distribution) from August 1995 to August 1996 and still serves as Non-executive Chairman and Director. Mr. Bernbach was Vice-Chairman of DDB Needham Worldwide, Inc., an advertising agency, from October 1993 to June 1994 and also was its President and a director from 1986 to 1993. He is Chairman of the Board of Avenue China, Inc. and is a director of Northbridge Programming, Inc. and an Advisor to the Board of Wemco, Inc. JOHN L. ERNST is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1983. He is the Chairman of the Board and President of Bloomingdale Properties, Inc., an investment and real estate company. Mr. Ernst also is a director of First Financial Caribbean Corporation. THOMAS C. ISRAEL is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1989. Mr. Israel is a director and Chairman of A.C. Israel Enterprises, Inc., an investment company, as well as a director of Glenayre Technologies, Inc. DAN W. LUFKIN is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1976. Mr. Lufkin also is a private investor and a director of Syratech, Inc. GRAHAM V. SHERREN is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1987. Mr. Sherren is Chairman and Chief Executive Officer of Centaur Communications Limited, as well as a director of each of Hundred Acre Securities Ltd., InType Ltd., Gieves Group Ltd. and Stace-Barr Holdings Ltd. 46 PETER J. SOLOMON is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1980. Mr. Solomon also is Chairman of Peter J. Solomon Company Limited and Peter J. Solomon Securities Company Limited. In addition, he is a director of Centennial Cellular Corporation, Century Communications Corporation, Charrette Corporation, Monro Muffler Brake, Inc., Office Depot, Inc. and Phillips-Van Heusen Corporation. FRANCIS T. VINCENT, JR. is a Director of both the Company and Culbro. He has been a Director of the Company since December 1996 and a Director of Culbro since 1992. Mr. Vincent currently runs Vincent Enterprises and is a private investor. He was senior advisor to Peter J. Solomon Company Limited from 1993 to 1994 and the Commissioner of Major League Baseball from 1989 to 1992. Mr. Vincent is a director of Horizon Group, Inc., Oakwood Homes Corp. and Time Warner, Inc. EXECUTIVE COMPENSATION The Company was incorporated in December 1996. Accordingly, no compensation was paid to any of its executive officers for fiscal 1996 or prior years. Each of the named executive officers has, however, been employed by an affiliate of the Company. The following table sets forth the annual and long-term compensation for the Company's Chief Executive Officer and the four highest-paid executive officers (the "Named Executive Officers"), as well as the total compensation paid to each individual during the last three calendar years, in connection with such employment. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ------------------------------------------------- ---------------------- OTHER RESTRICTED SECURITIES ANNUAL STOCK UNDERLYING NAME AND PRINCIPAL POSITION(1) YEAR SALARY BONUS COMPENSATION(2) AWARDS OPTIONS(5) - ------------------------------------------- --------- --------- --------- ---------------- --------- ----------- Edgar M. Cullman........................... 1996 $ 400,000 $ -- $ 17,256 -- -- Chairman of the Board 1995 375,000 -- 13,689 -- -- 1994 360,000 -- 23,628 -- -- Edgar M. Cullman, Jr....................... 1996 400,000 -- 30,012 -- 100,000 President and 1995 367,000 1,164,400(3) 29,871 -- -- Chief Executive Officer 1994 352,000 -- 33,716 -- -- Jay M. Green............................... 1996 355,000(4) 65,000 1,128,068 -- -- Executive Vice President, 1995 355,000 666,607(3) 24,912 -- -- Chief Financial Officer and Treasurer 1994 340,000 -- 26,714 -- 125,000 Austin T. McNamara......................... 1996 250,000 148,025 319,915 -- 10,000 Executive Vice President 1995 200,000 375,629(3) 15,712 -- 15,000 and Chief Operating Officer 1994 190,000 158,603 15,510 -- 12,400 A. Ross Wollen............................. 1996 225,000 55,000 25,589 -- 5,000 Senior Vice President, 1995 205,000 377,501(3) 109,879 -- 15,000 General Counsel and Secretary 1994 176,925 -- 30,182 -- 11,500
- ------------------------------ (1) Each of the executive officers identified was employed by Culbro during each of the last three years, except for Austin T. McNamara, who was employed by General Cigar Co., Inc. during such period. Until April 1996, Edgar M. Cullman was the Chief Executive Officer of Culbro. Amounts shown exclude $778,778, $621,960 and $655,872 to be paid over three years beginning in 1997 to Messrs. Cullman, Jr., Green and Wollen, respectively, as a result of the termination and payout of benefits under Culbro's 1995-1997 Long Term Performance Plan. See "Certain Employee Benefit Matters--Culbro Long Term Performance Plan." (2) Amounts shown include matching contributions made by Culbro under its Savings Plan and other miscellaneous cash benefits, but do not include funding for or receipt of retirement plan benefits. No executive officer who would otherwise have been includable in such table resigned or terminated employment during 1996. The amounts shown in 1996 for Messrs. Green and McNamara include value realized upon exercise of options of $1,102,163 and $303,169, respectively. (3) Annual and long-term bonuses were paid in 1996 with respect to performance in 1995 and the 1993-95 cycle, respectively. (4) All but $46,664 of such compensation was deferred pursuant to the Company's Deferred Incentive Compensation Plan. (5) Numbers shown are in shares of Culbro common stock. Upon consummation of the Merger, each option will be exercisable for such number of shares of Class A Common Stock as is equal to 4.44557 multiplied by the number of Culbro shares shown. 47 COMPENSATION OF DIRECTORS Directors who do not receive compensation as officers or employees of the Company or any of its affiliates will be paid an annual retainer fee of $20,000 and a fee of $900 for each meeting of the Board of Directors or any committee thereof they attend, plus reasonable out-of-pocket expenses. CERTAIN EMPLOYEE BENEFIT MATTERS 1997 STOCK OPTION PLAN Prior to the consummation of the Offering, the Company adopted a new Stock Option Plan (the "General Cigar Holdings 1997 Stock Option Plan." A total of 3,300,000 shares of Class A Common Stock will be available for issuance under the General Cigar Holdings 1997 Stock Option Plan and existing Culbro Stock Option Plans (which will be assumed by the Company following the Merger as described below). The General Cigar Holdings 1997 Stock Option Plan, together with the assumed Culbro Stock Option Plans, are referred to as the "1997 Stock Option Plan." Options granted under the General Cigar Holdings 1997 Stock Option Plan will be incentive stock options or nonqualified options. The General Cigar Holdings 1997 Stock Option Plan contains a limitation on the dollar amount of incentive stock options which may be granted to any employee and restrictions pertaining to any grant to an employee who beneficially owns 10% or more of the outstanding Common Stock. Prior to the Offering the Company plans to grant options with respect to substantially all shares of Class A Common Stock available for issuance pursuant to the General Cigar Holdings 1997 Stock Option Plan. Options granted under the General Cigar Holdings 1997 Stock Option Plan prior to the Offering will become exercisable with respect to one-third of the underlying shares on each of the third, fourth and fifth anniversaries after the date of the grant and will terminate not more than ten years following the date of the grant. The exercise price of such options will be the price to the public of the shares of Class A Common Stock offered hereby. Pursuant to the General Cigar Holdings 1997 Stock Option Plan, options to purchase a number of shares of Class A Common Stock (based on a per share exercise price equal to the price per share to the public in the Offering) at an aggregate exercise price of $1.0 million will be granted to certain persons employed by Villazon pursuant to the Villazon Acquisition. See "--Employment and Consulting Agreements of Frank Llaneza, Daniel Blumenthal and Constantino Gonzalez." In addition, pursuant to the General Cigar Holdings 1997 Stock Option Plan, an option to purchase 100,000 shares of Class A Common Stock (based on a per share exercise price equal to the price per share to the public in the Offering) will be granted to Austin T. McNamara. CULBRO EMPLOYEE BENEFIT PLANS TO BE ASSUMED BY THE COMPANY The following is a summary of certain of Culbro's employee benefit plans and awards pursuant thereto that the Company has assumed or will assume, as of the date of the Asset Transfers, the date of Distribution or the date of the Merger, as the case may be, as described below. Assumption of the Culbro plans will be effected pursuant to the Benefits and Employment Matters Allocation Agreement to be entered into prior to the Distribution. CULBRO STOCK OPTION PLANS Culbro maintains three employee stock option plans (collectively, the "Culbro Employee Stock Option Plans") under which unexercised options currently are outstanding: (i) the Culbro Corporation 1991 Employees Incentive Stock Option Plan (the "1991 Plan"); (ii) the Culbro Corporation 1992 Stock Plan (the "1992 Plan"); and (iii) the Culbro Corporation 1996 Stock Plan (the "1996 Plan"). As of December 31, 1996 options for 46,114 shares, 196,400 shares, and 100,000 shares of Culbro common stock were outstanding under the 1991 Plan, the 1992 Plan and the 1996 Plan, respectively. The Culbro Employee Stock Option Plans currently are administered by the Compensation Committee of the Board of Directors of Culbro (the "Culbro Compensation Committee"). Options granted under the Culbro Employee Stock Option Plans are intended to be incentive stock options or nonqualified options. Options 48 granted under the 1991 Plan and the 1992 Plan are not exercisable until three years after the date of grant and terminate eight years from the date of the grant. Options granted under the 1996 Plan are exercisable in equal installments over five years beginning on the third anniversary of the date of grant at increasing exercise prices. See "--Culbro Stock Option Information." Culbro maintains two stock option plans for its non-employee Directors, the 1993 Stock Option Plan for Non-Employee Directors (the "1993 Director Plan") and the 1996 Stock Option Plan for Non-Employee Directors (the "1996 Director Plan"). Under the 1993 Director Plan, options to purchase 2,000 shares of Culbro common stock were granted to each non-employee Director of Culbro in each of 1993, 1994 and 1995. In total, options exercisable with respect to 42,000 shares of Culbro common stock were granted under the 1993 Director Plan, of which options exercisable with respect to 36,000 shares were outstanding as of December 31, 1996. Options granted under the 1993 Director Plan have exercise prices between $14.38 and $19.50 per share. No further options will be granted pursuant to the 1993 Director Plan. Under the 1996 Director Plan, options exercisable for 1,000 shares of Culbro common stock will be granted annually to non-employee Directors of Culbro. There are a total of 25,000 shares of Culbro common stock reserved for issuance under the 1996 Director Plan, of which options exercisable for 7,000 shares were granted in April 1996 at an exercise price of $63.81. Pursuant to the Benefits and Employment Matters Allocation Agreement, as of the date of the Distribution, each current holder of an option to acquire shares of Culbro common stock pursuant to the 1991 Plan, the 1992 Plan, the 1996 Plan, the 1993 Director Plan or the 1996 Director Plan (together, the "Culbro Stock Option Plans") will receive in exchange therefor two separately exercisable options, one option to purchase shares of Culbro common stock (a "Culbro Option") and one option to purchase shares of CLR common stock (a "CLR Option"), each containing terms substantially equivalent in the aggregate to those of such holder's pre-Distribution option. With respect to each holder of a nonqualified option, the combined aggregate exercise price of the Culbro Option and the CLR Option shall be equal to the aggregate exercise price of the pre-Distribution option. With respect to each holder of an incentive stock option, the number of shares with respect to which each Culbro Option and each CLR Option are exercisable, and the exercise price for each Culbro Option and each CLR Option, will be set so as to preserve the Exercise Ratio and the Aggregate Spread (both as defined below) attributed to options currently outstanding, such determination to be based on the respective trading prices of Culbro common stock and CLR common stock following the Distribution. The "Exercise Ratio" of the Culbro Option and the CLR Option, respectively, shall be set such that on a share by share basis, the ratio of the exercise price of the Culbro Option and the CLR Option to the value of Culbro common stock or CLR common stock, respectively, shall be equal to the ratio of the pre-Distribution exercise price to the pre-Distribution value of stock subject to the option. The "Aggregate Spread" of an option is an amount equal to the difference between the exercise price of an option and the price of a share of Culbro common stock immediately prior to the Distribution multiplied by the number of shares underyling such option. Upon consummation of the Merger, each Culbro Option will be converted into an option to purchase Class A Common Stock (a "Company Option"). The number of shares with respect to which the Company Option is exercisable and the exercise price for the Company Option will be subject to adjustment based on the ratio of the number of shares of Class A Common Stock issuable in the Merger with respect to each share of Culbro common stock. The Culbro Options will not be exercisable for Class A Common Stock until the Merger has been consummated. In order to assure that the exercise of Culbro Options between the consummation of the Offering and the consummation of the Merger does not result in disproportionate dilution to the Culbro shareholders, Culbro will pay to the Company the amount of the exercise price received upon the exercise of such Culbro Option and in exchange therefor the Company will provide to Culbro a number of shares of Class A Common Stock equal to the number of shares of Culbro common stock issued upon exercise of such Culbro Option multiplied by 4.44557. 49 CULBRO STOCK OPTION INFORMATION The following table sets forth the number of stock options granted to each of the Named Executive Officers during fiscal 1996.
POTENTIAL REALIZABLE VALUE INDIVIDUAL GRANTS AT ASSUMED ANNUAL ------------------------------------ RATES OF STOCK NUMBER OF PERCENTAGE OF TOTAL PRICE APPRECIATION SECURITIES OPTIONS FOR TEN YEAR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED(#)(1) 1996 FISCAL YEAR ($/SHARE) DATE 5% 10% - ------------------------------------------ ------------- --------------------- ------------- ----------- --------- --------- Edgar M. Cullman, Jr...................... 100,000 74.4% (2) 1/16/04 $2,633,368 $8,422,455 A. Ross Wollen............................ 1,500 1.1% $ 59.38 2/21/04 $ 56,016 $ 141,954 A. Ross Wollen............................ 3,500 2.6% $ 46.75 1/16/04 $ 102,903 $ 260,776 Austin T. McNamara........................ 10,000 7.4% $ 59.38 2/21/04 $ 373,438 $ 946,364
- ------------------------------ (1) Upon consummation of the Distribution, each holder of an option to acquire shares of Culbro common stock as set forth herein will receive in exchange therefor two separately exercisable options: a Culbro Option and a CLR Option. See "--Culbro Stock Option Plans." (2) 40,000 of such options are exercisable at $66.00 per share, 40,000 of such options are exercisable at $72.60 per share and 20,000 of such options are exercisable at $80.00 per share. Edgar M. Cullman did not hold any options at 1996 fiscal year end. The following table presents the value of options exercised in fiscal 1996 and the value of unexercised options held by the other Named Executive Officers at November 30, 1996.
