Exhibit 2
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company and Consolidated Cigar did not have a Compensation
Committee prior to the Company's initial public offering of the Class A
Common Stock (the "IPO"), completed on August 21, 1996. The Compensation
Committee of the Company is presently comprised of Messrs. Gittis and
Xxxxxxx, neither of whom is an officer or employee of the Company or its
subsidiaries.
EMPLOYMENT ARRANGEMENTS
Mafco Consolidated Group entered into an employment agreement (the "MCG
Employment Agreement") with Xx. Xxxx with respect to an employment term
commencing on July 1, 1995 and ending on December 31, 1998. Until August 1,
1996, Xx. Xxxx served the Company and Consolidated Cigar pursuant to the MCG
Employment Agreement. As of August 1, 1996, Consolidated Cigar assumed the
obligations of Mafco Consolidated Group under the MCG Employment Agreement with
respect to a portion of the base salary and employee benefits to be provided to
Xx. Xxxx under the MCG Employment Agreement and, simultaneously therewith,
entered into a new employment agreement with Xx. Xxxx memorializing such
assumption and expiring on December 31, 1999. The employment agreement provides
for an initial base salary of $770,000 per year. In addition, Xx. Xxxx is
eligible to receive annual performance bonus payments, subject to an annual
maximum of $2 million, based on achievement by Consolidated Cigar of certain
EBITDA targets, which bonus payments shall be made pursuant to the Consolidated
Cigar Performance Bonus Plan, as set forth in his employment agreement. See
"--Consolidated Cigar Performance Bonus Plan." After December 31, 1998,
Consolidated Cigar may give notice of non-renewal, in which case the term of the
agreement will be extended for a period of twelve months following such notice.
From and after January 1, 2000, the term will be automatically extended
day-by-day until Consolidated Cigar gives notice of non-renewal, in which case
the term will be extended for a period of twelve months. In the event of
Consolidated Cigar's breach, Xx. Xxxx is entitled to terminate the employment
agreement; in that event, base salary, performance bonuses and benefits are to
be paid for the remaining term of the employment agreement or, if longer and if
no non-renewal notice has been given by Consolidated Cigar prior to that time,
twelve months, offset by any other compensation Xx. Xxxx receives during this
period. The Company may terminate the agreement, among other things, in the
event of gross neglect or willful misconduct or breach by Xx. Xxxx of any
material provision of the agreement.
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On August 1, 1996, Consolidated Cigar entered into an employment
agreement with each of Messrs. DiMeola, Xxxxx, Xxxxxxx and Gershel, each of
which expires on December 31, 1999, unless sooner terminated by the employee's
death, disability (in which case Consolidated Cigar may elect to terminate the
employment agreement), gross neglect or willful misconduct (in which case
Consolidated Cigar may terminate the employment agreement immediately upon
written notice), the employee's willful and material failure to perform his
contractual obligations or by Consolidated Cigar's material breach of the
agreement. After December 31, 1998, Consolidated Cigar may give notice of
non-renewal, in which case the term of the agreement will be extended for a
period of twelve months following such notice. From and after January 1, 2000,
the term will be automatically extended day-by-day until Consolidated Cigar
gives notice of non-renewal, in which case the term will be extended for a
period of twelve months. In the event of Consolidated Xxxxx's breach, the
employee is entitled to terminate the employment agreement; in that event, base
salary, performance bonuses and benefits are to be paid to the employee for the
remaining term of the employment agreement or, if longer and if no non-renewal
notice has been given by Consolidated Cigar prior to that time, twelve months,
offset by any other compensation the employee receives during this period. The
employment agreements provide for initial annual base salaries of $275,000 for
Xx. XxXxxxx, $217,500 for each of Messrs. Xxxxx and Xxxxxxx and $247,500 for Xx.
Xxxxxxx. The employment agreements also provide, subject to approval by
stockholders, for annual performance bonus payments, subject to an annual
maximum of $1 million, based on achievement by Consolidated Cigar of certain
EBITDA targets, which bonus payments shall be made pursuant to the Consolidated
Cigar Performance Bonus Plan, as set forth in the employment agreements.
