<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1998
------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- ----------------------
Commission file number 1-11995
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CONSOLIDATED CIGAR HOLDINGS INC.
--------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3694743
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5900 NORTH ANDREWS AVENUE, FORT LAUDERDALE, FLORIDA 33309-2369
--------------------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(954) 772-9000
--------------
(Registrant's telephone number, including area code)
- - -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Sections 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] No [ ]
As of November 13, 1998 the Registrant had 10,168,116 shares of Class
A Common Stock and 19,600,000 shares of Class B Common Stock outstanding. All
of the shares of Class B Common Stock were held by Mafco Consolidated Group
Inc.
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
INDEX
Page
Number
------
Part I. FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Condensed Consolidated Balance Sheets at October 3, 1998
(unaudited) and December 31, 1997................................... 3
Condensed Consolidated Statements of Income for the Thirteen
Weeks Ended October 3, 1998 (unaudited) and
September 27, 1997 (unaudited) ..................................... 5
Condensed Consolidated Statements of Income
for the Thirty-Nine Weeks Ended October 3, 1998
(unaudited) and September 27, 1997 (unaudited) ..................... 6
Condensed Consolidated Statements of Stockholders' Equity
for the Thirty-Nine Weeks Ended October 3, 1998 (unaudited)
and September 27, 1997 (unaudited) ................................. 7
Condensed Consolidated Statements of Cash Flows
for the Thirty-Nine Weeks Ended October 3, 1998 (unaudited)
and September 27, 1997 (unaudited).................................. 8
Notes to Unaudited Condensed Consolidated Financial Statements...... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................. 12
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................ 17
2
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, October 3,
1997 1998
(Unaudited)
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,231 $ 3,452
Accounts receivable, less allowances
of $6,008 and $6,253 respectively 24,969 24,663
Inventories 88,945 135,420
Deferred taxes 4,187 4,727
Prepaid and other 13,220 15,635
--------- ---------
Total current assets 134,552 183,897
Property, plant and equipment, net 39,511 39,184
Trademarks, less accumulated amortization
of $4,190 and $4,850, respectively 30,876 30,236
Goodwill, less accumulated amortization
of $8,295 and $9,736, respectively 70,590 69,149
Other intangibles and assets, less accumulated
amortization of $4,359 and $218, respectively 3,904 6,661
--------- ---------
Total assets $ 279,433 $ 329,127
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements
3
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Continued)
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, October 3,
1997 1998
(Unaudited)
------------ -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of promissory note due to affiliate $ 10,000 $ 10,000
Current portion of long-term debt 657 951
Accounts payable 13,704 14,395
Accrued expenses and other 18,440 20,130
-------- --------
Total current liabilities 42,801 45,476
Long-term debt due to third parties 112,900 147,900
Promissory note due to affiliate 50,000 42,500
Deferred taxes 13,810 17,332
Other liabilities 4,785 6,197
-------- --------
Total liabilities 224,296 259,405
-------- --------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, par value $0.01 per share;
20,000,000 shares authorized - -
Class A Common Stock, par value $0.01 per share;
300,000,000 shares authorized 111 111
Class B Common Stock, par value $0.01 per share;
250,000,000 shares authorized 196 196
Capital deficiency (13,123) (13,123)
Retained earnings 67,953 91,987
-------- --------
55,137 79,171
Less treasury stock, at cost - (9,449)
-------- --------
Total stockholders' equity 55,137 69,722
-------- --------
Total liabilities and stockholders' equity $279,433 $329,127
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
4
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Thirteen
Weeks Ended Weeks Ended
September 27, October 3,
1997 1998
------------- ----------
<S> <C> <C>
Net sales $ 82,642 $ 66,417
Cost of sales 45,736 41,402
---------- ----------
Gross profit 36,906 25,015
Selling, general
and administrative expenses 9,065 10,347
---------- ----------
Operating income 27,841 14,668
---------- ----------
Other expenses:
Interest expense, net 2,455 2,410
Minority interest 399 183
Miscellaneous, net 277 298
---------- ----------
3,131 2,891
---------- ----------
Income before provision for income taxes 24,710 11,777
Provision for income taxes 7,918 3,488
---------- ----------
Net income $ 16,792 $ 8,289
========== ==========
Basic and diluted net income per common share:
Basic net income per common share $ 0.55 $ 0.28
========== ==========
Diluted net income per common share $ 0.54 $ 0.28
========== ==========
Basic weighted average common shares outstanding 30,683,644 29,993,386
========== ==========