VALUE OF UNEXERCISED NUMBER OF SECURITIES IN-THE- UNDERLYING OPTIONS MONEY OPTIONS AT SHARES VALUE HELD AT FISCAL YEAR END(#) FISCAL YEAR END (1) ACQUIRED ON REALIZED -------------------------- -------------------------- NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - -------------------------------- ------------- --------- ----------- ------------- ----------- ------------- Edgar M. Cullman, Jr. .......... -- -- -- 100,000 $ 0 $ 0 Jay M. Green.................... 24,300 $1,102,163 85,200 75,000 $3,913,825 $ 3,975,000 A. Ross Wollen.................. 12,697 $ 676,115 19,003 31,500 $ 774,249 $ 1,184,375 Austin T. McNamara.............. 6,900 $ 303,169 3,000 37,400 $ 120,750 $ 1,185,850
- ------------------------------ (1) The amounts presented in this column have been calculated based upon the difference between the fair market value of $57.00 of Culbro's common stock on November 30, 1996 and the exercise price of each stock option. See "--Culbro Stock Option Plans." CULBRO ANNUAL INCENTIVE COMPENSATION PLAN The Culbro Compensation Committee meets during the first quarter of each year to assess the performance during the preceding fiscal year of the officers of Culbro and senior officers of its subsidiaries and to recognize and reward meritorious performance by payment of incentive compensation with respect to such year. Pursuant to a plan approved for 1996 by the Culbro Board of Directors, such annual incentive compensation was based upon predetermined percentages of each recipient's annual salary and depended upon the achievement of specified financial and strategic goals. Incentive compensation is payable in cash subject to deferral under Culbro's Deferred Incentive Compensation Plan. Culbro's 1996 annual plan resulted in the payments to Culbro executives set forth under "Management--Executive Compensation." Culbro employees who do not participate in the incentive compensation plan may be eligible for annual bonus payments depending upon operating unit results. Following the consummation of the Asset Transfer, the Company intends to assume and continue the Annual Incentive Compensation Plan, subject to any adjustments necessary to reflect the Distribution and the Merger. In addition, it is currently contemplated that Company employees who do not participate in the incentive compensation plan may be eligible to receive annual bonus payments depending on Company results. 50 CULBRO LONG TERM PERFORMANCE PLAN In 1988, the Culbro Compensation Committee and the Culbro Board of Directors approved the Long Term Performance Plan (the "Performance Plan") which is intended to provide additional cash compensation to certain officers of Culbro and senior officers of its subsidiaries selected by the Culbro Compensation Committee. Payments under the Performance Plan are based on the financial performance of the subsidiaries and Culbro over three-year performance cycles, which began in 1989 and every other year thereafter. The third three-year performance cycle which began with fiscal year 1993 resulted in the payments set forth under "Management--Executive Compensation." The Performance Plan was amended for the three-year performance period 1995-1997. Certain senior officers of General Cigar Co., Inc. and certain other subsidiaries are eligible to receive rewards based upon the return on net assets for the applicable business unit. In late 1996, the Culbro Board of Directors, on the recommendation of the Compensation Committee, approved the full vesting and termination of the 1995-1997 Performance Plan as it pertains to Culbro corporate executives. These awards total approximately $3.4 million and will be paid in installments from 1997 to 1999. See "Management--Executive Compensation." Pursuant to the Asset Transfers, the Company assumed the Performance Plan with respect to participants employed by General Cigar Co., Inc., subject to any adjustments necessary to reflect the Distribution and the Merger. Employees of subsidiaries other than General Cigar Co., Inc. are eligible to receive the portion of their award, if any, earned through the date of the Asset Transfers, and all such employees ceased participating in the Performance Plan following the date of the Asset Transfers. Determination and payment of any award under the Performance Plan with respect to participants other than participants employed by General Cigar Co., Inc. will be made by the subsidiary for which the employee was employed. CULBRO DEFERRED INCENTIVE COMPENSATION PLAN In 1982, the Culbro Board of Directors adopted the Deferred Incentive Compensation Plan to be administered by the Culbro Compensation Committee, pursuant to which recipients of incentive compensation and directors' fees may elect to defer receipt thereof under a defined contribution arrangement. Amounts deferred earn interest, compounded quarterly, at the prime rate less 1%. Such amounts are not intended to be recognized for tax purposes until received. Participating recipients may designate the amount and the time periods of deferral. Participants have no vested rights in deferred amounts credited to their accounts and are general creditors of Culbro until such amounts actually are paid. Pursuant to the Asset Transfers, the Company has assumed and will continue the Deferred Incentive Compensation Plan, subject to any adjustments necessary to reflect the Distribution and the Merger. Upon the assumption of the Deferred Incentive Compensation Plan by the Company, participants will become general creditors of the Company until deferred amounts credited to their accounts are paid. CULBRO SAVINGS PLAN The Culbro Board of Directors adopted a Savings Plan in 1982 (the "Savings Plan"). The Savings Plan covers salaried and hourly employees of Culbro and its participating subsidiaries who are employed in the U.S., are over age 21 and have six months of service. In 1996, a participating employee could have (i) saved up to 5% of annual base salary through payroll deductions, with Culbro contributing $0.40 on each dollar contributed and (ii) saved an additional 10% of annual base salary without receiving any matching contributions. Highly compensated employees are limited to an additional 3% of annual base salary without receiving any matching contributions. Contributions made in 1996 through payroll deductions not in excess of $9,500 per employee may have been accumulated as pre-tax savings pursuant to Section 401(k) of the Internal Revenue Code. Participants are permitted to choose to allocate their contributions among several alternative investment options. Pursuant to the Asset Transfers, CLR is responsible for any amounts under the Savings Plan due to its employees as of the date of the Asset Transfers. 51 During fiscal 1996, Culbro's matching contributions under the Savings Plan for the accounts of the Named Executive Officers are included in the Summary Compensation Table set forth under "Management--Executive Compensation." Effective as of the date of the Distribution, Savings Plan participants employed by CLR will cease to be eligible to participate in the Savings Plan. Following the Distribution, Culbro will continue to maintain the Savings Plan. Upon the consummation of the Merger, the Company will assume and continue to maintain the Savings Plan. CULBRO RETIREMENT PLAN Retirement benefits are payable under Culbro's Employees Retirement Plan (the "Retirement Plan") for officers and other employees of Culbro and its participating subsidiaries. Directors who are not employees do not participate. Benefits are accrued under the Plan on a career-average earnings basis and through 1996, the pension credit is 1.1% for annual compensation up to the individual's covered compensation as determined from published Social Security tables and 1.65% for annual compensation above said amounts. Compensation is the base rate of earnings as of the first business day of each Plan Year payable for service during the Plan Year excluding overtime, bonuses, incentive compensation or other additional compensation. The estimated annual benefits payable as a life annuity upon retirement at normal retirement age, which assumes service will continue until age 65 at 1996 base salaries, for Messrs. Cullman, Jr., Green, Wollen and McNamara are $101,991, $56,641, $65,324 and $59,044, respectively. The retirement benefit of $165,544, subject to certain inflation adjustments, for Edgar M. Cullman reflects the fact that he deferred receipt since age 65 from 1983 to 1989. Effective as of the Distribution, the benefits of all Retirement Plan participants employed by CLR following the Distribution will be frozen, and such participants will cease to accrue further benefits under the Retirement Plan. All such participants will be fully vested in any benefits accrued through the date of the Distribution. Following the Distribution, Culbro will continue to maintain the Retirement Plan. Upon the consummation of the Merger, the Company will assume and continue to maintain the Retirement Plan, and participants, other than those employed by CLR following the Distribution, will continue to accrue benefits in the Retirement Plan in accordance with its terms. CULBRO INSURANCE AND HEALTH PROGRAMS Culbro maintains a variety of employee welfare benefit plans providing life, hospitalization, medical and long-term disability insurance for its salaried and certain hourly paid employees. In addition Culbro provides life, hospitalization and medical insurance for certain of its retired employees. Culbro's aggregate contributions for such employee welfare benefit plans in fiscal 1996 amounted to approximately $3.3 million. Culbro plans to maintain such welfare benefit plans and insurance arrangements for all eligible pre-Asset Transfers employees, and that upon the consummation of the Merger, the Company will assume and continue such welfare benefit plans and insurance arrangements. Any such plan or arrangement benefiting persons employed by CLR following the Asset Transfer Date will be subject to certain fee sharing arrangements with CLR. In 1976, Culbro adopted an Executive Life Insurance Program (the "Program") pursuant to which insurance was purchased for middle and senior level officers and employees. Insurance coverage of $20,000 was provided for each $10,000 salary increment in excess of $50,000 and additional coverage of $10,000 was provided for each $10,000 salary increment in excess of $100,000 up to a maximum insurance coverage of $250,000. As of July 1, 1988 the Program was suspended and all benefits remain as they were as of that date. No new participants have been offered benefits under this Program since its suspension. The aggregate face amount of such coverage through November 30, 1996 was approximately $2.8 million. The amounts paid by Culbro in fiscal 1996 as premiums totaled approximately $80,000, which was paid in part from a loan against the cash value of said insurance and the balance in cash. 52 EMPLOYMENT AGREEMENT OF JAY M. GREEN In 1994, Culbro entered into an employment agreement with Jay M. Green, Culbro's Chief Financial Officer (the "Employment Agreement"). The Employment Agreement provides that Mr. Green be employed as Executive Vice President--Finance and Administration and Treasurer for a period of five years from April 1994 to April 1999 at a base salary of $340,000 (subject to increase annually as determined by the Culbro Compensation Committee). If Mr. Green is terminated by Culbro without cause, he will be entitled to receive a cash severance payment of 150% of his annual salary. The Employment Agreement also provides for a grant of an option (the "Option") to purchase 125,000 shares of Culbro's common stock at an exercise price of $4 per share. The Option vests and becomes exercisable with respect to 20% of the underlying common stock per year, on each of the five anniversaries of the date of the grant. The Option expires (a) on the tenth anniversary date of the date it becomes exercisable, or (b) after the date Mr. Green ceases to be an employee of Culbro or its subsidiaries, (i) within one year following Mr. Green's death or disability, (ii) within three months following a voluntary termination and (iii) immediately upon a termination for cause. The Option shall become immediately exercisable with respect to all shares covered thereby in the event of a termination without cause after the first 30 months of the Employment Agreement; provided that the Option shall expire within three months of such termination. Additionally, in the event that the Cullman & Ernst Group owns less than 40% of Culbro's common stock (or the Common Stock, following the assumption of the Employment Agreement by the Company), the Option shall become exercisable in its entirety. Mr. Green may not be permitted to exercise such number of options in any year which would result in his total compensation exceeding the $1.0 million income tax deduction cap of Section 162(m), unless such exercises are approved by the Section 162(m) Subcommittee of the Board of Directors of Culbro Corporation, and the Culbro Compensation Committee and would not require further approval of the shareholders of Culbro. Such limitation may not apply in the final year of the Option. The Company assumed Culbro's obligations under the Employment Agreement pursuant to the Asset Transfers. Upon consummation of the Distribution, Mr. Green will receive, in exchange for his Option, two separately exercisable options: one Culbro Option and one CLR Option. Upon consummation of the Merger, Mr. Green's Culbro Option will be converted into a Company Option. The number of shares with respect to which the Company Option is exercisable, and the exercise price for the Company Option, will be subject to adjustment based on the ratio of Class A Common Stock to Culbro common stock in the Merger. See "--Culbro Stock Option Plans." EMPLOYMENT AND CONSULTING AGREEMENTS OF FRANK LLANEZA, DANIEL BLUMENTHAL AND CONSTANTINO GONZALEZ Simultaneously with the consummation of the Villazon Acquisition, General Cigar Co., Inc. entered into employment and consulting agreements (the "Consulting Agreements") with Frank Llaneza, Daniel Blumenthal and Constantino Gonzalez, officers of Villazon (the "Villazon Officers"). The Consulting Agreements provide that the Villazon Officers will act as principal executives of General Cigar Co., Inc. and will continue to discharge the duties historically associated with their positions at Villazon. The Villazon Officers will serve in such positions until January 31, 2000. Each of Mr. Llaneza's and Mr. Blumenthal's salary will be $250,000 per year, while Mr. Gonzalez's salary will be $200,000 per year. No other payments will be made under the Consulting Agreements. The Villazon Officers will serve as consultants with respect to all aspects of the business, including product development and customer and supplier relations, from February 1, 2000 until January 31, 2001. Thereafter, the Villazon Officers will advise General Cigar Co., Inc. from time to time, until January 31, 2002. Upon consummation of the Offering, the Villazon Officers will be entitled to receive options pursuant to the General Cigar Holdings 1997 Stock Option Plan. Mr. Llaneza and Mr. Blumenthal each will be entitled to receive options for a number of shares of Class A Common Stock with an exercise price equal to $360,000, while Mr. Gonzalez shall be entitled to receive options for a number of shares of Class A Common Stock with an exercise price equal to $280,000, in each case at an exercise price per share equal to the price to the public in the Offering. See "--1997 Stock Option Plan." 53 THE ASSET TRANSFERS, THE DISTRIBUTION AND THE MERGER GENERAL The Company, Culbro and CLR are parties to a Distribution Agreement (the "Distribution Agreement") and other related agreements. The Distribution Agreement provides for (i) consummation of the Asset Transfers, (ii) the Distribution of CLR common stock to the existing shareholders of Culbro following consummation of the Offering and (iii) the merger of Culbro with and into the Company following the Distribution. THE ASSET TRANSFERS Pursuant to the Distribution Agreement, Culbro transferred to the Company all of the common stock of General Cigar Co., Inc., Club Macanudo, Inc., Club Macanudo (Chicago), Inc. and all of Culbro's interest in the building located at 387 Park Avenue South, New York, New York. In addition, Culbro transferred to General Cigar Co., Inc. approximately 1,100 acres of its real estate holdings in the Connecticut River Valley used to cultivate cigar wrapper tobacco. In connection with these transfers, the Company received all licenses, permits, accounts receivable, prepaid expenses, reserves and other current assets related to the cigar business. The Distribution Agreement also provides for the transfer to CLR of substantially all the non-tobacco related assets of Culbro, including: (i) all of the common stock of Imperial Nurseries, Inc., a wholly-owned subsidiary of Culbro; (ii) approximately 5,500 acres of land in Connecticut and Florida, as well as several nursery wholesale and retail centers; (iii) Culbro's interests in Eli Witt and assets previously owned by Eli Witt; (iv) its 25% interest in Centaur; and (v) all licenses, permits, accounts receivable, prepaid expenses, reserves and other current assets (other than cash) related to the real estate and nursery business. Pursuant to the Distribution Agreement, CLR will be allocated $7.0 million in cash. The Distribution Agreement also provides for the assumption by the Company of all liabilities relating to the cigar business and the assets transferred to the Company and General Cigar Co., Inc. These liabilities include all of Culbro's retained indebtedness, including bank and corporate debt, all expenses related to the Asset Transfers, the Offering, the Distribution and the Merger and certain other contingent liabilities, other than those liabilities related to the assets transferred to CLR. Similarly, CLR assumed all liabilities relating to the real estate business and the nursery business and relating to the assets transferred to CLR. These liabilities include all of CLR's assumed and retained indebtedness, including bank and corporate debt, other liabilities relating to the assets transferred to CLR and certain additional tax liabilities. As a result of the Asset Transfers, Culbro is a holding company, substantially all of the assets of which are the stock of the Company and CLR. Pursuant to the terms of the Distribution Agreement, from and after the Offering Date, each of the Company and CLR will operate independently of the other. The Distribution Agreement also contains general indemnities between Culbro (or the Company, following the Merger) and CLR and the procedures by which indemnification may be claimed. The Distribution Agreement provides for, on the one hand, Culbro and the Company to indemnify CLR for any losses, liabilities or damages (including attorneys fees) in connection with any claim or action in respect of any of the liabilities to be assumed or retained by Culbro and the Company and, on the other hand, CLR to similarly indemnify Culbro and the Company in connection with any claim or action in respect of any liabilities retained or assumed by CLR. In each instance, indemnities are limited by insurance proceeds recovered by the indemnified party that reduce the amount of the loss, liability or damage. In addition, the Distribution Agreement contains provisions for the administration of insurance policies shared by the parties and provisions for the sharing of information and related services among the parties. Upon consummation of the Merger, Culbro's obligations with respect to such indemnities will become the obligations of the Company. With respect to corporate governance, the Distribution Agreement requires the resignation of all CLR directors and officers from any positions they previously held with Culbro, the Company or General Cigar Co., Inc., and each of their respective subsidiaries, except that 54 Edgar M. Cullman, Edgar M. Cullman, Jr. and John L. Ernst will retain their seats on the CLR board of directors notwithstanding their various positions at Culbro and the Company, and Edgar M. Cullman will be the Chairman of the Board of CLR. Culbro intends to effect the Distribution because it believes that it is in the best interests of Culbro and the Company to separate the cigar business from the unrelated businesses of Culbro. By effecting the Distribution, Culbro believes that shareholders will benefit by allowing its cigar business and non-tobacco related businesses to be evaluated on a stand-alone basis. RELATED AGREEMENTS Pursuant to the Distribution Agreement, Culbro and CLR have entered into certain agreements described below. TAX SHARING AGREEMENT Culbro and CLR have entered into a tax sharing agreement (the "Tax Sharing Agreement") that defines the parties' rights and obligations with respect to filing of returns, payments, deficiencies and refunds of federal, state and other income or franchise taxes relating to Culbro's business for tax years prior to and including the Distribution. In general, with respect to periods ending on or before the last day of the taxable year in which the Distribution occurs, Culbro is responsible for (i) filing both consolidated federal tax returns for the Culbro affiliated group and combined or consolidated state tax returns for any group that includes a member of the Culbro affiliated group, including in each case CLR and its subsidiaries for the relevant periods of time that such companies were members of the applicable group and (ii) paying the taxes relating to such returns. Generally, any subsequent adjustments resulting from the redetermination of such tax liabilities by the applicable taxing authorities will be paid by the member or affiliated group to which the adjustment relates, with CLR assuming responsibility for all adjustments relating to Culbro and its affiliates other than the Company and its subsidiaries. CLR is responsible for filing returns and paying taxes relating to any member of the CLR affiliated group for periods that begin before and end after the Distribution and for periods that begin after the Distribution. Culbro and CLR have agreed to cooperate with each other and to share information in preparing such tax returns and in dealing with other tax matters. SERVICES AGREEMENT Culbro and CLR have entered into a services agreement (the "Services Agreement") pursuant to which Culbro agreed to provide a number of administrative and other services to CLR for a period of at least one year. These services include administration of CLR insurance policies, internal audit, preparation of tax returns, transportation and general in-house legal services. CLR will make an annual payment of approximately $550,000 to, and will reimburse out-of-pocket expenses incurred by, Culbro and its subsidiaries, in connection with such services. Culbro will make the above services available to CLR on an as-needed basis for a period of at least one year following the Distribution. BENEFITS AND EMPLOYMENT MATTERS ALLOCATION AGREEMENT Culbro and CLR have entered into the Benefits and Employment Matters Allocation Agreement which provides for the assumption by the Company of certain Culbro employee benefit plans and the conversion of outstanding options and other accrued benefits into outstanding options and awards of the Company and CLR. For a discussion of the allocations to be made pursuant to the Benefits and Employment Matters Allocation Agreement, see "Certain Employee Benefit Matters." 55 LEASES CLR as lessor and General Cigar Co., Inc. as lessee have entered into a lease for certain agricultural real property in Connecticut and Massachusetts (the "Agricultural Lease") and, prior to the Distribution, will enter into a lease for certain commercial space in Connecticut (the "Commercial Lease"). The Agricultural Lease is for approximately 500 acres of arable land allocated to CLR for possible commercial development in the long-term, but which will provide the Company with an important short-term source of Connecticut Shade wrapper tobacco. General Cigar Co., Inc.'s use of the land is limited to the cultivation of cigar wrapper tobacco. The Agricultural Lease has an initial term of ten years and provides for the extension of the lease for additional periods thereafter. In addition, at CLR's option the Agricultural Lease may be terminated with respect to 100 acres of such land annually upon one year's prior notice. The rent payable by General Cigar Co., Inc. under the Agricultural Lease is principally equal to the aggregate amount of all taxes and other assessments payable by CLR attributable to the land leased. The Commercial Lease will be for approximately 25,000 square feet of office space in the Griffin Center South office complex in Bloomfield, Connecticut. The Commercial Lease will have an initial term of ten years and provides for the extension of the lease for additional annual periods thereafter. The rent payable by General Cigar Co., Inc. under the Commercial Lease will be at market rates. THE DISTRIBUTION The Distribution Agreement also provides for the PRO RATA distribution by Culbro to the shareholders of Culbro of all issued and outstanding shares of common stock of CLR. The Distribution will occur subsequent to the Offering and will be contingent principally upon (i) either a tax ruling or an opinion of counsel satisfactory to Culbro that the Distribution constitutes a tax free reorganization under Section 355 of the Internal Revenue Code and (ii) approval of the Merger by the Culbro shareholders. THE MERGER Approximately 180 days following the consummation of the Offering (but no sooner than 180 days after the Offering without the consent of DLJ) and subject to (i) the completion of the Distribution and (ii) approval of the Merger by the shareholders of Culbro, Culbro will be merged with and into the Company, pursuant to an Agreement and Plan of Merger that has been approved and adopted by the Company and by the Board of Directors of Culbro. The shareholders of Culbro will not vote with respect to the adoption of the Merger until May 1997; however, the members of the Cullman & Ernst Group have indicated that they will vote their shares of Culbro common stock in favor of the Merger. The Merger has been approved by Culbro as sole stockholder of the Company prior to the Offering and, consequently, the holders of the Class A Common Stock offered hereby will not vote in connection with the Merger. The Company will be the surviving corporation in the Merger and will issue to the holders of the common stock of Culbro 4.44557 shares of Class B Common Stock for each share of the Culbro common stock outstanding on the date of the Merger, or approximately 20,087,182 shares of Class B Common Stock in the aggregate, subject to adjustment for any Culbro stock options exercised prior to the Merger. Each option to purchase Culbro common stock outstanding prior to the Merger will be converted into an option to acquire Class A Common Stock. See "Certain Employee Benefit Matters--Culbro Benefit Plans to be Assumed by the Company--Culbro Stock Option Plans." 56 The following chart illustrates the effect of the Distribution and the Merger. [CHART SHOWING THE STRUCTURE OF THE COMPANY AND THE PARENT FOLLOWING THE OFFERING] [CHART SHOWING THE STRUCTURE OF THE COMPANY AND CLR FOLLOWING THE DISTRIBUTION AND THE MERGER] 57 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since December 1, 1995, Frederick M. Danziger, a member of the Cullman & Ernst Group and the husband of Lucy C. Danziger, has been Of Counsel to the law firm of Latham & Watkins. During Culbro's 1996 fiscal year, such firm received fees and disbursements of approximately $1.5 million from Culbro for services rendered. See "Principal Stockholders." The interior design firm of Cullman & Kravis, which is part-owned by a member of the Cullman & Ernst Group, provided interior design services for Club Macanudo, Inc. and for renovations to Culbro's New York City facilities. In 1996, a total of approximately $526,000 was paid to such firm in reimbursement for the purchase of furniture, fabrics and painting and for fees and commissions. The Company recently entered into an agreement with John L. Bernbach, a Director of the Company, pursuant to which Mr. Bernbach will provide consulting services to the Company with respect to its international operations, for which the Company will pay Mr. Bernbach a fee of $75,000 per year. Messrs. Cullman are members of the Board of Directors of Bloomingdale Properties, Inc. of which Mr. Ernst is Chairman and President. Edgar M. Cullman is a member of the Board of Directors of Centaur, of which Mr. Sherren is Chief Executive Officer. Mr. Solomon is Chairman of Peter J. Solomon Company Limited ("PJSC"), an investment banking firm. Such firm provides Culbro with strategic and financial advisory services as well as specific transaction-related advisory services pursuant to an engagement letter. In 1995, PJSC was paid a retainer of $75,000 for providing such advisory services. In 1996, PJSC was paid a retainer of $140,625 for such advisory services and was paid a transaction fee of $825,000 for services rendered as financial advisor in connection with the sale of Culbro's CMS Gilbreth Packaging Systems, Inc. division. In addition, Culbro reimbursed PJSC for certain expenses incurred in connection with the rendering of such services. In connection with the Offering, at the request of the Company, the Underwriters have agreed to pay Peter J. Solomon Securities Company Limited, an affiliate of PJSC, a fee of $700,000. See "Underwriting." Real estate management and advisory services have been provided to Culbro by an affiliate of Bloomingdale Properties, Inc., with which members of the Cullman & Ernst Group are associated. A fee of approximately $199,000 was paid by Culbro in 1995 for management of Culbro's New York office building and for other real estate advisory services. PRINCIPAL STOCKHOLDERS Culbro beneficially owns 20,087,182 shares of Class B Common Stock, constituting all of the outstanding shares of Class B Common Stock. No shares of Class A Common Stock will be outstanding prior to consummation of the Offering. Following the Offering and before giving effect to the Merger, Culbro will continue to own 20,087,182 shares of Class B Common Stock, constituting 77% of the outstanding Common Stock and 97% of the voting power of the outstanding Common Stock. Pursuant to the Merger, each of the 4,518,472 outstanding shares of Culbro common stock will be converted into the right to receive 4.44557 shares of Class B Common Stock, subject to adjustment for any Culbro stock options exercised prior to the Merger, and each share of Class B Common Stock owned by Culbro will be canceled. As a result, the holders of Culbro common stock immediately preceding the Merger will own 20,087,182 shares of Class B Common Stock, constituting 77% of the outstanding Common Stock and 97% of the voting power of the outstanding Common Stock, following the Merger. For information regarding the Merger, see "The Asset Transfers, the Distribution and the Merger." For a description of the Class A Common Stock and the Class B Common Stock, see "Description of Capital Stock." The following table sets forth certain information regarding beneficial ownership of the (i) Culbro common stock as of February 25, 1997 and (ii) the Common Stock as of December 31, 1996, after giving effect to the Merger, in each case, by each person who is known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, each director and Named Executive Officer of the 58 Company and all directors and executive officers of the Company as a group. Unless otherwise indicated, all shares of Common Stock shown represent Class B Common Stock. Unless otherwise indicted, the address of each person named in the table below is Culbro Corporation, 387 Park Avenue South, New York, New York 10016.