CONSOLIDATED CIGAR PERFORMANCE BONUS PLAN
Consolidated Cigar has entered into employment agreements with certain
employees, including Messrs. Folz, DiMeola, Xxxxx, Xxxxxxx and Gershel, each of
which provides, among other things, for payment of performance bonuses (the
"Consolidated Cigar Performance Bonus Plan"). The Consolidated Cigar Performance
Bonus Plan has been approved by the Company's stockholders. Compensation payable
under the Xxxxxxx dated Cigar Performance Bonus Plan is intended to qualify as
"performance based compensation" under Section 162(m) of the Code. Under the
Consolidated Cigar Performance Bonus Plan, the participants are eligible to
receive annual performance bonus cash awards based on achievement of EBITDA
targets established by the Compensation Committee and set forth in their
respective employment agreements with respect to each calendar year. The
payments under the Consolidated Cigar Performance Bonus Plan to any one
individual during any
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calendar year may not exceed $2 million for the Chief Executive Officer and $1
million for each of the other participants.
DEFINED BENEFIT PLAN
Domestic (United States) salaried employees of Consolidated Cigar are
eligible to participate in the Consolidated Cigar Domestic Salaried Employees'
Defined Benefit Plan, a defined benefit pension plan (the "Plan"), which,
effective as of the end of 1995, was merged into a defined benefit pension plan
sponsored by a subsidiary of Mafco Consolidated Group. Effective September 30,
1997, Consolidated Xxxxx's pension assets and liabilities were spun-off to a new
Consolidated Cigar plan. The effect of the assumption of the net accrued pension
liability was recorded as a reduction of capital of $300,000. The merger and
spin-off of the Plan did not change the level of pension benefits provided to
Consolidated Cigar employees. Plan benefits are a factor of service (up to a
maximum of 33 years) with Consolidated Cigar and "Average Final Compensation"
(average monthly compensation during the 60 consecutive months in which
compensation was highest in the ten years prior to termination of employment).
Compensation includes total wages, overtime, bonuses and 401(k) salary
deferrals, and excludes fringe benefits and employer contributions to other
deferred compensation plans. Benefits in the Plan are reduced by (i) any annuity
purchased under the Gulf Western Consumer Products Salaried Employees Retirement
Plan (the "Gulf & Western Plan") as of March 8, 1983 and (ii) the actuarial
equivalent of any Consolidated Cigar-provided benefits received under Xxxxxxx
dated Cigar's 401(k) plan.
Consolidated Cigar established a benefit restoration plan effective
January 1, 1994 (the "BRP") which was designed to restore retirement benefits to
those employees whose eligible pension earnings were limited to $150,000 under
regulations enacted by the Internal Revenue Service. The BRP is not funded and
all other vesting and payment rules follow the Plan. Beginning in 1996, the
annual payment under the Plan and BRP, expressed as a straight life annuity,
before adjustment for social security beginning at age 65 and before reduction
for benefits payable under the Gulf & Western Plan or the Company's 401(k) plan,
are as follows:
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YEARS OF SERVICE
---------------------------------------------------------------------------------------
REMUNERATION 5 10 15 20 25 35
------------ ------------ ------------- ------------ ------------- -----------
$ 50,000 $ 3,788 $ 7,575 $ 11,363 $ 15,150 $ 18,938 $ 25,000
75,000 5,681 11,363 17,044 22,725 28,406 37,500
100,000 7,575 15,150 22,725 30,300 37,875 50,000
125,000 9,469 18,938 28,406 37,875 47,344 62,500
150,000 11,363 22,725 34,088 45,450 56,813 75,000
175,000 13,256 26,513 39,769 53,025 66,281 87,500
200,000 15,150 30,300 45,450 60,600 75,750 100,000
225,000 17,044 34,088 51,131 68,175 85,219 112,500
250,000 18,938 37,875 56,813 75,750 94,688 125,000
300,000 22,725 45,450 68,175 90,900 113,625 150,000
400,000 30,300 60,600 90,900 121,200 151,500 200,000
450,000 34,088 68,175 102,263 136,350 170,438 225,000
500,000+ 37,875 75,750 113,625 151,500 189,375 250,000
Benefits under the Plan are subject to the maximum limitations imposed
by federal law on pension benefits. The annual limitation in 1997 was $125,000
or $10,400 per month, based on a maximum annual compensation of $160,000. The
maximum annual remuneration considered for purposes of the BRP was $500,000 in
1997.