Diluted weighted average common shares outstanding 31,025,909 29,993,386
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements
5
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 27, October 3,
1997 1998
------------- ----------
<S> <C> <C>
Net sales $ 214,907 $ 198,668
Cost of sales 119,929 117,806
---------- ----------
Gross profit 94,978 80,862
Selling, general
and administrative expenses 29,050 31,568
---------- ----------
Operating income 65,928 49,294
---------- ----------
Other expenses:
Interest expense, net 7,618 7,394
Minority interest 854 1,180
Miscellaneous, net 983 708
---------- ----------
9,455 9,282
---------- ----------
Income before provision for income taxes and extraordinary item 56,473 40,012
Provision for income taxes 18,082 12,804
---------- ----------
Income before extraordinary item 38,391 27,208
Extraordinary item-
Early extinguishment of debt, net of tax - 3,174
---------- ----------
Net income $ 38,391 $ 24,034
========== ==========
Basic and diluted net income per common share:
Income before extraordinary item $ 1.25 $ 0.90
Extraordinary item - (0.11)
---------- ----------
Basic net income per common share $ 1.25 $ 0.79
========== ==========
Income before extraordinary item $ 1.24 $ 0.90
Extraordinary item - (0.11)
---------- ----------
Diluted net income per common share $ 1.24 $ 0.79
========== ==========
Basic weighted average common shares outstanding 30,677,913 30,396,917
========== ==========
Diluted weighted average common shares outstanding 30,854,306 30,396,917
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements
6
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
Common Common Capital Retained Treasury
Stock Stock Deficiency Earnings Stock Total
----- ----- ---------- -------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 61 $ 246 $ (13,314) $ 14,362 $ - $ 1,355
Net income for the thirty-nine weeks - - - 38,391 - 38,391
Exercise of stock options - - 421 - - 421
Secondary public offering and retirement
of Class B Common Stock sold 50 (50) - - - -
----- ----- --------- -------- ------- --------
Balance at September 27, 1997 $ 111 $ 196 $ (12,893) $ 52,753 $ - $ 40,167
===== ===== ========= ======== ======= ========
Balance at December 31, 1997 $ 111 $ 196 $ (13,123) $ 67,953 $ - $ 55,137
Net income for the thirty-nine weeks - - - 24,034 - 24,034
Purchase of treasury stock - - - - (9,449) (9,449)
----- ----- --------- -------- ------- --------
Balance at October 3, 1998 $ 111 $ 196 $ (13,123) $ 91,987 $(9,449) $ 69,722
===== ===== ========= ======== ======= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
7
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 27, October 3,
1997 1998
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,391 $ 24,034
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 5,834 6,273
Loss on early extinguishment of debt, net of tax - 3,174
Deferred income (115) (38)
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable (12,220) 306
Inventories (24,862) (48,049)
Prepaid expenses and other (4,628) (2,279)
Increase (decrease) in:
Accounts payable 3,214 (527)
Accrued expenses and
other liabilities 3,962 7,169
------- ------
Net cash provided by (used for) operating activities 9,576 (9,937)
------- ------
Cash flows (used for) provided by investing activities:
Capital expenditures (4,578) (3,699)
Acquisition, net of cash acquired (14,420) -
(Increase) decrease in other assets & other 9 (1,715)
------- ------
Net cash used for investing activities (18,989) (5,414)
------- ------
</TABLE>
See notes to unaudited condensed consolidated financial statements
8
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Thirty-Nine
Weeks Ended Weeks Ended
September 27, October 3,
1997 1998
------------- ----------
<S> <C> <C>
Cash flows provided by (used for) financing activities:
Borrowings of revolving loan, net $ 19,398 $ 154,094
Early extinguishment of debt - (118,800)
Debt issuance and refinancing costs - (3,386)
Purchase of treasury stock - (9,449)
Due to affiliates and other borrowings (9,294) (6,887)
Exercise of stock options 421 -
------- -------
Net cash provided by financing activities 10,525 15,572
------- -------
Increase in cash and cash equivalents 1,112 221
Cash and cash equivalents, beginning of period 1,906 3,231
------- -------
Cash and cash equivalents, end of period $ 3,018 $ 3,452
======= =======
Supplemental disclosures of cash flow information:
Interest paid during the period $ 10,246 $ 9,946
Income taxes paid during the period 16,709 543
</TABLE>
See notes to unaudited condensed consolidated financial statements
9
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
Consolidated Cigar Holdings Inc. (the "Company") is a holding company
with no business operations of its own and was formed as a Delaware corporation
on January 6, 1993 to hold all of the outstanding capital stock of Consolidated
Cigar Corporation ("Consolidated Cigar"), through which the Company conducts
its business operations. The results of operations and financial position of
the Company therefore reflect the consolidated results of operations and
financial position of Consolidated Cigar. Unless the context otherwise
requires, all references in these notes to the consolidated financial
statements of the Company shall mean Consolidated Cigar Holdings Inc. and its
subsidiaries.