CULBRO COMMON STOCK COMMON STOCK OF THE COMPANY PRIOR TO THE MERGER FOLLOWING THE MERGER ------------------------ ------------------------ SHARES PERCENT SHARES PERCENT BENEFICIALLY OF BENEFICIALLY OF NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) TOTAL OWNED TOTAL - --------------------------------------------------------------------- ----------- ----------- ----------- ----------- Edgar M. Cullman (2)................................................. 974,874 21.6% 4,333,870 16.6% Edgar M. Cullman, Jr. (2)............................................ 891,658 19.7 3,963,927 15.2 Louise B. Cullman (2)(3)............................................. 834,347 18.5 3,709,147 14.2 Susan R. Cullman (2)(3).............................................. 784,529 17.4 3,487,678 13.4 Lucy C. Danziger (2)(3).............................................. 1,051,264 23.3 4,673,467 17.9 John L. Ernst (2).................................................... 420,271 9.3 1,868,343 7.2 B. Bros. Realty Limited Partnership (4).............................. 233,792 5.2 1,039,338 4.0 Gabelli Funds, Inc. (5).............................................. 971,800 21.5 4,320,204 16.6 Dan W. Lufkin........................................................ 14,000(6) * 62,237(6) * Thomas C. Israel..................................................... 9,000(7) * 40,010(7) * Peter J. Solomon..................................................... 5,000(7) * 22,227(7) * Francis T. Vincent, Jr............................................... 5,000(7) * 22,227(7) * John L. Bernbach..................................................... 2,600(6) * 11,558(6) * Graham V. Sherren.................................................... 2,500(6) * 11,113(6) * Bruce A. Barnet...................................................... 4,100(7) * 18,226(7) * Jay M. Green......................................................... 110,900(8) 2.4 493,013(8) 1.9 Austin T. McNamara................................................... 15,400(9) * 68,461(9) * A. Ross Wollen....................................................... 43,368(10) * 192,795(10) * All officers and directors as a group (14 persons)(11)............... 1,692,542 37.5 7,524,313 28.0
- ------------------------ * Less than 1% (1) This information reflects the definition of beneficial ownership adopted by the SEC. Beneficial ownership shown reflects sole investment and voting power, except as reflected in footnote 2. Where more than one person shares investment and voting power in the same shares such shares may be shown more than once. Such shares are reflected only once, however, in the total for all directors and officers. Includes options exercisable within 60 days granted to directors pursuant to the Stock Option Plans for Non-employee Directors and options exercisable within 60 days held by each Named Executive Officer. Excluded are shares held by charitable foundations and trusts of which members of the Cullman and Ernst Group are officers and directors. As of December 20, 1996, a group consisting of Messrs. Cullman, direct members of their families and trusts for their benefit, Mr. Ernst, his sister and direct members of their families and trusts for their benefit, a partnership in which members of the Cullman and Ernst families hold substantial direct and indirect interests and charitable foundations and trusts of which members of the Cullman and Ernst families are directors or trustees, owned an aggregate of approximately 2,237,147 shares of Culbro's common stock (approximately 50% of the outstanding shares of Culbro common stock). Among others, Messrs. Cullman and Mr. Ernst hold investment and voting power or shared investment and voting power over such shares. Certain of such shares are pledged as security for loans payable under standard pledge arrangements. A form filed with the SEC on behalf of the Cullman & Ernst Group states that there is no formal agreement governing the group's holding and voting of such shares but that there is an informal understanding that the persons and entities included in the group will hold and vote together the shares owned by each of them in each case subject to any applicable fiduciary responsibilities. Louise B. Cullman is the wife of Edgar M. Cullman. Susan R. Cullman and Lucy C. Danziger are the daughters of Edgar M. Cullman and Louise B. Cullman. 59 (2) Included within the Culbro shares shown as beneficially owned by Edgar M. Cullman are 863,576 shares in which he holds shared investment and/or voting power; included within the shares shown as beneficially owned by Mr. Ernst are 411,321 shares in which he holds shared investment and/or voting power; and included within the shares shown as beneficially owned by Edgar M. Cullman, Jr. are 751,490 shares in which he holds shared investment and/or voting power. Included within the shares shown as beneficially owned by Louise B. Cullman are 730,937 shares in which she holds shared investment and/or voting power; included within the shares shown as beneficially owned by Susan R. Cullman are 690,042 shares in which she holds shared investment and/or voting power; included within the shares shown as beneficially owned by Lucy C. Danziger are 969,422 shares in which she holds shared investment and/or voting power. Excluded in each case are shares held by charitable foundations and trusts in which such persons or their families or trusts for their benefit are officers and directors. Messrs. Cullman, Ernst and Cullman, Jr. disclaim beneficial interest in all shares over which there is shared investment and/or voting power and in all excluded shares. (3) The address of each of Louise B. Cullman, Susan R. Cullman and Lucy C. Danziger is c/o 641 Lexington Avenue, New York, New York. (4) The address of B. Bros. Realty Limited Partnership is 641 Lexington Avenue, New York, New York. (5) The address of such person is Gabelli Funds, Inc., One Corporate Center, Rye, New York, NY 10580. A form filed with the SEC in September 1991 by Gabelli Funds, Inc. as subsequently amended indicates that the securities have been acquired by Gabelli Funds, Inc. and its wholly-owned subsidiaries on behalf of their investment advisory clients. Culbro has been informed that no individual client of Gabelli Funds, Inc. has ownership of more than 5% of Culbro's common stock. (6) 2,000 of such shares reflect options which, upon consummation of the Merger, will be exercisable for 8,891 shares of Class A Common Stock. (7) 4,000 of such shares reflect options which, upon consummation of the Merger, will be exercisable for 17,782 shares of Class A Common Stock. (8) 110,200 of such shares reflect options which, upon consummation of the Merger, will be exercisable for 489,901 shares of Class A Common Stock. (9) All of such shares reflect options which, upon consummation of the Merger, will be exercisable for 68,461 shares of Class A Common Stock. (10) 30,503 of such shares reflect options which, upon consummation of the Merger, will be exercisable for 135,603 shares of Class A Common Stock. (11) Excluding shares held by certain charitable foundations the officers and/or directors of which include certain officers and directors of the Company. 60 DESCRIPTION OF CAPITAL STOCK The Company's authorized capital stock consists of 50,000,000 shares of Class A Common Stock, 25,000,000 shares of Class B Common Stock and 20,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock"), of which 20,087,182 shares of Class B Common Stock are outstanding. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the form of Amended and Restated Certificate of Incorporation of the Company (the "Amended Certificate") and By-Laws of the Company (the "By-Laws"), a copy of each of which is filed as an exhibit to the Registration Statement (as defined herein) of which this Prospectus forms a part. CLASS A COMMON STOCK AND CLASS B COMMON STOCK The Amended Certificate provides for two classes of common stock, Class A Common Stock and Class B Common Stock, which are substantially identical, except for disparity in voting power. See "Risk Factors--Control by Certain Stockholders; Anti-Takeover Effects of Dual Classes of Stock; Other Anti- Takeover Provisions." Each share of Class A Common Stock entitles the holder of record to one vote and each share of Class B Common Stock entitles the holder of record to ten votes at each annual or special meeting of stockholders, in the case of any written consent of stockholders, and for all other purposes. The holders of Class A Common Stock and Class B Common Stock vote as a single class on all matters submitted to a vote of the stockholders, except as otherwise provided by law. Neither the holders of Class A Common Stock nor the holders of Class B Common Stock have cumulative voting or preemptive rights. The Company, as a condition to counting the votes cast by any holder of Class B Common Stock at any annual or special meeting of stockholders, in the case of any written consent of stockholders, or for any other purpose, may require the furnishing of such affidavits or other proof as it may reasonably request to establish that the Class B Common Stock held by such holder has not been converted, by virtue of the provisions of the Amended Certificate, into Class A Common Stock. The holders of the Class A Common Stock and Class B Common Stock are entitled to receive dividends and other distributions as may be declared thereon by the Board of Directors of the Company out of assets or funds of the Company legally available therefor, subject to the rights of the holders of any series of Preferred Stock and any other provision of the Amended Certificate. The Amended Certificate provides that if at any time a dividend or other distribution in cash or other property is paid on Class A Common Stock or Class B Common Stock, a like dividend or other distribution in cash or other property also will be paid on Class B Common Stock or Class A Common Stock, as the case may be, in an equal amount, except that voting securities paid on the Class B Common Stock may have ten times the number of votes per share as voting securities paid on the Class A Common Stock. In the case of any split, subdivision, combination or reclassification of Class A Common Stock or Class B Common Stock, the shares of Class A Common Stock or Class B Common Stock, as the case may be, also will be split, subdivided, combined or reclassified so that the number of shares of Class A Common Stock and Class B Common Stock outstanding immediately following such split, subdivision, combination or reclassification will bear the same relationship to each other as that which existed immediately prior thereto. In the event of any liquidation, dissolution or winding up of the Company, the holders of Class A Common Stock and the holders of Class B Common Stock are entitled to receive the assets and funds of the Company available for distribution after payments to creditors and to the holders of any Preferred Stock of the Company that may at the time be outstanding, in proportion to the number of shares held by them, respectively, without regard to class. In the event of any corporate merger, consolidation, purchase or acquisition of property or stock, or other reorganization in which any consideration is to be received by the holders of Class A Common Stock or the holders of Class B Common Stock, the holders of Class A Common Stock and the holders of Class B Common Stock will receive the same consideration on a per share basis; except that, if such consideration 61 shall consist in any part of voting securities (or of options or warrants to purchase, or of securities convertible into or exchangeable for, voting securities), the holders of Class B Common Stock may receive, on a per share basis, voting securities with ten times the number of votes per share as those voting securities to be received by the holders of Class A Common Stock (or options or warrants to purchase, or securities convertible into or exchangeable for, voting securities with ten times the number of votes per share as those voting securities issuable upon exercise of the options or warrants to be received by the holders of the Class A Common Stock, or into which the convertible or exchangeable securities to be received by the holders of the Class A Common Stock may be converted or exchanged). The Amended Certificate provides that no person holding record or beneficial ownership of shares of Class B Common Stock (a "Class B Holder") may transfer, and the Company will not register the transfer of, such shares of Class B Common Stock, except to a Permitted Transferee. For purposes of the foregoing, the issuance of shares of Class B Common Stock to holders of Culbro common stock as a result of the Merger will not be deemed to be a transfer. A transfer to a Permitted Transferee generally means a transfer to an affiliate of the Class B Holder, which may include transfers into estates, from trusts to their beneficiaries and from owners into trusts. In certain circumstances set forth in the Amended Certificate, the change in ownership or control of a record or beneficial holder of Class B Common Stock will also result in the conversion of such holder's Class B Common Stock into Class A Common Stock. Notwithstanding the foregoing, any holder of Class B Common Stock may pledge shares of Class B Common Stock as collateral for any indebtedness or other obligations without triggering a conversion of such Class B Common Stock into Class A Common Stock. The Amended Certificate also provides that the Company will not register the transfer of any shares of Class B Common Stock unless the transferee and the transferor of such Class B Common Stock have furnished such affidavits and other proof as the Company reasonably may request to establish that such proposed transferee is a Permitted Transferee. In addition, upon any purported transfer of shares of Class B Common Stock not permitted under the Amended Certificate, including as a result of a foreclosure upon shares of Class B Common Stock subject to a pledge, all shares of Class B Common Stock purported to be so transferred will be deemed to be converted into shares of Class A Common Stock, and stock certificates formerly representing such shares of Class B Common Stock will be deemed to represent such number of shares of Class A Common Stock as equals the number of shares of Class A Common Stock into which such shares of Class B Common Stock could be converted pursuant to the terms of the Amended Certificate. PREFERRED STOCK The Board of Directors, without further stockholder authorization, is authorized to issue, from time to time, Preferred Stock in one or more series, to establish the number of shares to be included in any such series and to fix the designations, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof, including dividend rights and preferences over dividends on the Common Stock, conversion rights, voting rights, redemption rights, the terms of any sinking fund therefor and rights upon liquidation. The ability of the Board of Directors of the Company to issue Preferred Stock, while providing flexibility in connection with financing, acquisitions and other corporate purposes, could have the effect of discouraging, deferring or preventing a change in control of the Company or an unsolicited acquisition proposal, since the issuance of Preferred Stock could be used to dilute the share ownership of a person or entity seeking to obtain control of the Company. In addition, because the Board of Directors of the Company has the power to establish the preferences, powers and rights of the shares of any such series of Preferred Stock, it may afford the holders of any Preferred Stock preferences, powers and rights (including voting rights) senior to the rights of the holders of Common Stock, which could adversely affect the rights of holders of Common Stock. 62 SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW Section 203 ("Section 203") of the General Corporation Law of the State of Delaware (the "DGCL") provides, in general, that a stockholder acquiring more than 15% of the outstanding voting stock of a corporation subject to Section 203 (an "Interested Stockholder") but less than 85% of such stock may not engage in certain Business Combinations (as defined in Section 203) with the corporation for a period of three years subsequent to the date on which the stockholder became an Interested Stockholder unless (i) prior to such date the corporation's board of directors approved either the Business Combination or the transaction in which the stockholder became an Interested Stockholder or (ii) the Business Combination is approved by the corporation's board of directors and authorized by a vote of at least 66 2/3% of the outstanding voting stock of the corporation not owned by the Interested Stockholder. The Amended Certificate contains a provision electing not to be governed by Section 203. LIMITATIONS ON DIRECTORS' LIABILITY The Amended Certificate contains a provision which eliminates the personal liability of a director to the Company and its stockholders for certain breaches of his or her fiduciary duty of care as a director. This provision does not, however, eliminate or limit the personal liability of a director (i) for any breach of such director's duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Delaware statutory provisions making directors personally liable, under a negligence standard, for unlawful dividends or unlawful stock repurchases or redemptions or (iv) for any transaction from which the director derived an improper personal benefit. This provision offers persons who serve on the Board of Directors of the Company protection against awards of monetary damages resulting from breaches of their duty of care (except as indicated above), including grossly negligent business decisions made in connection with takeover proposals for the Company. As a result of this provision, the ability of the Company or a stockholder thereof to successfully prosecute an action against a director for a breach of his duty of care has been limited. However, the provision does not affect the availability of equitable remedies such as an injunction or recision based upon a director's breach of his duty of care. The SEC has taken the position that the provision will have no effect on claims arising under the federal securities laws. In addition, the Amended Certificate and By-Laws provide mandatory indemnification rights, subject to limited exceptions, to any person who was or is party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that such person is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. Such indemnification rights include reimbursement for expenses incurred by such person in advance of the final disposition of such proceeding in accordance with the applicable provisions of the DGCL. TRANSFER AGENT AND REGISTRAR Chemical Mellon Shareholder Services, LLC is the transfer agent and registrar for the Common Stock. 63 DESCRIPTION OF THE CREDIT FACILITY On January 21, 1997, General Cigar Co., Inc. entered into a Credit Agreement with certain lenders and The Chase Manhattan Bank ("Chase"), as administrative agent, which provides for credit facilities (collectively, the "Credit Facility") comprised of $60.0 million in term loans and a revolving credit facility aggregating $60.0 million. Net proceeds of the Offering of up to $70.0 million are required to be applied to pay the term loan and to reduce the commitment under the revolving credit facility, provided that the revolving credit facility will not be reduced to less than $50.0 million. At present, indebtedness under the Credit Facility is guaranteed by Culbro, CLR, Imperial Nurseries, Inc., 387 PAS Corp., GCH Transporation, Inc., Villazon & Company, Inc. and Club Macanudo, Inc. and is secured by the stock of such subsidiaries of Culbro. Upon the consummation of the Offering, Culbro, CLR and Imperial Nurseries, Inc. will be released from their guarantees and all collateral will be released. Prior to the consummation of the Offering, borrowings under the Credit Facility will initially bear interest at a rate equal to 2.0% above the rate at which eurodollar deposits for one, two, three or six months (at the Company's option) are offered to Chase in the interbank eurodollar market (the "Eurodollar Rate"), or 1.0% above the "ABR Rate," which is defined as the higher of (i) the rate of interest publicly announced by Chase as its prime rate in effect at its principal office in New York City (the "Prime Rate") and (ii) the federal funds effective rate from time to time plus 0.5%. Following consummation of the Offering, the rate will be the ABR Rate or 0.75% above the Eurodollar Rate. The Credit Facility includes financial and ratio covenants, including fixed charge coverage, current ratio and tangible net worth and maximum leverage tests. The Credit Facility also will include negative covenants including limitations on indebtedness, liens, guarantee obligations, mergers, consolidations, liquidations and dissolutions, sales of assets, leases, dividends and other payments in respect of capital stock, capital expenditures, investments, loans and advances, optional payments and modifications of subordinated and other debt instruments, transactions with affiliates, sale and leasebacks, changes in fiscal year, negative pledge clauses and changes in lines of business. 64 SHARES ELIGIBLE FOR FUTURE SALE Immediately after consummation of the Offering, the Company will have outstanding 6,000,000 shares of Class A Common Stock and 20,087,182 shares of Class B Common Stock, assuming no exercise of the over-allotment option granted to the Underwriters. Of these shares, the 6,000,000 shares of Class A Common Stock sold in the Offering (or a maximum of 6,900,000 shares if the over-allotment option is exercised in full) will be freely tradeable without restrictions or further registration under the Securities Act, unless purchased by "affiliates" of the Company (as that term is defined under the Securities Act). All of the Class B Common Stock will be owned by Culbro and, following the Merger, such shares of Class B Common Stock will be held directly by the former shareholders of Culbro. Immediately after consummation of the Offering, 570,555 shares of Class A Common Stock (2,733,373 shares following consummation of the Merger) will be subject to outstanding options. The Company intends to file a registration statement on Form S-8 under the Securities Act to register the sale of 3,300,000 shares of Class A Common Stock reserved for issuance under the 1997 Stock Option Plan, including 570,555 shares issuable upon exercise of options issued at the time of the consummation of Offering and 2,162,818 shares of Class A Common Stock issuable upon exercise of Culbro Options following the Merger. As a result, any shares of Class A Common Stock issued upon exercise of such stock options will be available, subject to special rules for affiliates, for resale in the public market, subject to applicable lock-up arrangements. In general, under Rule 144, as currently in effect, (i) a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of Class A Common Stock as to which at least two years have elapsed since such shares were sold by the Company or by an affiliate of the Company in a transaction or chain of transactions not involving a public offering ("restricted securities") or (ii) an affiliate of the Company who holds shares of Class A Common Stock that are not restricted securities may sell, within any three-month period, a number of such shares that does not exceed the greater of 1% of the Class A Common Stock then outstanding or the average weekly trading volume in the Class A Common Stock during the four calendar weeks preceding the date on which notice of such sale required under Rule 144 was filed. Sales under Rule 144 also are subject to certain provisions relating to the manner and notice of sale and availability of current public information about the Company. Affiliates of the Company must comply with the requirements of Rule 144, including the two-year holding period requirement, to sell shares of Class A Common Stock that are restricted securities. Furthermore, if a period of at least three years has elapsed from the date restricted securities were acquired from the Company or an affiliate of the Company, a holder of such restricted securities who is not an affiliate of the Company at the time of the sale and has not been an affiliate of the Company at any time during the three months prior to such sale would be entitled to sell such shares without regard to the volume limitation and other conditions described above. The SEC has adopted amendments reducing the required two-year holding period under Rule 144 to one year and reducing the required three-year holding period under Rule 144(k) to two years. The amendments may be relied upon by holders of restricted securities upon publication of the amendments in the Federal Register and will allow such holders to sell restricted securities in the open market significantly earlier than currently permitted. All shares of Class B Common Stock and all shares of Class A Common Stock issuable upon conversion of such shares of Class B Common Stock will be eligible for sale in the public market immediately after consummation of the Merger; provided, that all of such shares held by the members of the Cullman & Ernst Group may be resold only pursuant to, and in accordance with, the volume, manner of sale and other conditions of Rule 144 described above. The Company has agreed that it will not effect the Merger without the prior written consent of DLJ on behalf of the Underwriters for a period of 180 days after the date of this Prospectus. See "Underwriting." Prior to the Offering, there has been no public market for the Class A Common Stock. Although the Company can make no prediction as to the effect, if any, that sales of shares of Class A Common Stock by 65 the Cullman & Ernst Group would have on the market price prevailing from time to time, sales of substantial amounts of Class A Common Stock or the availability of such shares for sale could adversely affect prevailing market prices. Subject to certain exceptions, the Company, the executive officers and directors of the Company, Culbro and certain stockholders of Culbro (who in the aggregate hold 2,276,112 shares of Culbro common stock, or 2,722,623 shares, assuming exercise of outstanding options held by such person) each have agreed that they will not, without the prior written consent of DLJ, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or Culbro common stock or any securities convertible into or exercisable or exchangeable for such Common Stock or Culbro common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such Common Stock or Culbro common stock for a period of 180 days from the date of this Prospectus. UNDERWRITING Subject to certain conditions contained in the Underwriting Agreement, a syndicate of underwriters named below (the "Underwriters"), for whom DLJ and Smith Barney Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company an aggregate of 6,000,000 shares of Class A Common Stock. The number of shares of Class A Common Stock that each Underwriter has agreed to purchase is set forth opposite its name below:
NUMBER OF UNDERWRITERS SHARES - ----------------------------------------------------------------------------------------------------- ---------- Donaldson, Lufkin & Jenrette Securities Corporation.................................................. 2,115,000 Smith Barney Inc..................................................................................... 2,115,000 Cowen & Co........................................................................................... 60,000 ABN Amro Chicago Corporation......................................................................... 60,000 Bear, Stearns & Co. Inc.............................................................................. 60,000 Alex. Brown & Sons Incorporated...................................................................... 60,000 Dean Witter Reynolds Inc............................................................................. 60,000 Deutsche Morgan Grenfell Inc......................................................................... 60,000 Dillon, Read & Co. Inc............................................................................... 60,000 A.G. Edwards & Sons, Inc............................................................................. 60,000 Furman Selz LLC...................................................................................... 60,000 Goldman, Sachs & Co.................................................................................. 60,000 Merrill Lynch, Pierce, Fenner & Smith Incorporated................................................... 60,000 Montgomery Securities................................................................................ 60,000 Morgan Stanley & Co. Incorporated.................................................................... 60,000 Oppenheimer & Co., Inc............................................................................... 60,000 Prudential Securities Incorporated................................................................... 60,000 Salomon Brothers Inc................................................................................. 60,000 Anderson & Strudwick, Inc............................................................................ 30,000 Arnhold and S. Bleichroeder, Inc..................................................................... 30,000 Brean Murray, & Co., Inc............................................................................. 30,000 Chatsworth Securities LLC............................................................................ 30,000 Cleary Gull Reiland & McDevitt Inc................................................................... 30,000 Doft & Co., Inc...................................................................................... 30,000 First of Michigan Corporation........................................................................ 30,000 Gabelli & Company, Inc............................................................................... 30,000 Gerard Klauer Mattison & Co., LLC.................................................................... 30,000 Interstate/Johnson Lane Corporation.................................................................. 30,000 Johnston, Lemon & Co. Incorporated................................................................... 30,000
66
NUMBER OF UNDERWRITERS SHARES - ----------------------------------------------------------------------------------------------------- ---------- Legg Mason Wood Walker, Incorporated................................................................. 30,000 McDonald & Company Securities, Inc................................................................... 30,000 Nutmeg Securities Ltd................................................................................ 30,000 Ohio Company......................................................................................... 30,000 Ormes Capital Markets, Inc........................................................................... 30,000 Parker/Hunter Incorporated........................................................................... 30,000 Pennsylvania Merchant Group Ltd...................................................................... 30,000 Pryor, McClendon, Counts & Co., Inc.................................................................. 30,000 Raymond James & Associates, Inc...................................................................... 30,000 Redwine & Company, Inc............................................................................... 30,000 Rickel and Associates, Inc........................................................................... 30,000 Roney & Co., L.L.C................................................................................... 30,000 Ryan, Beck & Co...................................................................................... 30,000 Sands Brothers & Co., Ltd............................................................................ 30,000 Van Kasper & Company................................................................................. 30,000 H. C. Wainwright & Co., Inc.......................................................................... 30,000 ---------- Total................................................................................................ 6,000,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the several Underwriters to purchase the shares of Class A Common Stock offered hereby are subject to approval of certain legal matters by their counsel and to certain other conditions. If any of the shares of Class A Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, the Underwriters are obligated to purchase all such shares (other than those covered by the over-allotment option described below). Of the shares of Class A Common Stock offered hereby, 300,000 shares have been reserved (the "Reserved Shares") for sale to certain individuals, including employees of the Company and members of their families. The Reserved Shares will be sold at a price per share equal to the Price to the Public set forth on the cover page of this Prospectus. The number of shares available to the general public will be reduced to the extent those persons purchase Reserved Shares. Any shares not so purchased will be offered in the Offering at the price to the public set forth on the cover page of this Prospectus. Prior to this Offering, there has been no established trading market for the Class A Common Stock. The initial price to the public for the Class A Common Stock set forth on the cover page of this Prospectus has been determined by negotiation between the Company and the Representatives. The principal factors considered in determining the initial price to the public were the information set forth in this Prospectus and otherwise available to the Representatives, the history and prospects for the industry in which the Company competes, the ability of the Company's management, the past and present operations of the Company, the historical results of operations, the prospects for future earnings of the Company, the present state of the Company's development, the general condition of the securities markets at the time of the offering and the recent market prices and the demand for publicly traded common stock of generally comparable companies. The Company has been advised by the Underwriters that they propose to offer the shares of Class A Common Stock to the public initially at the price to the public set forth on the cover page of this Prospectus and to certain dealers (who may include the Underwriters) at such price, less a concession not in excess of $0.71 per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $0.10 per share to certain other dealers. After the initial public offering, the price to the public, the concession and the discount to dealers may be changed by the Representatives. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 900,000 additional shares of Class A Common Stock at the initial price to the 67 public less underwriting discounts and commissions, solely to cover over-allotments. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. In the Underwriting Agreement, the Company and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. Subject to certain exceptions, the Company, the executive officers and directors of the Company, Culbro and certain stockholders of Culbro each have agreed that they will not, without the prior written consent of DLJ, offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any shares of Common Stock or Culbro common stock or any securities convertible into or exercisable or exchangeable for such Common Stock or Culbro common stock or in any other manner transfer all or a portion of the economic consequences associated with the ownership of any such Common Stock or Culbro common stock for a period of 180 days from the date of this Prospectus. From time to time in the ordinary course of their businesses, affiliates of certain of the Underwriters have engaged and may in the future engage in general financing and banking transactions with the Company and its affiliates. At the request of the Company, the Underwriters have agreed to pay Peter J. Solomon Securities Company Limited a fee of $700,000 related to its acting as a financial advisor to the Company in connection with the Offering. Peter J. Solomon, a Director of the Company, is the Chairman of Peter J. Solomon Securities Company Limited. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Latham & Watkins, New York, New York. Frederick M. Danziger, Of Counsel to Latham & Watkins, is a Director and shareholder of Culbro and a member of the Cullman & Ernst Group. See "Certain Relationships and Related Transactions." Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn & Crutcher LLP, New York, New York. EXPERTS The Combined Financial Statements of General Cigar Holdings, Inc. as of December 2, 1995 and November 30, 1996 and for each of the fiscal years ended December 3, 1994, December 2, 1995 and November 30, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The Consolidated Financial Statements of Villazon & Company, Inc. and Subsidiary as of December 31, 1995 and October 31, 1996 and for each of the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse LLP, independent certified public accountants, given on the authority of said firm as experts in auditing and accounting. The Financial Statements of Honduras American Tabaco, S.A. de C.V. as of December 31, 1995 and October 31, 1996, and for each of the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996 included in this Prospectus have been so included in reliance on the report of Price Waterhouse, independent accountants, given on the authority of said firm as experts in auditing and accounting. 68 ADDITIONAL INFORMATION The Company has filed with the SEC, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and to the exhibits and schedules filed therewith. Statements contained in this Prospectus as to the contents of any contract or other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document as filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected by anyone without charge at the SEC's principal office in Washington D.C., at the regional offices of the SEC located at 7 World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661 and through the SEC's internet site at www.sec.gov. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed by the SEC. 69 INDEX TO FINANCIAL STATEMENTS
PAGE --------- GENERAL CIGAR HOLDINGS, INC. Report of Independent Accountants.......................................................................... F-2 Combined Balance Sheet as of December 2, 1995 and November 30, 1996........................................ F-3 Combined Statement of Operations for the Fiscal Years Ended December 3, 1994, December 2, 1995 and November 30, 1996................................................................................................. F-4 Combined Statement of Cash Flows for the Fiscal Years Ended December 3, 1994, December 2, 1995 and November 30, 1996................................................................................................. F-5 Notes to Combined Financial Statements..................................................................... F-6 VILLAZON & COMPANY, INC. AND SUBSIDIARY Report of Independent Certified Public Accountants......................................................... F-21 Consolidated Balance Sheets as of December 31, 1995 and October 31, 1996................................... F-22 Consolidated Statements of Income for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended October 31, 1996................................................................................... F-23 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended October 31, 1996............................................................ F-24 Consolidated Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended October 31, 1996................................................................................... F-25 Notes to Consolidated Financial Statements................................................................. F-26 HONDURAS AMERICAN TABACO, S.A. DE C.V. Report of Independent Accountants.......................................................................... F-33 Balance Sheets as of December 31, 1995 and October 31, 1996................................................ F-34 Statements of Operations and Retained Earnings for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended October 31, 1996........................................................................ F-35 Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 and for the Ten Months Ended October 31, 1996......................................................................................... F-36 Notes to Financial Statements.............................................................................. F-37
F-1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of General Cigar Holdings, Inc. In our opinion, the accompanying combined balance sheet and the related combined statements of operations and of cash flows present fairly, in all material respects, the combined financial position of General Cigar Holdings, Inc. (a wholly-owned subsidiary of Culbro Corporation) at December 2, 1995 and November 30, 1996 and the results of their combined operations and their combined cash flows for each of the fiscal years ended December 3, 1994, December 2, 1995 and November 30, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP New York, New York January 28, 1997 F-2 GENERAL CIGAR HOLDINGS, INC. COMBINED BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 2, NOVEMBER 30, 1995 1996 ------------ ------------ PRO FORMA FOR LIABILITY ASSUMPTION NOVEMBER 30, 1996 (1) ------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash................................................................. $ 322 $ 409 $ 409 Accounts receivable, less allowance of $465 and $482................. 23,840 31,295 31,295 Inventories.......................................................... 37,843 53,702 53,702 Other current assets................................................. 3,312 3,673 3,673 ------------ ------------ ------------- Total current assets................................................. 65,317 89,079 89,079 Property and equipment, net.......................................... 46,492 52,507 52,507 Other assets......................................................... 1,846 3,456 3,456 ------------ ------------ ------------- Total assets......................................................... $ 113,655 $ 145,042 $ 145,042 ------------ ------------ ------------- ------------ ------------ ------------- LIABILITIES AND CULBRO INVESTMENT CURRENT LIABILITIES Accounts payable and accrued liabilities............................. $ 20,740 $ 22,827 $ 24,361 Current portion of long-term debt.................................... 945 1,131 1,131 ------------ ------------ ------------- Total current liabilities............................................ 21,685 23,958 25,492 Long-term debt....................................................... 11,352 11,079 54,879 Accrued retirement benefits.......................................... 12,100 12,525 15,409 Deferred income taxes................................................ 2,121 1,057 -- Other noncurrent liabilities......................................... 302 2,704 4,004 ------------ ------------ ------------- Total liabilities.................................................... 47,560 51,323 99,784 Commitments and contingencies (See Note 13).......................... -- -- -- Culbro Investment.................................................... 66,095 93,719 45,258 ------------ ------------ ------------- Total liabilities and Culbro Investment.............................. $ 113,655 $ 145,042 $ 145,042 ------------ ------------ ------------- ------------ ------------ -------------
See Notes to Combined Financial Statements. (1) Reflects the assumption of certain liabilities by the Company. The liabilities include principally the estimated Culbro debt of $43.8 million to be assumed, certain accrued retirement obligations and other items. F-3 GENERAL CIGAR HOLDINGS, INC. COMBINED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS)
FOR THE FISCAL YEARS ENDED, -------------------------------------- DECEMBER 3, DECEMBER 2, NOVEMBER 30, 1994 1995 1996 ----------- ----------- ------------ Net sales............................................................... $ 89,538 $ 124,033 $ 154,676 Cost of goods sold...................................................... 54,285 69,683 86,240 ----------- ----------- ------------ Gross profit............................................................ 35,253 54,350 68,436 Selling, general and administrative expenses............................ 27,210 36,726 44,593 Other nonrecurring expense.............................................. -- -- 3,600 ----------- ----------- ------------ Operating profit........................................................ 8,043 17,624 20,243 Gain on insurance settlement............................................ -- 2,586 -- Other nonoperating (expense) income..................................... (23) (597) 853 Interest expense........................................................ 607 1,049 951 ----------- ----------- ------------ Income before income taxes.............................................. 7,413 18,564 20,145 Income tax provision.................................................... 2,863 7,240 7,738 ----------- ----------- ------------ Net income.............................................................. $ 4,550 $ 11,324 $ 12,407 ----------- ----------- ------------ ----------- ----------- ------------
See Notes to Combined Financial Statements. F-4 GENERAL CIGAR HOLDINGS, INC. COMBINED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE FISCAL YEARS ENDED, -------------------------------------- DECEMBER 3, DECEMBER 2, NOVEMBER 30, 1994 1995 1996 ----------- ----------- ------------ OPERATING ACTIVITIES: Net income.............................................................. $ 4,550 $ 11,324 $ 12,407 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization......................................... 3,271 3,550 3,813 Gain on insurance settlement.......................................... -- (2,586) -- Deferred income taxes................................................. 43 (236) (1,064) Changes in assets and liabilities which increase (decrease) cash: Accounts receivable................................................. 302 (10,600) (7,492) Inventories......................................................... 1,571 (733) (15,859) Other current assets................................................ (212) (1,204) (361) Accounts payable and accrued liabilities............................ 2,000 9,834 2,087 Accrued retirement benefits......................................... 453 843 425 Other, net............................................................ 705 (656) 1,125 ----------- ----------- ------------ Net cash provided by (used in) operating activities..................... 12,683 9,536 (4,919) ----------- ----------- ------------ INVESTING ACTIVITIES: Additions to property and equipment..................................... (1,884) (2,841) (9,701) Proceeds from insurance settlement...................................... 500 2,225 -- ----------- ----------- ------------ Net cash used in investing activities................................... (1,384) (616) (9,701) ----------- ----------- ------------ FINANCING ACTIVITIES: Net transactions with Culbro............................................ (15,131) (13,389) 15,217 Increase in debt........................................................ 5,000 5,000 476 Repayment of indebtedness............................................... (734) (673) (563) Class A Common Stock issuance costs..................................... -- -- (423) ----------- ----------- ------------ Net cash (used in) provided by financing activities..................... (10,865) (9,062) 14,707 ----------- ----------- ------------ Net increase (decrease) in cash......................................... 434 (142) 87 Cash at beginning of period............................................. 30 464 322 ----------- ----------- ------------ Cash at end of period................................................... $ 464 $ 322 $ 409 ----------- ----------- ------------ ----------- ----------- ------------