As of December 31, 1997, the credited years of service under the Plan
were 14 years for Xx. Xxxx, 13 years for Xx. XxXxxxx, nine years for Xx. Xxxxx,
21 years for Xx. Xxxxxxx and 37 years for Xx. Xxxxxxx.
COMMON STOCK PERFORMANCE
The Company's Common Stock commenced trading on the New York Stock
Exchange (the "NYSE") on August 16, 1996. The graph set forth below presents a
comparison of cumulative stockholder return through December 31, 1997, assuming
reinvestment of dividends, by an investor who invested $100 on August 16, 1996
in each of (i) the Class A Common Stock (ii) the Xxxxxxx 2000 Index and (iii) a
self determined peer group.
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(1) Shares of Class A Common Stock issuable upon conversion of the Class B
Common Stock owned by Mafco Consolidated Group are deemed to be
outstanding for purposes of computing the percentage ownership of Class A
Common Stock of Xx. Xxxxxxxx through Mafco Consolidated Group, but are
not deemed to be outstanding for the purposes of computing the percentage
ownership of Class A Common Stock of any other person shown in the table.
(2) Represents shares of Class A Common Stock issuable upon the conversion of
the Class B Common Stock indirectly owned through Mafco Holdings. Mafco
Holdings is wholly owned by Xx. Xxxxxxxx. All of the shares of common
stock owned by Mafco Holdings are and shares of intermediate holding
companies are, or may from time to time be, pledged to secure
obligations.
(3) Reflects the percentage of shares of Class A Common Stock beneficially
owned by such person. In each case, such person beneficially owns less
than 3% of the outstanding Common Stock and less than 1% of the combined
voting power of the outstanding Common Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH MAFCO HOLDINGS
As a result of Mafco Holdings' stock ownership, the Company's Board of
Directors is, and is expected to continue to be, comprised entirely of designees
of Mafco Holdings, which is expected to continue to be, able to direct and
control the policies of the Company and its subsidiaries, including with respect
to mergers, sales of assets and similar transactions.
Mafco Holdings is 100% wholly-owned by Xxxxxx X. Xxxxxxxx. Mafco Holdings
is a diversified holding company with interests in several industries. Through
its 83% ownership of Revlon, Inc., Mafco Holdings is engaged in the cosmetics
and skin care, fragrance and personal care products business. Mafco Holdings
also owns 65% of Meridian Sports, a manufacturer and marketer of specialized
ski-boats. Through its 64% ownership of the Company, Mafco Holdings is engaged
in the manufacture and distribution of cigars and pipe tobacco. Through its 36%
ownership of M & F Worldwide (assuming conversion of certain preferred stock),
Mafco Holdings is in the business of processing licorice and other flavors. On
December 18, 1997, Mafco Holdings entered into an agreement pursuant to which
Mafco Holdings will acquire a controlling interest in Panavision Inc., a
manufacturer and supplier of film camera systems to the motion picture and
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television industries. Mafco Holdings is also in the financial services business
through its 80% ownership interest in California Federal. On February 4, 1998,
Mafco Holdings entered into an agreement with Golden State Bancorp Inc. pursuant
to which California Federal and Golden State Bancorp Inc. will merge. The
resulting corporation will retain the name California Federal.