On August 21, 1996, the Company, then a direct wholly-owned subsidiary
of Mafco Consolidated Group Inc. ("Mafco Consolidated Group"), completed an
initial public offering (the "IPO") in which it issued and sold 6,075,000
shares of its Class A Common Stock for $23.00 per share. The proceeds, net of
underwriters' discount and related fees and expenses, of $127.8 million, were
paid as a dividend to Mafco Consolidated Group. On March 20, 1997 the Company
completed a secondary offering (the "Offering"), of 5,000,000 shares of Class A
Common Stock sold by Mafco Consolidated Group, reducing its ownership in the
Company. The Company did not receive any of the proceeds from the Offering.
Mafco Consolidated Group's current ownership in the Company is 65.8%. Since
July 9, 1997, Mafco Consolidated Group has been a wholly-owned subsidiary of
Mafco Holdings Inc. ("Mafco Holdings"), which is owned by Ronald O. Perelman.
Prior to that date, Mafco Holdings held an 85% ownership interest in Mafco
Consolidated Group.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
accordingly include all adjustments (consisting only of normal recurring
accruals) which, in the opinion of management, are necessary for a fair
statement of the operations for the periods presented. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The fiscal year of the
Company is comprised of four quarters with each quarter consisting of thirteen
weeks ending on a Saturday except the last quarter which ends on December 31st.
The statements should be read in conjunction with the consolidated financial
statements of the Company and notes thereto for the fiscal year ended December
31, 1997, as filed with Form 10-K. The results of operations for the
thirty-nine week periods ended October 3, 1998 and September 27, 1997 are not
necessarily indicative of the results for the entire year.
-10-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION (CONTINUED)
During the first quarter of 1998, the Company adopted the Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of SFAS 130 had no impact
on the Company's net income or shareholders' equity. There was no difference
between the Company's net income and comprehensive income for the thirteen and
thirty-nine week periods ended October 3, 1998 and September 27, 1997.
NOTE B - INVENTORIES
The components of inventory are as follows:
<TABLE>
<CAPTION>
(In thousands)
December 31, 1997 October 3, 1998
----------------- ---------------
<S> <C> <C>
Raw materials and supplies $61,764 $88,830
Work in process 3,977 7,755
Finished goods 23,204 38,835
------- --------
$88,945 $135,420
======= ========
</TABLE>
NOTE C - EXTRAORDINARY ITEM
On March 2, 1998, the Company redeemed its 10 1/2% Senior Subordinated
Notes due 2003 (the "Senior Subordinated Notes") at a price of 103.00% of the
principal amount, together with accrued interest. As a result, the Company
recognized an extraordinary charge of $3.2 million, net of a $1.6 million
income tax benefit for this early extinguishment of debt.