See Notes to Combined Financial Statements. F-5 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. CERTAIN TRANSACTIONS The accompanying combined financial statements include the accounts of General Cigar Holdings, Inc. (the "Company")(See Note 3--Basis of Presentation), and reflect its financial position, results of operations and cash flows after elimination of intercompany accounts and transactions. The Company, a wholly-owned subsidiary of Culbro Corporation ("Culbro"), was formed on December 12, 1996 and holds all of the outstanding stock of General Cigar Co., Inc. ("General Cigar"). The Company has no business operations of its own and its principal asset is all of the outstanding stock of General Cigar. In January 1997, in addition to the transfer of all of the outstanding Common Stock of General Cigar Co., Inc., certain other assets, including principally 1,100 acres of land, all of the outstanding common stock of 387 PAS Corp. ("387 PAS"), Club Macanudo, Inc., Club Macanudo (Chicago), Inc. and GCH Transportation, Inc. were transferred to the Company (the "Additional Asset Transfers") and the Company assumed certain related liabilities and substantially all of the debt of Culbro in accordance with the terms of a Distribution Agreement (the "Distribution Agreement") among the Company, Culbro and Culbro Land Resources, Inc. ("CLR"). The Additional Asset Transfers are reflected in the accompanying combined financial statements at Culbro's historical cost. The Additional Asset Transfers, the transfer of General Cigar Stock and the assumption by the Company of the liabilities and debt of Culbro referred to above are herein collectively referred to as the "Asset Transfers." The Distribution Agreement also provides for the assumption of employee benefit arrangements of Culbro by the Company, for a tax sharing agreement and for a potential distribution of the stock (the "Distribution") of CLR to Culbro's shareholders. Following the Distribution, subject to certain conditions, Culbro will be merged (the "Merger") with and into the Company. Such transactions are not reflected in the accompanying combined financial statements. 2. VILLAZON ACQUISITION On January 21, 1997, the Company completed its acquisition of two affiliated companies, Villazon and Company, Inc., a U.S. corporation, and Honduras American Tabaco, S.A. de C.V., a Honduran corporation (collectively "Villazon"), for approximately $81.4 million consisting of $90.5 million of purchase price and direct acquisition costs, less $9.1 million of cash acquired. $64.6 million of cash was paid at closing and $24.4 million aggregate principal amount of seller notes were issued (the "Villazon Acquisition"). Both companies are engaged in the cigar business. The Villazon Acquisition will be accounted for using the purchase method of accounting. Cost in excess of the fair value of net assets acquired, primarily trade names and other intangible assets, is expected to be approximately $71 million. The Company secured a loan to finance the acquisition, and anticipates that the loan will be repaid either entirely or partially, with the proceeds from the expected Offering. (See Notes 4 and 7) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying combined financial statements of the Company include the accounts of General Cigar, Club Macanudo, Inc. ("Club Macanudo") and 387 PAS. Club Macanudo was incorporated in 1995 and operates a cigar bar in New York City, which opened on May 1, 1996. 387 PAS holds Culbro's corporate headquarters which is approximately 80% leased to unrelated commercial tenants. Club Macanudo and 387 PAS were not material to the Company's results of operations in any of the periods presented. Subsequent to November 30, 1996, the Company formed Club Macanudo (Chicago), Inc., which will operate a cigar bar in Chicago and GCH Transportation, Inc., a non operating entity which owns certain of the Company's transportation equipment. F-6 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The combined financial statements have been presented as if the Company had operated as an independent stand-alone entity for all periods presented. Such financial statements may not necessarily present the financial position, results of operations and cash flows the Company would have reported had it actually operated as a stand-alone entity. See Note 4 for unaudited combined condensed pro forma financial information. FISCAL YEAR The Company's fiscal year ends on the Saturday nearest November 30. Fiscal 1994, 1995 and 1996 ended on December 3, 1994, December 2, 1995 and November 30, 1996, respectively. Fiscal 1994 contained 53 weeks and fiscal 1995 and 1996 contained 52 weeks. RECLASSIFICATION Certain amounts in the prior years financial statements have been reclassified to conform to the current year's presentation. INVENTORIES The Company's inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") method. Raw materials include tobacco in the process of aging, a substantial amount of which will not be used or sold within one year. It is industry practice to include such inventories in current assets. Raw materials also include tobacco in bond which is subject to customs duties payable upon withdrawal from bond. Following industry practice, the Company does not include such duties in inventories until paid. PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation is determined on a straight-line basis over the estimated useful asset lives for financial reporting purposes and principally on accelerated methods for tax purposes. REVENUE RECOGNITION Sales and the related cost of sales are recognized upon shipment of products. The Company generally accepts returns of cigars that are stale or damaged in transit. Sales revenue is recorded net of anticipated returns based on historical experience. Sales returns are not material. ADVERTISING AND PROMOTION EXPENSE Advertising and promotion costs are expensed when incurred. Production costs of future media advertising are deferred until the advertising first occurs. FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts included in the financial statements for accounts receivable, accounts payable and accrued liabilities reflect their fair values because of the short-term maturity of these instruments. The fair values of the Company's other financial instruments are discussed in Note 7. F-7 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER SHARE The Company is a wholly-owned subsidiary of Culbro and its historical capital structure does not permit a meaningful presentation of earnings per share. Accordingly, earnings per share are not presented herein. RECENTLY ISSUED ACCOUNTING STANDARDS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain intangibles held and used by a business entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company continually reviews its long-lived assets and intangible assets, considering future performance of those assets in assessing the need for adjustments to their carrying values. The Company will perform such reviews in the future in accordance with the methods prescribed by SFAS No. 121. In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based Compensation." This Statement establishes a fair value method of accounting for, or disclosing, stock-based compensation plans. The Company intends to adopt the disclosure provisions of this standard which require disclosing the pro forma effect on net income and earnings per share of the fair value method of accounting for stock-based compensation. The adoption of the disclosure provisions will not affect combined financial condition, results of operations, or cash flows. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the period reported. Actual results could differ from those estimates. Estimates are used when accounting for allowance for uncollectible accounts receivable, depreciation and amortization, employee benefit plans, taxes, and contingencies, among others. 4. COMBINED CONDENSED PRO FORMA FINANCIAL INFORMATION (UNAUDITED) The following combined condensed unaudited pro forma financial information reflects the Company as if the liability portion of the Asset Transfers had occurred and the Villazon Acquisition had been consummated. The unaudited pro forma combined condensed statement of operations assumes that the transactions took place at the beginning of fiscal 1996. The unaudited pro forma combined condensed balance sheet assumes that the items discussed above occurred at the balance sheet date. The unaudited pro forma financial information presented herein may not necessarily reflect the results of operations and financial position had these items discussed above actually taken place on these dates. The pro forma financial information reflects the elimination of intercompany accounts. F-8 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 4. COMBINED CONDENSED PRO FORMA FINANCIAL INFORMATION (UNAUDITED) (CONTINUED) COMBINED CONDENSED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS)
NOVEMBER 30, 1996 ------------ Net sales....................................................................... $ 196,694 ------------ Operating profit................................................................ 32,324 Other nonoperating income, net.................................................. 1,532 Interest expense................................................................ 11,669 ------------ Income before income taxes...................................................... 22,187 Income tax provision............................................................ 8,535 ------------ Net income...................................................................... $ 13,652 ------------ ------------
COMBINED CONDENSED PRO FORMA BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS)
NOVEMBER 30, 1996 ------------ Current assets.................................................................. $ 110,788 Property and equipment, net..................................................... 56,857 Intangible assets............................................................... 71,352 Other assets.................................................................... 5,798 ------------ Total assets.................................................................... $ 244,795 ------------ ------------ Current liabilities............................................................. $ 101,295 Long-term debt.................................................................. 72,029 Other noncurrent liabilities.................................................... 26,213 ------------ Total liabilities............................................................... 199,537 Culbro Investment............................................................... 45,258 ------------ Total liabilities and Culbro Investment......................................... $ 244,795 ------------ ------------
5. RELATED PARTY TRANSACTIONS CULBRO INVESTMENT The Company maintained an intercompany account with Culbro in which the intercompany transactions including cash transfers and the liability for benefit and insurance costs and allocated general and administrative expenses described below were recorded. The balance in the intercompany account at the end of each period presented has been included in Culbro Investment in the combined balance sheet. The F-9 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. RELATED PARTY TRANSACTIONS (CONTINUED) Culbro Investment account also includes the cumulative net earnings of the Company and its capital stock. The changes in the Culbro Investment account are summarized as follows:
FOR THE FISCAL YEARS ENDED, -------------------------------------- DECEMBER 3, DECEMBER 2, NOVEMBER 30, 1994 1995 1996 ----------- ----------- ------------ (DOLLARS IN THOUSANDS) Balance beginning of year............................................... $ 78,741 $ 68,160 $ 66,095 Net income............................................................ 4,550 11,324 12,407 ----------- ----------- ------------ 83,291 79,484 78,502 ----------- ----------- ------------ Transactions with Culbro: Net operating cash flow transferred to Culbro......................... (23,483) (29,409) (3,290) Allocated Culbro general and administrative expenses.................. 5,489 8,780 7,169 Allocated Culbro other nonrecurring expense........................... -- -- 3,600 Intercompany income taxes............................................. 2,863 7,240 7,738 ----------- ----------- ------------ Total transactions with Culbro, net..................................... (15,131) (13,389) 15,217 ----------- ----------- ------------ Balance end of year..................................................... $ 68,160 $ 66,095 $ 93,719 ----------- ----------- ------------ ----------- ----------- ------------ Average intercompany balance due from Culbro............................ $ (5,097) $ (19,357) $ (18,443) ----------- ----------- ------------ ----------- ----------- ------------
At the end of each month during the three year period ended November 30, 1996, the Company provided cumulative cash flow to Culbro. TREASURY Through the date of the expected Offering, the Company's treasury activities will remain integrated into Culbro's cash management system. The Company's cash receipts are transferred daily into Culbro's cash account and the Company's cash disbursement accounts are reimbursed by Culbro on a daily basis. The difference between cash transferred by the Company to Culbro and reimbursements by Culbro to the Company's disbursement accounts has been reflected in Culbro Investment in the combined balance sheet. INTERCOMPANY ACTIVITIES The Company's employees participate in certain benefit programs which are sponsored and administered by Culbro. See Note 8 for discussion of employee benefit plan costs. The Company's risk insurance and employee medical coverage are provided through insurance policies and programs purchased by Culbro on behalf of the Company and Culbro's other subsidiaries. The cost of these items was allocated based on the specific insurance data related to each subsidiary. All direct charges relating to the Company for these services, and the Company's participation in these plans have been charged to the Company by Culbro, and included in the Company's combined financial statements. A substantial amount of Culbro management time and resources were related to the operations of the Company, and Culbro also performed certain specific administrative functions for the Company, including legal, tax, treasury, human resources and internal audit. In addition to the direct charges above for employee benefits and risk insurance, the combined statement of operations reflects general and administrative expenses of $5.5 million, $8.8 million and $7.2 million for 1994, 1995 and 1996, respectively, F-10 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 5. RELATED PARTY TRANSACTIONS (CONTINUED) allocated by Culbro to the Company for these services. These charges were based principally on the Company's proportionate share of expenses relating to the Culbro corporate activities associated with the Company's operations and are considered by management to be reasonable. These amounts may not necessarily be indicative of the additional general and administrative expenses the Company would have incurred had it operated independently during the years presented. No interest has been charged or paid to Culbro on the net investment account, and accordingly intercompany interest expense has not been included in the combined statements of operations. See Notes 4 and 7. OTHER RELATED PARTY TRANSACTIONS During 1996, the Company entered into transactions in the ordinary course of business, with entities with which certain stockholders and board of directors members of Culbro are associated. In 1996 the aggregate cost of such services to these firms was approximately $2.3 million. 6. INTERCOMPANY INCOME TAXES All current tax liabilities were paid by Culbro and accordingly the Company's current tax liabilities are reflected in the Culbro Investment account. Historically, the combined results of operations of the Company were included in Culbro's consolidated U.S. federal income tax returns, and will be included in such returns until the Distribution and Merger are consummated. The income tax provisions and deferred tax liabilities have been calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" as if the Company had filed separate tax returns. The provision for income taxes is summarized as follows:
1994 1995 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) Current: Federal........................................................ $ 2,374 $ 6,435 $ 7,647 State and local................................................ 446 1,041 1,155 Deferred, principally federal.................................... 43 (236) (1,064) --------- --------- --------- $ 2,863 $ 7,240 $ 7,738 --------- --------- --------- --------- --------- ---------
The reasons for the difference between the United States statutory income tax rate and the effective rates are shown in the following table:
1994 1995 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) Tax expense at statutory rates................................... $ 2,520 $ 6,497 $ 7,051 State and local income taxes..................................... 294 677 751 Other............................................................ 49 66 (64) --------- --------- --------- $ 2,863 $ 7,240 $ 7,738 --------- --------- --------- --------- --------- ---------
F-11 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 6. INTERCOMPANY INCOME TAXES (CONTINUED) The significant components of net deferred tax liabilities are as follows:
1995 1996 --------- --------- (DOLLARS IN THOUSANDS) Depreciation............................................................ $ 7,094 $ 7,015 Postretirement benefit liabilities...................................... (2,303) (2,367) Pension liabilities..................................................... (1,826) (1,901) Other................................................................... (844) (1,690) --------- --------- $ 2,121 $ 1,057 --------- --------- --------- ---------
In connection with the expected Offering, Culbro and the Company will enter into a Tax Sharing Agreement which will provide, among other things, for the allocation between CLR and the Company of federal, state, local and foreign tax liabilities for all periods through the Distribution and Merger. With respect to the consolidated tax returns filed by Culbro, the Tax Sharing Agreement will provide that the Company will be liable for any amounts that it would have been required to pay with respect to any deficiencies assessed, generally as if it had filed separate tax returns. 7. LONG-TERM DEBT Long-term debt includes:
DECEMBER 2, NOVEMBER 30, 1995 1996 ----------- ------------ (DOLLARS IN THOUSANDS) Building mortgage................................................. $ 5,000 $ 5,000 Equipment loan.................................................... 4,488 4,218 Capital leases.................................................... 2,809 2,992 ----------- ------------ Total............................................................. 12,297 12,210 Less: due within one year......................................... 945 1,131 ----------- ------------ Total long-term debt.............................................. $ 11,352 $ 11,079 ----------- ------------ ----------- ------------
As of November 30, 1996, the annual payment requirements under the terms of the building mortgage and equipment loan, for the years 1997 through 2001 are $0.3 million, $0.4 million, $5.4 million, $0.4 million and $0.4 million, respectively. The building mortgage is on the 387 PAS corporate office building which had a net book value of $29.5 million at November 30, 1996. The mortgage, which bears interest at 2.0% above LIBOR, matures in March 1999 and requires periodic payments of only interest until maturity. The equipment loan was entered into in January 1994, and bears interest at 7.25% per annum and has a term of ten years, with a balloon payment of $1.2 million due at maturity. The equipment had a net book value of $3.0 million at November 30, 1996. On January 21, 1997, the Company entered into a Credit Agreement with certain banks which provided financing of $120.0 million for the Villazon Acquisition, for repayment of the Culbro debt obligation assumed by the Company in the liability portion of the Asset Transfers and for general working capital purposes. The Credit Agreement includes a $60.0 million term loan, due on January 20, 1998 that is required to be prepaid at the time of and with a portion of the proceeds from the expected Offering, and a revolving credit facility of $60.0 million, which expires in January 2000. Proceeds from the expected F-12 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM DEBT (CONTINUED) Offering will be used to repay the term loan and reduce amounts outstanding under the revolving credit facility. In accordance with the terms of the Credit Agreement, during the period prior to the completion of the expected Offering, the borrowings under the term loan and revolving credit facility will bear interest, at the Company's option, of either (1) 1% above the Alternate Base Rate ("ABR"), which is defined as the greater of the Prime Rate or the Federal Funds Effective Rate plus 0.5%, (2) the Eurodollar rate plus 2%, or (3) a combination thereof. After completion of the expected Offering, provided that the Offering generates proceeds of at least $70.0 million, the borrowings under the revolving credit facility will bear interest, at the Company's option, of either (1) the ABR, (2) the Eurodollar rate plus 0.75% or (3) a combination thereof. The Company will pay a commitment fee of 3/8 of 1% on the unused portion of the revolving credit facility prior to the expected Offering and 1/4 of 1% after the expected Offering provided the Offering generates proceeds of at least $70 million. The Credit Agreement includes limitations on indebtedness, investments and other significant transactions, as defined. The Company expects to assume approximately $43.8 million of Culbro debt prior to the Offering as part of the Culbro obligations assumed under the liability portion of the Asset Transfers. This debt was not an obligation of the Company in earlier periods and the Company generally has been a net cash provider to Culbro. Accordingly, this debt and its related interest expense were not part of the Company's capital structure in the combined financial statements for any of the periods presented. Management believes that the amounts reflected on the balance sheet for debt obligations reflect their current market values based on market interest rates for comparable risks, maturities and collateral. F-13 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. RETIREMENT BENEFITS PENSION PLAN The Company's employees participate in Culbro's noncontributory defined benefit pension plan, which covers substantially all employees of Culbro and its subsidiaries. The plan's benefits are based on employees' years of service and compensation. Contributions to the plan are made in accordance with the provisions of the Employee Retirement Income Security Act. Pension expense of $0.6 million, $0.4 million and $0.7 million for 1994, 1995 and 1996, respectively, included in the combined statement of operations reflects the Company's proportionate share of Culbro's consolidated pension expense based on the benefit costs attributable to its employees, as determined by the plan's actuaries. Pension expense in 1996 included $0.3 million related to early retirement of certain of the Company's employees. The Company intends to maintain this plan and will be directly responsible for all of the pension obligations of the plan, including those relating to its employees and its former employees, as well as all vested employees of Culbro and its subsidiaries under the plan. The Company expects to continue to provide its current employees with the existing level of benefits under the plan; all other Culbro employees will cease to be active participants in the plan. In connection with the Distribution and Merger, the Company and CLR will enter into an Employee Benefits Administration Agreement for the purpose of defining the responsibilities for the administration of the plan. As of November 30, 1996, the Plan was overfunded and Culbro has not made any contributions to the plan in the past five years. The pro forma unaudited financial information in Note 4 reflects the effect of the Company's assumption of the Culbro Plan assets and obligations as if it had occurred on the dates noted therein. The status of the Culbro pension plan as determined by the plan's actuaries at December 2, 1995 and November 30, 1996 was as follows (dollars in thousands):
1995 1996 --------- --------- Present value of benefits earned by participants including vested benefits of $53,730 and $52,095 at December 2, 1995 and November 30, 1996, respectively............................................. $ 54,274 $ 52,668 --------- --------- --------- --------- Plan assets at fair value, primarily equities........................ $ 64,639 $ 70,711 Present value of projected benefit obligations....................... 56,882 54,759 --------- --------- Plan assets in excess of projected benefit obligations............... 7,757 15,952 Amount included on Culbro balance sheet.............................. 5,993 6,697 --------- --------- Unrecognized net asset............................................... $ 13,750 $ 22,649 --------- --------- --------- --------- Unrecognized net asset includes: Net gain from experience differences and assumption changes.......... $ 14,190 $ 23,101 Less: Changes due to plan amendments................................. (203) (321) Net pension obligation at adoption of SFAS No. 87............... (237) (131) --------- --------- Unrecognized net asset............................................... $ 13,750 $ 22,649 --------- --------- --------- ---------
Discount rates of 7.50% and 7.75% were used to compute the present value of pension benefits at December 2, 1995 and November 30, 1996, respectively. A 5% rate of increase in future compensation levels was used to estimate the projected pension obligations at both December 2, 1995 and November 30, 1996. The expected rate of return on pension plan assets in 1994, 1995 and 1996 was estimated at 9% representing the average long-term rate expected from the investment of plan assets. F-14 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 8. RETIREMENT BENEFITS (CONTINUED) OTHER POSTRETIREMENT BENEFITS Through the date of the Offering, the Company's employees will participate in Culbro's postretirement benefits program, which provides principally health and life insurance benefits to certain of its retired employees. The cost of such benefits attributable to the Company's employees under the plan's benefit formula was $0.5 million in fiscal 1994 and in fiscal 1995, respectively, and $0.4 million in fiscal 1996. The Company's proportionate share of the present value of the liabilities for accumulated postretirement benefits, as determined by the Plan's actuaries, is shown below. None of these liabilities have been funded at December 2, 1995 and November 30, 1996.