The Company is insured under policies maintained by Mafco Holdings, and
the Company reimburses Mafco Holdings for the portion of the cost of such
policies attributable to the Company. Management of the Company believes that
such cost is lower than would be incurred were such entities to be separately
insured. In addition, the Company reimburses Mafco Holdings for the Company's
allocable portion of certain costs such as legal, accounting and other
professional fees and other services and related expenses.
In connection with the IPO, the Company granted options to purchase
500,000 shares of Class A Common Stock to Xx. Xxxxxxxx as compensation for
services rendered and to be rendered to the Company by Xx. Xxxxxxxx. Such
options were granted pursuant to the Stock Plan at an exercise price equal to
$23.00 per share.
The options do not vest until 2001.
TAX SHARING AGREEMENT
The Company and Consolidated Cigar have been, for federal income tax
purposes, members of an affiliated group of corporations of which Mafco Holdings
is the common parent (the "Tax Group") until March 26, 1997. As a result of such
affiliation, the Company and Consolidated Cigar have been included in the
consolidated federal income tax returns and, to the extent permitted by
applicable law, included in combined state or local income tax returns filed on
behalf of the Tax Group. Pursuant to a tax sharing agreement among the Company,
Consolidated Cigar, and Mafco Consolidated Group and a tax sharing agreement
between Mafco Consolidated Group and Mafco Holdings (collectively, the "Tax
Sharing Agreements"), the Company had been required to pay to Mafco Consolidated
Group with respect to each taxable year an amount equal to the consolidated
federal, state and local income taxes that would have been incurred by the
Company had it not been included in the consolidated federal and any combined
state or local income tax returns filed by the Tax Group. The net amounts paid
by Consolidated Cigar, through the Company, during the years ended December 31,
1995 and 1996 were approximately $0.4 million and $9.8 million, respectively and
through March 26, 1997 was $4.4 million.
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The Company completed a secondary offering of Class A Common Stock on
March 26, 1997, and as a result thereof, the Company is no longer included in
the Tax Group's consolidated tax returns and will, instead, file its own tax
returns and pay its own taxes on a separate company basis. The Company has net
operating losses for the period prior to the acquisition of Consolidated Cigar
by Mafco Consolidated Group on March 3, 1993 ("Pre-Acquisition"), which,
pursuant to the Tax Sharing Agreements, were not available to the Company to
offset taxable income generated in the period after the acquisition of
Consolidated Cigar by Mafco Consolidated Group ("Post- Acquisition"). The
Pre-Acquisition net operating losses that were previously restricted, pursuant
to the Tax Sharing Agreements, are available to the extent that the loss
carryforwards are not utilized in a Mafco Holding's consolidated tax return.
Since these losses relate to the Pre-Acquisition period, a deferred tax asset
would be recorded with a corresponding reduction in goodwill.
In addition, the Company incurred tax losses in the Post-Acquisition
period which the Company utilized under the Tax Sharing Agreements. A portion of
these losses may be allocated to the Company pursuant to the Treasury Regulation
Section 1.1502-79 which deals with consolidated returns. This tax attribute
would be recorded as a deferred tax asset with a corresponding decrease to
capital deficiency.
Under existing federal income tax regulations, the Company, Consolidated
Cigar and Mafco Consolidated Group are severally liable for the consolidated
federal income taxes of the Tax Group for any taxable year in which they are a
member of the Tax Group. Pursuant to the Tax Sharing Agreements, Mafco Holdings
has agreed to indemnify the Company and Consolidated Cigar for any such federal
income tax liability.
PROMISSORY NOTE
In connection with the IPO, the Company issued a promissory note in an
original principal amount of $70 million (the "Promissory Note") to Mafco
Consolidated Group as a dividend. The Promissory Note is noninterest bearing,
unsecured, subordinated to senior indebtedness (as defined in the Promissory
Note) and repayable in whole or in part at any time or from time to time without
premium or penalty. The Promissory Note is payable in quarterly installments of
$2.5 million beginning March 31, 1997 with the final installment payable on
December 31, 2003.