Coinciding with the redemption of the Senior Subordinated Notes, the
Company entered into a new credit agreement (the "New Credit Agreement") with
Chase Manhattan Bank ("Chase") as administrative agent for the lenders. The New
Credit Agreement initially provided for an unsecured revolving credit facility
in an aggregate principal amount not to exceed $140.0 million. In addition to
financing the redemption of the Senior Subordinated Notes, the New Credit
Agreement was used to satisfy obligations under the previous credit agreement
as of March 2, 1998. On April 27, 1998, the New Credit Agreement was amended to
allow for an additional $50.0 million of borrowings for a total availability of
$190.0 million. The New Credit Agreement will be utilized as the source for
working capital needs and other general corporate purposes.
NOTE D - NET INCOME PER COMMON SHARE
For the thirteen and thirty-nine week periods ended October 3, 1998,
there was no difference between the basic and diluted earnings per share
("EPS") calculation. For the thirteen and thirty-nine week periods ended
September 27, 1997, the only difference between the basic and diluted EPS
calculation was the dilutive impact of stock options which are included in the
diluted EPS calculations.
-11-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COMPARISON OF THE THIRTEEN WEEKS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
AND THE THIRTY-NINE WEEKS ENDED OCTOBER 3, 1998 AND SEPTEMBER 27, 1997
Net sales were $66.4 million and $82.6 million for the thirteen weeks
ended October 3, 1998 (the "1998 Quarter") and September 27, 1997 (the "1997
Quarter"), respectively, a decrease of $16.2 million or 19.6%. Net sales were
$198.7 million and $214.9 million for the thirty-nine week periods ended
October 3, 1998 (the "1998 Period"), and September 27, 1997 (the "1997
Period"), respectively, a decrease of $16.2 million or 7.6%. The decrease in
net sales for the 1998 Quarter is primarily due to a decrease in premium cigar
unit volume sales. The decrease in net sales for the 1998 Period is primarily
due to a decrease in premium cigar volume units, partially offset by an
increase in natural-wrapped mass market sales. Sales for the 1998 Quarter and
the 1998 Period were negatively impacted by retailer/wholesaler inventory
imbalances and excessive inventories of historically unknown brands. These
trends could continue at least through the end of the current year and possibly
beyond depending on when normal customer ordering patterns resume.
Gross profit was $25.0 million and $36.9 million for the 1998 Quarter
and the 1997 Quarter, respectively, a decrease of $11.9 million or 32.2%. The
decrease in gross profit for the 1998 Quarter was due to the decrease in sales
and lower margins. Gross profit was $80.9 million and $95.0 million for the
1998 Period and the 1997 Period, respectively, a decrease of $14.1 million or
14.9%. The decrease in gross profit for the 1998 Period was due to the decrease
in sales and lower margins. As a percentage of net sales, gross profit was
37.7% for the 1998 Quarter, compared to 44.7% for the 1997 Quarter. Gross
profit for the 1998 Period was 40.7% compared to 44.2% for the 1997 Period. The
decrease in margin was primarily due to a shift in the sales mix to lower
margin cigars and the impact of tobacco cost increases.
Selling, general and administrative ("SG&A") expenses were $10.3 million
and $9.1 million for the 1998 and 1997 Quarters, respectively, an increase of
$1.2 million or 14.1%. SG&A expenses were $31.6 million and $29.1 million for
the 1998 Period and 1997 Period, respectively, an increase of $2.5 million or
8.7%. The increases for the 1998 Quarter and the 1998 Period were primarily due
to increased marketing and selling expenses. As a percentage of net sales, SG&A
expenses increased to 15.6% for the 1998 Quarter from 11.0% for the 1997
Quarter and to 15.9% for the 1998 Period from 13.5% for the 1997 Period. The
increases for the 1998 Quarter and the 1998 Period were primarily due to the
increased SG&A expenses on a lower net sales base, as compared to the 1997
Quarter and 1997 Period.
Operating income was $14.7 million and $27.8 million for the 1998
Quarter and 1997 Quarter, respectively, a decrease of $13.1 million or 47.3%.
Operating income was $49.3 million and $65.9 million for the 1998 Period and
the 1997 Period, respectively, a decrease of $16.6 million or 25.2%. As a
percentage of net sales, operating income decreased to 22.1% for the 1998
Quarter from 33.7% for the 1997 Quarter and to 24.8% for the 1998 Period from
30.7% for the 1997 Period. The decreases were primarily due to lower gross
profit margins and an increase in SG&A expenses as a percentage of net sales.