1995 1996 --------- --------- (DOLLARS IN THOUSANDS) Retirees................................................................ $ 3,678 $ 3,434 Fully eligible active participants...................................... 1,474 1,530 Other active participants............................................... 608 361 Unrecognized net gain from experience differences and assumption changes.................................................... 308 907 --------- --------- Liability for other postretirement benefits............................. $ 6,068 $ 6,232 --------- --------- --------- ---------
The Company expects that it will continue to provide its employees with the same level of retiree medical benefits as those provided under the Culbro program. Additionally, the Company will assume approximately $1.1 million of retiree medical benefits related to former Culbro employees. Discount rates of 7.50% and 7.75% were used to compute the accumulated postretirement benefit obligations at December 2, 1995 and November 30, 1996, respectively. Because the Company's obligation for retiree medical benefits is fixed, any increase in the medical cost trend would have no effect on the accumulated postretirement benefit obligation, service cost or interest cost. The adoption of SFAS No. 106 in 1993 has not had an adverse effect on cash flows because postretirement benefits are funded as incurred. 9. STOCK OPTION PLANS Upon consummation of the Merger and Distribution, the Company intends to convert all employee stock options outstanding under Culbro's stock option plans into options to purchase shares of common stock of the Company and shares of common stock of CLR. The number of outstanding options and exercise prices would be adjusted to preserve the value of the options. The combined financial statements of the Company do not reflect any effects that these plans have had in Culbro's consolidated financial statements. The status of, and transactions in, the Culbro stock option plans for the periods presented are as summarized below: EMPLOYEES STOCK OPTION PLANS The Culbro 1996 Stock Plan (the "1996 Plan"), the 1992 Stock Plan (the "1992 Plan") and the 1991 Employees Incentive Stock Option Plan (the "1991 Plan") for officers and key employees, made available 500,000, 300,000 and 210,000 shares of common stock, respectively, for purchase at prices equal to the fair market value at date of grant. A portion of the options outstanding under these plans may be exercised as incentive stock options, which under current tax laws do not provide any tax deductions to Culbro. F-15 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION PLANS (CONTINUED) Options are not exercisable until three years from the date of grant and may be exercised over a period ending not later than ten years from the date of grant. The exercise period for each grant was determined by Culbro's Compensation Committee. At November 30, 1996, a total of 400,000 and 40,300 shares under the 1996 Plan and 1992 Plan, respectively, were available for future grant. There are no shares available for future grant under the 1991 Plan. None of the options outstanding at November 30, 1996 may be exercised as stock appreciation rights. Transactions under the 1996, 1992 and 1991 Plans are summarized as follows: Options outstanding at November 27, 1993.................................. 280,700 Granted during 1994....................................................... 88,300 Expired, canceled and exercised........................................... (33,400) ----------- Options outstanding at December 3, 1994................................... 335,600 Granted during 1995....................................................... 68,000 Expired, canceled and exercised........................................... (92,200) ----------- Options outstanding at December 2, 1995................................... 311,400 Granted during 1996....................................................... 134,400 Expired, canceled and exercised........................................... (103,286) ----------- Options outstanding at November 30, 1996.................................. 342,514 ----------- ----------- Option prices range between:......................................... $12.25 and $80.00 Options exercisable: December 3, 1994.......................................................... 109,000 December 2, 1995.......................................................... 86,100 November 30, 1996......................................................... 78,114 Expiration of the 1991 Plan............................................... 2001 Expiration of the 1992 Plan............................................... 2002 Expiration of the 1996 Plan............................................... 2006 Number of option holders at November 30, 1996............................. 13
CULBRO NONEMPLOYEE DIRECTORS STOCK OPTION PLAN Options granted under the 1996 Stock Option Plan for Nonemployee Directors (the "1996 Non-employee Plan") and the 1992 Stock Option Plan for Nonemployee Directors (the "1992 Nonemployee Plan") will also be converted, after adjustment for dilution, into options to purchase common shares of the Company. Under these plans 70,000 options have been made available to purchase shares of Culbro common stock for purchase at prices equal to the fair market value at date of grant. Options canceled become available for future grant. Options are not exercisable until three years from the date of grant and may be exercised over a period ending not later than eight years from the date of grant. As of November 30, 1996, 18,000 options remained available for future grant under the 1996 Nonemployee Plan and 3,000 options remained available for future grant under the 1992 Nonemployee Plan. None of the options outstanding at November 30, 1996 may be exercised as stock appreciation rights. F-16 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 9. STOCK OPTION PLANS (CONTINUED) Transactions under the 1996 and 1992 Nonemployee Plans are as follows: Options outstanding at November 27, 1993.................................. 14,000 Granted during 1994....................................................... 14,000 ----------- Options outstanding at December 3, 1994................................... 28,000 Granted during 1995....................................................... 14,000 ----------- Options outstanding at December 2, 1995................................... 42,000 Granted during 1996....................................................... 7,000 Exercised during 1996..................................................... (6,000) ----------- Options outstanding at November 30, 1996.................................. 43,000 ----------- ----------- Options prices range between......................................... $14.38 and $63.81 Number of option holders at November 30, 1996............................. 7
EMPLOYMENT AGREEMENT Upon consummation of the Distribution and Merger, an employment agreement entered into in May 1994 between Culbro and an officer of Culbro will become an obligation of the Company. The agreement provides for the issuance of 125,000 Culbro stock options, exercisable at the rate of 25,000 per year from 1995 through 1999 at an option price of $4.00 per share. These options will become options to purchase shares of the Company, and the option price will be adjusted to reflect the dilutive effect referred to above. Through November 30, 1996, 15,000 of these options had been exercised under this agreement. The annual compensation expense for this agreement is $267,000 through April 1999 reflecting the amortization of the difference between the option price and the quoted market price at the date of grant. 10. LEASES The Company has the following noncancelable leases relating principally to a manufacturing facility and vehicles. CAPITAL LEASES Future minimum lease payments under capital leases and the present value of such payments as of November 30, 1996 were:
(DOLLARS IN THOUSANDS) 1997............................................................................. $ 1,124 1998............................................................................. 907 1999............................................................................. 707 2000............................................................................. 430 2001............................................................................. 286 ----------- Total minimum lease payments..................................................... 3,454 Less: Amounts representing interest.............................................. 462 ----------- Present value of minimum lease payments (a)...................................... $ 2,992 ----------- -----------
- ------------------------ (a) Includes current portion of $0.8 million on November 30, 1996. F-17 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 10. LEASES (CONTINUED) At December 2, 1995 and November 30, 1996, buildings, machinery and equipment included capital leases amounting to $3.9 million and $4.2 million, respectively, which is net of accumulated depreciation of $3.1 million and $3.4 million, respectively. Depreciation expense relating to capital leases was $0.7 million in 1994, 1995 and 1996. OPERATING LEASES Future minimum rental payments under noncancellable leases as of November 30, 1996 were:
(DOLLARS IN THOUSANDS) 1997............................................................................. $ 802 1998............................................................................. 771 1999............................................................................. 735 2000............................................................................. 687 2001............................................................................. 544 Later years...................................................................... 2,175 ----------- Total minimum lease payments..................................................... $ 5,714 ----------- -----------
Total rental expense for all operating leases in 1994, 1995 and 1996 was $0.1 million, $0.1 million and $0.6 million, respectively. 11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION NET SALES Excise taxes paid on cigar sales of $5.5 million, $7.0 million and $7.9 million for 1994, 1995 and 1996, respectively, are included in net sales and cost of goods sold. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Included in selling, general and administrative expenses were advertising expenses of $1.0 million, $2.8 million and $4.4 million for 1994, 1995 and 1996, respectively. OTHER NONRECURRING EXPENSE Other nonrecurring expense in 1996 includes the allocation to the Company of charges recorded by Culbro in connection with the termination of a management long-term incentive compensation plan which was based on Culbro's stock price, and the acceleration of the vesting of benefits under the plan, in anticipation of the expected Offering. Additionally, the other nonrecurring expense item includes accruals for severance and related expenses in connection with a headcount reduction at the Culbro corporate office. The Company's allocable share of these expenses was determined substantially on the same basis as the allocation of Culbro's general and administrative expenses referred to in Note 5 and is considered to be reasonable. GAIN ON INSURANCE SETTLEMENT The gain on insurance settlement in the 1995 statement of operations reflects the settlement of a property insurance claim related to a 1994 fire that destroyed an administration and warehouse facility owned and operated by General Cigar. The gain reflected total proceeds of $2.7 million less the book value of the destroyed building. F-18 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 11. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION (CONTINUED) OTHER NONOPERATING INCOME (EXPENSE) Other nonoperating income (expense) includes principally the net results of leasing activity in the 387 PAS office building. In 1995, the net expense included a breakup fee paid and certain other expenses incurred by General Cigar to terminate a proposed agreement to sell approximately fifty percent of its business. INVENTORIES Inventories consists of:
DECEMBER 2, NOVEMBER 30, 1995 1996 ----------- ------------ (DOLLARS IN THOUSANDS) Raw materials and supplies........................................ $ 30,640 $ 43,704 Work-in-process................................................... 2,633 4,529 Finished goods.................................................... 4,570 5,469 ----------- ------------ $ 37,843 $ 53,702 ----------- ------------ ----------- ------------
PROPERTY AND EQUIPMENT Property and equipment consist of:
DECEMBER 2, NOVEMBER 30, ESTIMATED 1995 1996 USEFUL LIVES ----------- ------------ ---------------- (DOLLARS IN THOUSANDS) Land........................................... $ 2,542 $ 2,534 Buildings and improvements..................... 54,592 58,225 10 to 40 years Machinery and equipment........................ 27,830 33,470 3 to 7 years ----------- ------------ 84,964 94,229 Accumulated depreciation....................... (38,472) (41,722) ----------- ------------ $ 46,492 $ 52,507 ----------- ------------ ----------- ------------
Included in land and buildings is the Company's New York City headquarters building, which had a cost of $39.5 million and accumulated depreciation of $10.0 million at November 30, 1996. Total depreciation expense was $3.2 million, $3.5 million and $3.7 million for 1994, 1995, and 1996, respectively. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities include trade payables of $8.0 million and $11.5 million for 1995 and 1996, respectively, accrued salaries, wages and other compensation of $5.8 million and $4.5 million for 1995 and 1996, respectively, and other accrued liabilities of $7.0 million and $6.8 million for 1995 and 1996, respectively, primarily accrued workers compensation and general liability insurance. SUPPLEMENTAL CASH FLOW INFORMATION Tax payments were made by Culbro on behalf of the Company. General Cigar has been included in Culbro's consolidated federal income tax returns (see Note 6). Accordingly, tax payments made by Culbro are reflected in net transactions with Culbro on the combined statement of cash flows. Interest paid by the Company was $0.6 million, $1.0 million and $1.0 million for 1994, 1995 and 1996, respectively. F-19 GENERAL CIGAR HOLDINGS, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 12. BUSINESS SEGMENT INFORMATION The Company's operations are conducted within one business segment comprising the manufacturing and marketing of cigars, sold primarily in the United States, and related activities including the distribution of lighters, and the operation of a cigar bar. The Company's export sales are not material. 13. COMMITMENTS AND CONTINGENCIES A portion of the insurance claims related to the loss of an administration and warehouse facility owned and operated by General Cigar was settled in 1995 (see Note 11), but certain claims remain outstanding. The amounts, if any, for which these claims will be settled cannot be evaluated at this time. In connection with the sale of a former subsidiary by Culbro, the Company remains liable on a machinery lease obligation of approximately $3.0 million assumed by the purchaser of that former subsidiary. At November 30, 1996 the Company has entered into firm commitments for capital expenditures of approximately $5.7 million for the expansion of its manufacturing and distribution facilities and the addition of machinery and equipment. The Company believes that the outcome of currently pending legal proceedings will not, in the aggregate, have a material adverse effect on the Company's combined financial position. F-20 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Shareholders and Directors of Culbro Corporation In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Villazon & Company, Inc. and Subsidiary at December 31, 1995 and at October 31, 1996, and the results of their operations and their cash flows for years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As disclosed in the consolidated financial statements, the Company has extensive transactions and relationships with related parties. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. PRICE WATERHOUSE LLP Tampa, Florida December 20, 1996 F-21 VILLAZON & COMPANY, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......................................................... $5,132,784 $ 9,121,536 Accounts receivable: Trade--less allowance for uncollectible accounts of $3,477 and $0................ 3,951,477 6,372,234 Related party receivables........................................................ 17,587 411,300 Insurance claim receivable....................................................... 104,110 -- Inventories...................................................................... 4,053,521 4,220,111 Advances to suppliers............................................................ -- 593,949 Prepaid expenses................................................................. 203,607 260,106 ------------ ------------ Total current assets........................................................... 13,463,086 20,979,236 Cash surrender value of insurance on lives of officers, net of policy loans of $55,027 and $0..................................................................... 867,186 1,084,949 Available-for-sale securities........................................................ 41,121 46,261 Property, plant and equipment, net................................................... 996,658 926,744 Trademarks, at cost, less amortization of $38,886, and $33,139....................... 99,736 151,504 ------------ ------------ Total assets................................................................... $15,467,787 $ 23,188,694 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Debt due within one year........................................................... $ 479,736 $ 194,590 Accounts payable................................................................... 1,247,268 1,323,496 Related party payables............................................................. 12,662 1,287,223 Income taxes payable............................................................... 34,303 175,978 Accrued liabilities: Bonuses, vacation, salaries and wages............................................ 196,294 428,543 Contribution to profit-sharing plan.............................................. 224,099 186,749 Other............................................................................ 1,423 72,743 ------------ ------------ Total current liabilities...................................................... 2,195,785 3,669,322 ------------ ------------ Excess of fair market value over cost of net assets acquired......................... 170,635 161,747 Long-term debt....................................................................... 3,267,205 5,396,729 Minority interest.................................................................... 290,636 344,765 ------------ ------------ Total liabilities.............................................................. 5,924,261 9,572,563 ------------ ------------ Commitments and contingencies (Notes 8, 9 and 11).................................... -- -- Stockholders' equity: Common stock, $50 par value: authorized 10,000 shares; issued and outstanding 4,264 shares........................................................................... 213,200 213,200 Capital in excess of par value..................................................... 223,659 223,659 Unrealized gains on securities..................................................... 41,121 46,261 Retained earnings.................................................................. 9,065,546 13,133,011 ------------ ------------ Total stockholders' equity..................................................... 9,543,526 13,616,131 ------------ ------------ Total liabilities and stockholders' equity..................................... $15,467,787 $ 23,188,694 ------------ ------------ ------------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-22 VILLAZON & COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED TEN MONTHS DECEMBER 31, ENDED ---------------------------- OCTOBER 31, 1994 1995 1996 ------------- ------------- ------------- Net sales........................................................... $ 22,464,641 $ 27,241,820 $ 34,674,257 ------------- ------------- ------------- Costs and expenses: Cost of sales..................................................... 14,184,218 17,030,427 20,785,924 Selling, general and administrative............................... 4,656,384 5,102,164 4,607,815 ------------- ------------- ------------- 18,840,602 22,132,591 25,393,739 ------------- ------------- ------------- Operating income.................................................... 3,624,039 5,109,229 9,280,518 ------------- ------------- ------------- Other income (expense): Interest income................................................... 32,222 135,937 172,823 Interest expense.................................................. (279,817) (455,815) (475,384) Other............................................................. 60,276 41,224 94,524 ------------- ------------- ------------- (187,319) (278,654) (208,037) ------------- ------------- ------------- Income from continuing operations before income taxes and minority interest.......................................................... 3,436,720 4,830,575 9,072,481 ------------- ------------- ------------- Income taxes: Current........................................................... 89,758 129,220 276,160 Deferred.......................................................... (3,987) 7,643 -- ------------- ------------- ------------- Total income taxes.................................................. 85,771 136,863 276,160 ------------- ------------- ------------- Income before minority interest in earnings......................... 3,350,949 4,693,712 8,796,321 Minority interest share of earnings of consolidated subsidiary...... (16,172) (32,652) (54,129) ------------- ------------- ------------- Net income.......................................................... $ 3,334,777 $ 4,661,060 $ 8,742,192 ------------- ------------- ------------- ------------- ------------- ------------- Earnings per share.................................................. $ 782.08 $ 1,093.12 $ 2,050.23 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-23 VILLAZON & COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1994 AND 1995, AND TEN MONTHS ENDED OCTOBER 31, 1996