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PURCHASE OF LICORICE EXTRACT
The Company purchases all of the licorice extract used as flavoring and
moistening agents in its manufacturing processes from Mafco Worldwide, a
subsidiary of M & F Worldwide Corp. During the years ended December 31, 1995,
1996 and 1997, the Company purchased approximately $269,000, $211,000 and
$239,000 of licorice extract from Pneumo Abex. During 1997 the Company sold
$152,000 of raw materials to Mafco Worldwide. The Company believes that the
licorice extract purchased from Pneumo Abex and the raw materials sold thereto
were on terms no less favorable to the Company than those obtainable in an arm's
length transaction with an independent third party.
SPECIALTY PRODUCTS DIVISION
The Company's Specialty Products Division assembles lipstick containers
for Revlon Products, an 83% owned subsidiary of Mafco Holdings. Revlon Products
purchased lipstick containers from the Company for approximately $874,000,
$958,000 and $843,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company believes that the terms of such arrangements with
Revlon Products were no less favorable to the Company than those obtainable in
an arm's length transaction with an independent third party.
REGISTRATION RIGHTS AGREEMENT
Prior to the consummation of the IPO, the Company and Mafco Consolidated
Group entered into the Registration Rights Agreement pursuant to which Mafco
Consolidated Group and certain transferees of Class B Common Stock held by Mafco
Consolidated Group (the "Holders") have the right to require the Company to
register (a "Demand Registration") under the Securities Act of 1933, as amended
(the "Securities Act"), all or part of the Class A Common Stock issuable upon
conversion of the Class B Common Stock owned by such Holders; provided that the
Company (i) is not obligated to effect a Demand Registration prior to February
11, 1997, unless Xxxxxxx, Xxxxx & Co. has given its consent and (ii) may
postpone giving effect to a Demand Registration for up to a period of 30 days if
the Company believes such registration might have a material adverse effect on
any plan or proposal by the Company with respect to any financing, acquisition,
recapitalization, reorganization or other material transaction, or the Company
is in possession of material non-public information that, if publicly disclosed,
could result in a material disruption of a major corporate development or
transaction then pending or in progress or in other material adverse
consequences to the Company. In addition, the
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Holders will have the right to participate in registrations by the Company of
its Class A Common Stock (a "Piggyback Registration"). The Company will pay any
expenses incurred in connection with any Demand Registration or Piggyback
Registration, except for underwriting discounts, commissions and certain
expenses attributable to the shares of Class A Common Stock sold by such
Holders.
ADDITIONAL INFORMATION
The Company will make available a copy of its Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 and any Quarterly Reports on Form
10-Q filed thereafter, without charge, upon written request to the Secretary,
Consolidated Cigar Holdings Inc., 0000 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 000, Xxxx
Xxxxxxxxxx, Xxxxxxx 00000- 0000. Each such request must set forth a good faith
representation that, as of the Record Date, March 24, 1998, the person making
the request was a beneficial owner of Common Stock entitled to vote.
In order to ensure timely delivery of such documents prior to the Annual
Meeting, any request should be received by the Company promptly.
STOCKHOLDER PROPOSALS
Under the rules and regulations of the SEC as currently in effect, any
holder of at least $1,000 in market value of Common Stock who has held such
securities for at least one year and who desires to have a proposal presented
in the Company's proxy material for use in connection with the Annual Meeting of
stockholders to be held in 1999 must transmit that proposal (along with his or
her name, address, the number of shares of Common Stock that he or she holds of
record or beneficially, the dates upon which the securities were acquired and
documentary support for a claim of beneficial ownership) in writing as set forth
below. Proposals of stockholders intended to be presented at the next annual
meeting must be received by the Secretary, Consolidated Cigar Holdings Inc.,
0000 Xxxxx Xxxxxxx Xxxxxx, Xxxxx 000, Xxxx Xxxxxxxxxx, Xxxxxxx 00000-0000, not
later than December 1, 1998.
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