COMMON STOCK CAPITAL IN TOTAL ----------------------- EXCESS OF UNREALIZED RETAINED STOCKHOLDERS' SHARES AMOUNT PAR VALUE GAINS EARNINGS EQUITY ----------- ---------- ---------- ----------- ------------- ------------- Balance at December 31, 1993.................. 4,264 $ 213,200 $ 223,659 $ -- $ 5,685,093 $ 6,121,952 Net income for the year 1994................ 3,334,777 3,334,777 Distributions to stockholders............... (1,314,685) (1,314,685) ----- ---------- ---------- ----------- ------------- ------------- Balance at December 31, 1994.................. 4,264 213,200 223,659 7,705,185 8,142,044 Change in unrealized gains on available-for-sale securities............. 41,121 41,121 Net income for the year 1995................ 4,661,060 4,661,060 Distributions to stockholders............... (3,300,699) (3,300,699) ----- ---------- ---------- ----------- ------------- ------------- Balance at December 31, 1995.................. 4,264 213,200 223,659 41,121 9,065,546 9,543,526 Change in unrealized gains on available-for-sale securities............. 5,140 5,140 Net income for the ten months ended October 31, 1996.................................. 8,742,192 8,742,192 Distributions to stockholders............... (4,674,727) (4,674,727) ----- ---------- ---------- ----------- ------------- ------------- Balance at October 31, 1996................... 4,264 $ 213,200 $ 223,659 $ 46,261 $ 13,133,011 $ 13,616,131 ----- ---------- ---------- ----------- ------------- ------------- ----- ---------- ---------- ----------- ------------- -------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-24 VILLAZON & COMPANY, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED TEN MONTHS DECEMBER 31, ENDED -------------------------- OCTOBER 31, 1994 1995 1996 ------------ ------------ ------------ OPERATING ACTIVITIES: Net income.................................................................. $ 3,334,777 $ 4,661,060 $ 8,742,192 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets.................................................... (21,000) -- -- Depreciation and amortization............................................. 123,370 143,910 144,840 Provision for deferred income taxes....................................... (3,987) 7,643 -- Minority interest in earnings............................................. 16,172 32,652 54,129 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable--trade.............................................. (535,237) (575,468) (2,420,757) Accounts receivable--related parties.................................... 24,650 (2,586) (393,713) Insurance claims receivable............................................. -- (104,110) 104,110 Inventories............................................................. 1,052,671 136,697 (166,590) Advances to suppliers................................................... -- -- (593,949) Prepaid expenses........................................................ 56,153 (54,300) (56,499) Trademarks.............................................................. (29,296) (34,069) (60,764) Increase (decrease) in liabilities: Accounts payable........................................................ 306,319 178,439 76,228 Related party payables.................................................. (690,458) (77,500) 1,274,561 Income taxes payable.................................................... 10,989 9,346 141,675 Accrued liabilities..................................................... (8,484) 16,198 266,219 ------------ ------------ ------------ Net cash provided by operating activities................................... 3,636,639 4,337,912 7,111,682 ------------ ------------ ------------ INVESTING ACTIVITIES: Decrease (increase) in cash surrender value of insurance on lives of officers.................................................................. 96,546 (51,655) (217,763) Purchase of property, plant and equipment................................... (46,290) (558,320) (74,818) Proceeds from sale of property, plant and equipment......................... 21,000 -- -- ------------ ------------ ------------ Net cash provided by (used in) investing activities......................... 71,256 (609,975) (292,581) ------------ ------------ ------------ FINANCING ACTIVITIES: Net payments on related party debt.......................................... (9,219) (45,334) (285,146) Net proceeds from long-term debt............................................ 367,844 686,052 2,129,524 Distributions to stockholders............................................... (1,314,685) (3,300,699) (4,674,727) ------------ ------------ ------------ Net cash used by financing activities....................................... (956,060) (2,659,981) (2,830,349) ------------ ------------ ------------ Net increase in cash........................................................ 2,751,835 1,067,956 3,988,752 Cash and cash equivalents at beginning of year.............................. 1,312,993 4,064,828 5,132,784 ------------ ------------ ------------ Cash and cash equivalents at end of year.................................... $ 4,064,828 $ 5,132,784 $ 9,121,536 ------------ ------------ ------------ ------------ ------------ ------------ SUPPLEMENTAL DISCLOSURES: Cash paid for income taxes.................................................. $ 67,217 $ 121,228 $ 133,168 ------------ ------------ ------------ ------------ ------------ ------------ Cash paid for interest...................................................... $ 278,395 $ 455,770 $ 434,704 ------------ ------------ ------------ ------------ ------------ ------------ NONCASH INVESTING AND FINANCING ACTIVITIES: Available-for-sale securities received as a result of demutualization of insurance company......................................................... $ -- $ 41,121 $ 5,140 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying Notes to Consolidated Financial Statements are an integral part of these financial statements. F-25 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Villazon & Company, Inc. (the "Company") is a Florida corporation based in Tampa, Florida. The Company manufactures and sells cigars and related products. The manufacturing operations are located in Tampa, Florida. The distribution operations are based in Upper Saddle River, New Jersey. The principal markets for the Company are within the United States. Approximately 80% of the labor force is covered by a collective bargaining agreement which expires in March 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its majority-owned (79.01%) subsidiary, James B. Russell, Inc. ("JBR"), a New Jersey corporation based in Upper Saddle River, New Jersey. All material intercompany accounts and transactions have been eliminated. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on deposit in time deposit accounts which mature within 90 days of purchase. INVENTORIES Supplies, work in process and finished goods are valued at the lower of cost (using the first-in, first-out method) or market. Leaf tobacco is valued at the lower of cost (using the specific identification method) or market. Leaf tobacco includes tobacco in the process of aging, a substantial amount of which may not be used within one year. It is industry practice to include such inventories as current assets. Leaf tobacco also includes tobacco in bond which is subject to customs duties upon withdrawal from bond. Following industry practice, the Company does not include such duties in inventories until paid. AVAILABLE-FOR-SALE SECURITIES Management determines the appropriate classification of securities at the time of acquisition and re-evaluates such designation as of each balance sheet date. Marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in a separate component of stockholders' equity. Available-for-sale securities at December 31, 1995, and October 31, 1996 are equity securities in an insurance company issued at the time of conversion from a mutual to a stock company with zero cost basis and estimated fair value of $41,121 and $46,261, respectively. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost and depreciated using accelerated methods. Maintenance and repairs are charged to expense as incurred. TRADEMARKS Trademarks consist of registered tradenames of cigars or other tobacco brands, and are initially capitalized at acquisition cost. Costs associated with renewal of trademark registrations are also capitalized. Trademarks are being amortized on a straight line basis over 5 to 15 years. Related amortization expense of $4,343, $10,339 and $8,996 for the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996, respectively, is included in selling, general and administrative expenses. F-26 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EXCESS OF FAIR MARKET VALUE OVER THE COST OF NET ASSETS ACQUIRED The excess of the fair market value over the cost of net assets acquired (negative goodwill) resulted from the acquisition of certain JBR stock and is being amortized on the straight-line basis over 20 years. The related amortization of $10,665, $10,665 and $8,888 for the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996, respectively, is included as a reduction of selling, general and administrative expenses. REVENUE RECOGNITION Sales and the related costs of sales are recognized primarily upon shipment of products. Excise taxes for the years ended December 31, 1994 and 1995, and for the ten months ended October 31, 1996, were approximately $1,005,000, $1,149,000 and $1,232,000, respectively, and are included in net sales and cost of sales in the consolidated statements of income. EARNINGS PER SHARE Earnings per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Primary and fully diluted earnings per share are equivalent. ESTIMATES Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from the estimates. FINANCIAL INSTRUMENTS The Company's financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, cash surrender value of insurance on lives of officers, available-for-sale securities, notes payable, accounts payable and long-term debt. In the opinion of management, the carrying amount of these financial instruments approximates their fair value. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company's customers are geographically dispersed but are concentrated in the tobacco industry. The Company historically has had no material losses on its accounts receivable from customers in excess of allowances provided. The Company's two largest customers accounted for approximately $3,516,139 (16%) and $3,136,208 (14%), $4,048,250 (15%) and $3,633,613 (13%), and $7,292,041 (21%) and $3,848,001 (11%) of net sales for the years ended December 31, 1994 and 1995, and for the ten months ended October 31, 1996, respectively. 3. INVENTORIES Inventories consist of the following:
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ------------ Leaf tobacco..................................................... $ 502,959 $ 917,842 Work in process.................................................. 899,229 1,010,458 Finished goods................................................... 2,218,363 1,832,677 Supplies......................................................... 432,970 459,134 ------------ ------------ $4,053,521 $ 4,220,111 ------------ ------------ ------------ ------------
F-27 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. ADVANCES TO SUPPLIERS Advances to suppliers at October 31, 1996 consist of the following: Advances to tobacco grower........................................ $ 390,000 Advances--other................................................... 203,949 --------- $ 593,949 --------- ---------
During 1996, the Company, under a three year verbal agreement with a tobacco supplier, advanced $390,000 to finance the growing, harvesting, curing and sorting of tobacco. The Company will be reimbursed for its advances from annual proceeds from the sale of crop. In addition, annual net income, if any, of the supplier during the term of the arrangement will be divided equally between the supplier and the financiers of the tobacco growing venture. The Company will have the right of first refusal to purchase its proportionate share of tobacco grown during the term of the arrangement. The Company is at risk for potential crop loss. As of October 31, 1996, no tobacco has been purchased by the Company from the supplier. The Company has also advanced approximately $204,000 to two tobacco suppliers in South America and Mexico during 1996 as a deposit on future purchases. 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and related accumulated depreciation and amortization of capital leases are summarized as follows:
DECEMBER 31, OCTOBER 31, 1995 1996 ------------- ------------- Land............................................................ $ 51,526 $ 51,526 Buildings and improvements...................................... 434,145 434,145 Machinery and equipment......................................... 555,244 550,960 Transportation equipment........................................ 543,423 543,423 Office furniture and equipment.................................. 489,576 518,694 Leasehold improvements.......................................... 205,752 201,130 Ground lease rights............................................. 132,214 132,214 ------------- ------------- 2,411,880 2,432,092 Less accumulated depreciation................................... (1,415,222) (1,505,348) ------------- ------------- $ 996,658 $ 926,744 ------------- ------------- ------------- -------------
Depreciation is determined on the straight-line and accelerated methods using estimated useful lives as follows: 5--31 1/2 Buildings and improvements.................................... years Machinery and equipment....................................... 4--15 years Transportation equipment...................................... 3--12 years Office furniture and equipment................................ 5--10 years Leasehold improvements........................................ 5--10 years
Ground lease rights, including land and building, were acquired in a 1980 acquisition of a cigar company with 72 years of the original 99 year lease term remaining. The portion of the purchase price related to the building is included in buildings and improvements above. The lease rights related to the land are amortized based on the straight-line method over the remaining life of the lease which is 72 years. Depreciation expense was $129,692 and $144,236 in 1994 and 1995, respectively and $144,732 for the ten months ended October 31, 1996. F-28 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DEBT
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ------------ Prime plus 1/2% (8.75% at October 31, 1996) unsecured demand notes payable to related parties............................................................................ $ 461,352 $ 182,649 Prime plus 1/2% (8.75% at October 31, 1996) unsecured notes payable to officers and stockholders, due in 1999 or payable 13 months after notice........................ 3,256,370 5,394,043 12.07% capital lease obligation on vehicles due $1,203 per month through 1997........ 18,685 9,165 10.38% capital lease obligation on UPS manifest system, due $1,912 per quarter through 1997....................................................................... 10,534 5,462 ------------ ------------ 3,746,941 5,591,319 Less amount due within one year...................................................... (479,736) (194,590) ------------ ------------ Long-term debt due after one year.................................................... $3,267,205 $ 5,396,729 ------------ ------------ ------------ ------------
Total interest expense to related parties was $267,634 in 1994, $445,180 in 1995 and $469,569 for the ten months ended October 31, 1996. The maturities of long-term debt at October 31, 1996 are as follows: 1997............................................................ $ 194,590 1998............................................................ -- 1999............................................................ 5,396,729 --------- $5,591,319 --------- ---------
7. RELATED PARTY TRANSACTIONS The Company has had transactions in the normal course of business with various other corporations, certain of whose directors or officers are also directors of the Company. HATSA Certain stockholders of the Company hold a 45% interest in Honduras American Tabaco, S.A. ("HATSA"). The Company purchases cigars, boxes and tobacco leaf from HATSA, and the Company sells tobacco and other supplies purchased from third parties to HATSA. Purchases and sales are netted, resulting in a net receivable or payable to HATSA. The net receivable (payable) was approximately $17,587 at December 31, 1995 and ($1,287,223) at October 31, 1996. Payments to HATSA are made when requested by HATSA. Approximately $5,668,000 in purchases were made in 1994, $7,450,000 in 1995 and $9,637,000 as of October 31, 1996, and approximately $1,590,000 in sales were made in 1994, $2,141,000 in 1995 and $2,618,000 as of October 31, 1996. NATSA Nicaragua American Tabaco, S.A. ("NATSA") was formed in 1996 and is owned by parties related to the Company including a minority stockholder and an employee. The Company began purchasing cigars from NATSA in 1996 and, at October 31, 1996, is the only customer. The Company has advanced money to NATSA for future purchases and sells tobacco purchased from other suppliers to NATSA, resulting in a net receivable from NATSA of approximately $411,300. MANUFACTURERS BANK Certain stockholders and members of the Company's Board of Directors are also stockholders and members of the Board of Directors of The Manufacturers Bank of Florida. The Company uses banking F-29 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RELATED PARTY TRANSACTIONS (CONTINUED) services provided by and purchases certificates of deposit issued by The Manufacturers Bank of Florida. Fees paid to The Manufacturers Bank of Florida were immaterial. TINDER BOX INTERNATIONAL A major stockholder of the Company owns 37.5% of Tinder Box International, Ltd. ("TBI"). In August 1989, the Company entered into a ten-year license agreement with TBI which provides the Company the right to sell and distribute specialized products. In consideration of the license granted, the Company remits a royalty to TBI based on a percentage of net sales of the products sold under the license. The license agreement provides for a 6% royalty percentage which will increase to 7% or 8% if related sales during any twelve-month period exceed $3,000,000 or $5,000,000, respectively. Prior to 1994, the license agreement was verbally amended to reduce the royalty percentage to 3% on sales $3,000,000 and less. Royalty expense for the years ended December 31, 1994 and 1995 was approximately $37,000 and $43,000, respectively, and was $51,000 for the ten months ended October 31, 1996 (at 3% of the related sales). The terms of the license agreement also contain certain covenants whereby at the option of the licensee or licensor, the license agreement may be terminated. These terms include the sale of majority ownership of the Company or a sale of all or a substantial portion of the Company's stock. Additionally, the Company has agreed that if TBI is sold, the Company will terminate its ownership of Tinderbox Wholesale Division which was originally purchased from TBI. TBI shall purchase all of the Company's inventories of Tinder Box Products, at licensee's cost, and all of the equipment, fixtures and supplies which the Company purchased from TBI at the lesser of market value or depreciated cost. OTHER Rentals paid to related parties were approximately $302,500 in 1994 and 1995, and $246,500 for the ten months ended October 31, 1996. See Note 11 for related party leases. See Note 6 for related party debt. 8. STOCK PURCHASE AGREEMENT AND PROPOSED SALE Under an agreement between the Company and its stockholders, any stockholder desiring to pledge, encumber or otherwise dispose of his stock in the Company during his lifetime shall first obtain the written consent of the Company and the stockholders. Stock may be sold, however, if the stock is first offered to the Company and the nonselling stockholders at the same price and on the same terms and conditions as those offered to the third party. The offered shares may be sold to any other person if both the Company and the remaining stockholders do not exercise their rights. Under terms of the agreement, the purchase price of each share of stock purchased in a transfer upon death shall be $3,517.82 unless redetermined by agreement of the Company and the stockholders. The stock purchase agreement also calls for the Company to maintain life insurance policies to insure or partially insure its obligations under the agreement. Additionally, in the event a stockholder sells all of his stock in the Company, the stockholder shall have the right to purchase from the Company the insurance policies on his life for a price equal to the cash surrender value and accumulated dividends, less the balance of any outstanding loans. F-30 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. EMPLOYEE BENEFITS All factory employees are participants in the Cigar Makers' Union Local 533, Retail, Wholesale and Department Store Union Plan which is a multi-employer defined benefit plan. The Company's contribution is based on the rate of $0.70 per hour for the first 40 hours per week per employee in 1994, 1995 and 1996. Under the Employee Retirement Income Security Act of 1974, as amended by the Multi-employer Pension Plan Amendments Act of 1980, an employer is liable for a proportionate part of the plan's unfunded vested benefits. The relative position of each employer with respect to actuarial present value of accumulated benefits and net assets available for benefits, however, is not available to the Company. Profit-sharing plans cover nonunion employees who meet certain eligibility requirements. The plans are funded by discretionary contributions from the Company and JBR. Contributions to the profit-sharing plans were $216,584 and $224,099 in 1994 and 1995, respectively, and $186,749 for the ten months ended October 31, 1996. The expenses of these plans are as follows:
YEAR ENDED TEN MONTHS DECEMBER 31, ENDED ---------------------- OCTOBER 31, 1994 1995 1996 ---------- ---------- ----------- Union plan charge to cost of sales........................................... $ 128,976 $ 143,234 $ 117,000 Profit-sharing plan charged to selling, general and administrative expenses................................................................... 216,584 224,099 186,749 ---------- ---------- ----------- $ 345,560 $ 367,333 $ 303,749 ---------- ---------- ----------- ---------- ---------- -----------
10. INCOME TAXES The Company has elected by unanimous consent of its stockholders to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Company generally does not pay federal corporate income taxes on its taxable income. Instead, the stockholders are liable for individual federal income taxes on their respective share of the Company's taxable income. Certain states do not recognize the Subchapter S election and, accordingly, require the payment of taxes by the Company. JBR is subject to income tax under Subchapter C of the Internal Revenue Code. No significant differences exist between book and taxable income and, accordingly, JBR's effective tax rate approximates the combined state and federal statutory rate. The provision (benefit) for income taxes for the years ended December 31, 1994 and 1995, respectively, and the ten months ended October 31, 1996 consisted of the following:
TEN MONTHS YEARS ENDED ENDED DECEMBER 31, OCTOBER --------------------- 31, 1994 1995 1996 --------- ---------- ---------- Current: Federal.................................................. $ 43,716 $ 62,107 $ 142,307 State.................................................... 46,042 67,113 133,853 Deferred................................................... (3,987) 7,643 -- --------- ---------- ---------- $ 85,771 $ 136,863 $ 276,160 --------- ---------- ---------- --------- ---------- ----------
F-31 VILLAZON & COMPANY, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company occupies premises in Upper Saddle River, New Jersey. The building is owned by Glordiane Realty, a partnership of the principals of the Company. A ten year lease, effective December 1, 1984, provided for rent of approximately $24,000 per month effective July 1, 1985 plus a proportionate share of any increase in realty taxes and expenses. The lease was renewed for an additional five years under the same terms and conditions as of December 1, 1994 and expires on December 1, 1999. Future minimum rental commitments for all noncancelable operating leases are as follows:
YEAR ENDING DECEMBER 31, TOTAL - ---------------------------------------------------------------------------------- ---------- 1997.............................................................................. $ 314,500 1998.............................................................................. 292,500 1999.............................................................................. 292,500
LITIGATION The Company is party to litigation in the normal course of business. While the result of litigation cannot be predicted with certainty, the Company believes that the final outcome of all litigation will not have a material adverse effect on the Company's consolidated financial condition. ENVIRONMENTAL CLAIM In May 1995, the Company and other parties were notified by the Metropolitan Dade Environmental Resource Management Office of alleged environmental contamination on a parcel of land of which Villazon is a lessee/sub-lessor. The Company contends that they are not the cause of the contamination at this site. The ultimate resolution of this matter is not known at this time. 12. SUBSEQUENT EVENT On November 25, 1996, the Company entered into a preliminary agreement to sell substantially all of the assets of the Company to General Cigar Co., Inc. The purchase agreement and related terms have not been finalized. F-32 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Directors of Culbro Corporation In our opinion, the accompanying balance sheets and the related statements of operations and retained earnings and of cash flows present fairly, in all material respects, the financial position of Honduras American Tabaco, S.A. de C.V. at December 31, 1995, and October 31, 1996 and the results of its operations and its cash flows for the years ended December 31, 1994 and 1995 and the ten months ended October 31, 1996 in conformity with generally accepted accounting principles in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in the financial statements, the Company has extensive transactions and relationships with related parties. Because of these relationships, it is possible that the terms of these transactions are not the same as those that would result from transactions among wholly unrelated parties. PRICE WATERHOUSE Tegucigalpa, Honduras December 20, 1996 F-33 HONDURAS AMERICAN TABACO, S.A. DE C.V. BALANCE SHEETS (EXPRESSED IN U.S. DOLLARS)
DECEMBER 31, OCTOBER 31, 1995 1996 ------------ ------------ ASSETS CURRENT ASSETS Cash............................................................................... $ 611,512 $ 579,423 Accounts receivable--trade......................................................... 115,314 110,712 Related party receivables.......................................................... -- 1,287,823 Inventories........................................................................ 3,670,742 4,296,294 Prepaid expenses................................................................... 14,424 47,365 ------------ ------------ Total current assets............................................................. 4,411,992 6,321,617 Property, plant and equipment, net................................................. 395,808 561,381 Other assets....................................................................... 6,000 6,000 ------------ ------------ Total assets..................................................................... $4,813,800 $ 6,888,998 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities........................................... $ 83,020 $ 678,877 Related party payables............................................................. 280,623 102,237 Dividends payable.................................................................. -- 374,960 ------------ ------------ Total current liabilities........................................................ 363,643 1,156,074 ------------ ------------ Commitments (Note 9)................................................................. -- -- STOCKHOLDERS' EQUITY Common stock....................................................................... 2,105,328 2,105,328 Retained earnings.................................................................. 2,344,829 3,627,596 ------------ ------------ Total stockholders' equity....................................................... 4,450,157 5,732,924 ------------ ------------ Total liabilities and stockholders' equity....................................... $4,813,800 $ 6,888,998 ------------ ------------ ------------ ------------
The accompanying notes to financial statements are an integral part of these financial statements. F-34 HONDURAS AMERICAN TABACO, S.A. DE C.V. STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (EXPRESSED IN U.S. DOLLARS)
YEAR ENDED TEN MONTHS DECEMBER 31, ENDED --------------------------- OCTOBER 31, 1994 1995 1996 ------------ ------------- ------------- Net sales............................................................. $ 5,832,953 $ 7,282,830 $ 10,197,501 ------------ ------------- ------------- Cost and expenses Cost of goods sold.................................................. 3,818,682 5,249,450 6,758,968 Administrative expenses............................................. 168,099 202,965 214,444 ------------ ------------- ------------- Operating profit...................................................... 1,846,172 1,830,415 3,224,089 Other income (expense)................................................ 9,048 (2,045) (35,490) Foreign currency losses............................................... (344,818) (337,799) (54,643) ------------ ------------- ------------- Net income............................................................ 1,510,402 1,490,571 3,133,956 Retained earnings--beginning of the period............................ 1,562,881 2,302,035 2,344,829 Distribution to stockholders.......................................... (771,248) (1,447,777) (1,851,189) ------------ ------------- ------------- Retained earnings--end of the period.................................. $ 2,302,035 $ 2,344,829 $ 3,627,596 ------------ ------------- ------------- ------------ ------------- ------------- Earnings per share.................................................... $ 7.55 $ 7.45 $ 15.67 ------------ ------------- ------------- ------------ ------------- -------------
The accompanying notes to financial statements are an integral part of these financial statements. F-35 HONDURAS AMERICAN TABACO, S.A. DE C.V. STATEMENTS OF CASH FLOWS (EXPRESSED IN U.S. DOLLARS)
YEAR ENDED TEN MONTHS DECEMBER 31, ENDED ---------------------------- OCTOBER 31, 1994 1995 1996 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income......................................................... $ 1,510,402 $ 1,490,571 $ 3,133,956 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................................... 78,900 78,359 72,991 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable--trade....................................... 66,124 (32,426) 4,602 Related party receivables........................................ 930,820 77,500 (1,287,823) Inventories...................................................... (840,352) (608,206) (625,552) Prepaid expenses................................................. 7,503 (4,485) (32,941) Increase (decrease) in liabilities: Related party payables........................................... 23,050 107,438 (178,386) Accounts payable and accrued liabilities......................... (248,452) (38,105) 595,857 ------------- ------------- ------------- Net cash provided by operating activities............................ 1,527,995 1,070,646 1,682,704 ------------- ------------- ------------- INVESTING ACTIVITIES: Purchase of property, plant and equipment.......................... (290,381) (76,672) (238,564) ------------- ------------- ------------- Net cash used in investing activities................................ (290,381) (76,672) (238,564) ------------- ------------- ------------- FINANCING ACTIVITIES: Paid in capital.................................................... -- 475,698 -- Distributions to stockholders...................................... (771,248) (1,447,777) (1,476,229) ------------- ------------- ------------- Net cash used in financing activities................................ (771,248) (972,079) (1,476,229) ------------- ------------- ------------- Net (decrease) increase in cash...................................... 466,366 21,895 (32,089) Cash at beginning of the period...................................... 123,251 589,617 611,512 ------------- ------------- ------------- Cash at end of the period............................................ $ 589,617 $ 611,512 $ 579,423 ------------- ------------- ------------- ------------- ------------- -------------
The accompanying notes to financial statements are an integral part of these financial statements. F-36 HONDURAS AMERICAN TABACO, S.A. DE C.V. NOTES TO FINANCIAL STATEMENTS 1. NATURE OF OPERATIONS Honduras American Tabaco, S.A. de C.V. (the "Company") manufactures and sells cigars and related tobacco products. The Company sells approximately 95% of its production to Villazon & Company, Inc., a related party company located in the United States. The Company's maximum authorized fully paid common stock is L 10,000,000 (Honduran Lempiras (L)) (equivalent to $2,105,328 at October 31, 1996) represented by 200,000 shares of par value L 50 each. 2. SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies adopted by the Company, in accordance with generally accepted accounting principles in the United States, are summarized as follows: TRANSLATION OF FINANCIAL STATEMENTS INTO U.S. DOLLARS The Company's records are maintained in Honduran Lempiras (L), consequently a translation into U.S. dollars has been applied to the local currency prepared financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." The U.S. dollar has been established as the functional currency for purposes of the translation. Monetary assets and liabilities are translated at year-end exchange rates and non-monetary items are translated at historical rates. Income and expense accounts are translated at the average rates in effect during the year, except for depreciation and cost of product sales which are translated at historical rates. Gains and losses from changes in exchange rates are recognized in income in the year of occurrence. INVENTORIES Supplies, work in process and finished goods are stated at the lower of cost or market using the first-in, first-out method. Leaf tobacco is valued at the lower of cost or market using the specific identification method. Leaf tobacco includes tobacco in the process of aging, a substantial amount of which may not be used within one year. It is industry practice to include such inventories as current assets. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost. Depreciation is determined on a straight-line basis over the estimated useful asset lives for financial statement reporting purposes. Expenditures for maintenance and repairs are charged to expense when incurred. REVENUE RECOGNITION Sales and the related costs of sales are recognized primarily upon shipment of products. Sales are presented net of goods returned by customers. EARNINGS PER SHARE Earnings per share of common stock is computed by dividing net income by the number of common shares outstanding during the period. F-37 HONDURAS AMERICAN TABACO, S.A. DE C.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ESTIMATES Preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from the estimates. FINANCIAL INSTRUMENTS The Company's financial instruments include cash, accounts receivable and accounts payable. In the opinion of management, the carrying amount of these financial instruments approximates their fair value. CONCENTRATION OF CREDIT RISKS Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company historically has had no material losses on its accounts receivable in excess of allowances provided. The Company's largest customer is Villazon & Company, Inc. which accounted for approximately 92%, 95% and 92% of net sales for the years ended December 31, 1994, 1995 and the ten months ended October 31, 1996, respectively. SEVERANCE COMPENSATION Accrued severance compensation for employees under the terms of the Honduran Labor Code may be payable to them in the event of dismissal. A definite liability in this respect exists at October 31, 1996 in the amount of $147,038. This amount is included in the accounts payable and accrued liabilities balance. It is the Company's policy to pay this compensation to its employees regardless of dismissal events at year-end. ADJUSTMENTS AND RECLASSIFICATIONS Certain adjustments and reclassifications in the financial statements have been made to comply with accounting principles generally accepted in the United States. 3. INVENTORIES Inventories consist of the following:
1995 1996 ------------ ------------ Leaf tobacco...................................................... $ 2,747,267 $ 2,646,532 Work in process................................................... -- 38,143 Finished goods.................................................... -- 293,022 Supplies.......................................................... 914,982 1,031,464 Leaf tobacco in transit........................................... -- 241,165 Goods in transit.................................................. 8,493 45,968 ------------ ------------ $ 3,670,742 $ 4,296,294 ------------ ------------ ------------ ------------
F-38 HONDURAS AMERICAN TABACO, S.A. DE C.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment and related accumulated depreciation are summarized as follows:
1995 1996 ------------ ------------ Land.............................................................. $ 36,595 $ 157,835 Building and improvements......................................... 422,731 451,427 Machinery and equipment........................................... 486,496 564,702 Transportation equipment.......................................... 127,967 127,966 Office furniture and equipment.................................... 91,128 101,551 ------------ ------------ 1,164,917 1,403,481 Less--Accumulated depreciation.................................... (769,109) (842,100) ------------ ------------ $ 395,808 $ 561,381 ------------ ------------ ------------ ------------
Depreciation is determined on the straight-line method using estimated useful lives as follows: Buildings and improvements........................................ 10 years Machinery and equipment........................................... 4-5 years Transportation equipment.......................................... 5 years Office furniture and equipment.................................... 4-5 years
5. RELATED PARTY TRANSACTIONS Certain stockholders of the Company have a combined 92.5% ownership interest in Villazon & Company, Inc. ("Villazon"). The Company purchases tobacco, boxes and other supplies used in production from Villazon and from Oliva Tobacco Company through Villazon. The Company also sells cigars, boxes and tobacco leaf to Villazon. Balances of receivable and payables with related parties are presented as follows:
1995 1996 ------------ ------------ Receivable: Villazon & Company, Inc......................................... $ -- $ 1,287,823 ------------ ------------ ------------ ------------ Payables: Villazon & Company, Inc......................................... $ 17,587 $ -- Compania Agricola La Venta S.A.................................. 52,497 16,248 Tabacalera Rio Jagua S.A........................................ 30,272 24,841 Procesadora de Tabaco S.A....................................... -- 39,381 Officials and employees......................................... 180,267 21,767 ------------ ------------ $ 280,623 $ 102,237 ------------ ------------ ------------ ------------
Payments from Villazon are made when requested by the Company. Approximately $5,668,000, $7,450,000 and $9,637,000 in sales were made in 1994, 1995 and as of October 31, 1996, respectively to Villazon, and approximately $1,590,000, $2,141,000 and $2,618,000 in purchases were made in 1994, 1995 and as of October 31, 1996, respectively from Villazon. Also, purchases from Oliva Tobacco Company amounted to approximately $2,081,000, $2,531,000 and $2,648,000 for 1994, 1995 and as of October 31, 1996, respectively. F-39 HONDURAS AMERICAN TABACO, S.A. DE C.V. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCK PURCHASE AGREEMENT AND PROPOSED SALE Under an agreement between the Company and its stockholders, any stockholder desiring to pledge, encumber or otherwise dispose of his stock in the Company during his lifetime shall first obtain the written consent of the Company and the stockholders. Stock may be sold, however, if the stock is first offered to the nonselling stockholders at the same price and on the same terms and conditions as those offered to the third party. The offered shares may be sold to any other person if both the Company and the remaining stockholders do not exercise their rights. Under terms of the agreement, no purchase price has been predetermined for each share of stock purchased in a transfer upon death. 7. TAX BENEFITS The Company is eligible to benefit from the Temporary Import Regime (RIT) through resolutions issued by the Ministry of Economy, which expire in the year 1998. Tax benefits include: a) Exemption from payment of certain taxes and customs duties on imports of equipment and raw materials used in the production and exportation of cigars and related products. b) Exemption from payment of income tax, for a 10 year period, on profits generated by cigars and related products exports to foreign countries, excluding the Central American region. 8. OPERATING LEASES Future minimum rental payments under a noncancellable lease agreement with a related party as of October 31, 1996 are: 1996.............................................................. $ 6,000 1997.............................................................. 45,000 1998.............................................................. 48,000 1999.............................................................. 12,000 --------- $ 111,000 --------- ---------
Total rental expenses for operating leases were approximately $12,000, $16,000 and $27,800 in 1994, 1995 and 1996, respectively. 9. COMMITMENTS On November 25, 1996, the Company's shareholders entered into a preliminary agreement to sell all of their stock of the Company to General Cigar Co., Inc. for $20 million. The purchase agreement and related terms have not been finalized. F-40 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THAT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE Prospectus Summary.............................. 3 Risk Factors.................................... 10 Use of Proceeds................................. 17 Dividend Policy................................. 17 Capitalization.................................. 18 Dilution........................................ 19 Selected Combined Financial Data................ 20 Unaudited Pro Forma Combined Financial Statements.................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 25 Business........................................ 30 Management...................................... 44 Certain Employee Benefit Matters................ 48 The Asset Transfers, The Distribution and The Merger........................................ 54 Certain Relationships and Related Transactions.................................. 58 Principal Stockholders.......................... 58 Description of Capital Stock.................... 61 Description of the Credit Facility.............. 64 Shares Eligible for Future Sale................. 65 Underwriting.................................... 66 Legal Matters................................... 68 Experts......................................... 68 Additional Information.......................... 69 Index to Financial Statements................... F-1
-------------- UNTIL MARCH 24, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENT OR SUBSCRIPTIONS. 6,000,000 SHARES [LOGO] GENERAL CIGAR CLASS A COMMON STOCK ----------------- PROSPECTUS ----------------- DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SMITH BARNEY INC. FEBRUARY 27, 1997 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----