-12-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
Interest expense, net was $2.4 million and $2.5 million for the 1998
Quarter and 1997 Quarter, respectively. Interest expense, net was $7.4 million
and $7.6 million for the 1998 Period and the 1997 Period, respectively. The
decreases were primarily due to lower interest rates partially offset by higher
average borrowings.
The provision for income taxes as a percentage of income before income
taxes was 29.6% and 32.0% for the 1998 Quarter and 1997 Quarter, respectively,
and 32.0% for both the 1998 Period and 1997 Period. The decrease in the
effective rate for the 1998 Quarter was primarily due to a decrease in income
subject to United States taxation. Income tax expense for all periods reflects
provisions for federal income taxes, Puerto Rico tollgate taxes, and taxes on
Puerto Rico source income, together with state and franchise taxes.
An extraordinary charge of $3.2 million, net of a $1.6 million related
income tax benefit was recorded in the first quarter of 1998 as a result of the
early extinguishment of debt related to the Senior Subordinated Notes and the
previous credit agreement.
As a result of the foregoing, net income was $8.3 million and $16.8
million for the 1998 Quarter and 1997 Quarter, respectively, a decrease of $8.5
million, or 50.6%. Net income was $24.0 million and $38.4 million for the 1998
Period and the 1997 Period, respectively, a decrease of $14.4 million or 37.4%.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used for operating activities were $9.9 million for the
1998 Period. Net cash flows provided by operating activities were $9.6 million
for the 1997 Period. The decrease in cash flows of $19.5 million between the
two periods was due primarily to an increase in inventories combined with a
decrease in net income, which were partially offset by decreases in other
working capital requirements. The significant increase in demand for premium
cigars over the past few years has created shortages of most types of tobacco
leaf, resulting in the Company making commitments to increase its tobacco
purchases in 1998. Due to the slowdown in premium sales occurring in 1998 and
the increase in purchases of tobacco, the Company's inventory of raw tobacco
leaf has substantially increased. The Company has also substantially increased
its inventory of finished goods compared to the relative low levels of prior
periods. As a result of the increases in inventories, the Company has
undertaken a program to balance its raw material and finished goods inventory
requirements to levels more proportionate with current sales. Inventories
could continue to increase through the end of fiscal 1998, although they are
not expected to increase at the rate experienced during the 1998 Period.
Cash flows used for investing activities were $5.4 million for the 1998
Period and $19.0 million for the 1997 Period. The 1997 Period includes $14.4
million invested in Fabrica de Tabacos La Flor de Copan, S.A. de C.V. ("La
Flor"). La Flor is a manufacturer of hand-made cigars located in Santa Rosa,
Honduras. Capital expenditures in the 1998 and 1997 Periods amount to $3.7
million and $4.6 million, respectively, primarily relating to the expansion of
the Company's manufacturing facilities. Capital expenditures for the remainder
of 1998 are expected to be approximately $3.0 million.
-13-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Cash flows provided by financing activities were $15.6 million for the
1998 Period and $10.5 million for the 1997 Period. Cash flows provided by
financing activities for the 1998 Period consist primarily of net borrowings
under the New Credit Agreement to fund the debt redemption, reduced by
payments for the purchase of treasury stock and amounts due to affiliates.
Cash flows provided by financing activities for the 1997 Period consisted
primarily of borrowings under the previous credit agreement, reduced by
payments due to affiliates.
On February 11, 1998 the Company's Board of Directors authorized the
Company to repurchase from time to time up to 4.0 million shares of the
Company's Common Stock at prices deemed by the Company's officers to be
advantageous. The Board specified that any such purchase be subject to
compliance with applicable law and any credit or other agreements by which the
Company may be bound. The Company repurchased $9.4 million of Common Stock
during the 1998 Period and has classified them as treasury shares.
The Company's principal sources of working capital for the current year
will be generated from operations and borrowings under the New Credit
Agreement. The availability for borrowings under the New Credit Agreement, as
amended, was $190.0 million as of October 3, 1998, of which the Company had
borrowed $148.3 million (including letters of credit issued). Given the
availability of borrowing under the New Credit Agreement as amended, the
Company does not currently foresee the need to incur additional indebtedness
(other than from the New Credit Agreement), to meet its ongoing operating needs
during the next twelve months.
YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written
using two digits (rather than four) to define the applicable year. When the
Year 2000 occurs, these systems could interpret the year as 1900 rather than
2000. Unless hardware, system software and applications are corrected to be
Year 2000 compliant, computers and the devices they control could generate
miscalculations and create operational problems. Various systems could be
affected, ranging from complex information technology (IT) computer systems to
non-information technology (Non-IT) devices which include embedded technology
in equipment-related hardware and software, as well as communication systems.
To address this issue, the Company developed a multi-phase plan
including the formation of a team consisting of internal resources. The phases
of the plan include: inventorying affected technology and assessing the impact
of the Year 2000 issue on IT systems, Non IT systems (such as factory
equipment, building systems and other embedded systems) and business partner
readiness, developing solution plans, modification or replacement, testing and
certification, and developing contingency plans. The evaluation and assessment
phases of the components of software and hardware of the Company are complete
and the Company has adopted plans for remediation. At this time, modification
to existing software are essentially complete and testing phases have begun.
Computer hardware and most manufacturing control systems are currently
compliant. The Company's critical applications have been determined to be Year
2000 compliant and with modifications to existing software and conversions to
new software, the Year 2000 issue is not expected to pose significant
operational problems. Some Non-IT components have been determined to be in
non-compliance and some modifications have taken place and are continuing.
-14-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
YEAR 2000 ISSUE (CONTINUED)
The Company relies on third party suppliers for many products and
services and the Company could be adversely impacted if these suppliers, as
well as the Company's customers do not make the necessary changes to their own
systems and products successfully and in a timely manner. Formal communications
with all significant suppliers and customers have been established to determine
the extent to which related interfaces with Company systems are vulnerable if
these third parties fail to remediate their own Year 2000 issues. The responses
are being evaluated and incorporated into the current assessment with follow up
initiated where necessary. There can be no assurance that these third-party
systems will be converted on a timely basis and that they will not adversely
affect the Company's systems.
The Company expects to substantially complete and test Year 2000
modifications by the middle part of 1999. Based on preliminary information,
costs of addressing potential problems are not currently expected to exceed
$0.5 million and therefore not have a material adverse impact on the Company's
financial position, results of operations or cash flows in future periods.
Management of the Company believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. Nevertheless, since it is
not possible to anticipate all possible future outcomes, especially when third
parties are involved, there could be circumstances in which the Company would
be unable, in its usual fashion, to take customer orders, manufacture and ship
products, invoice customers or collect payments. In addition, failure of
critical suppliers and service providers to perform and disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the Company. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time, nor can the Company
identify specifically the most reasonably likely worst case scenario.
Contingency plans related to the Company's financial systems, embedded
chip technology and third-party relationships are not yet complete. These plans
may include among other actions, manual calculations, increasing certain
inventory levels and adjusting staffing requirements. Substantial completion of
these plans is expected by December 1998 with continual refinement to the plans
ongoing until all the Company's critical systems and all critical third-party
relationships have demonstrated Year 2000 compliance.
-15-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q filing, the words "believe," "should,"
"would" and similar expressions which are not historical are intended to
identify forward-looking statements that involve risks and uncertainties. Such
statements include, without limitation, expectations with respect to the
results for the full Year 1998, the Company's beliefs about trends in the cigar
industry and its views about the long-term future of the industry and the
Company, its plan to address the Year 2000 issue, the costs associated
therewith and the results of Year 2000 non-compliance by the Company or one or
more of its customers, suppliers or other strategic business partners. In
addition to factors that may be described in the Company's other Securities and
Exchange Commission filings, the following factors, among others, could cause
the Company's financial performance to differ materially from that expressed in
any forward-looking statements made by, or on behalf of, the Company: (i)
changes in consumer preference resulting in a decline in the demand for and
consumption of cigars; (ii) sustained inventory imbalances at the
retailer/wholesaler level; (iii) an inability on the part of the Company to
increase its production of premium cigars as a result of, among other things, a
shortage of raw materials; (iv) an increase in the price of raw materials; (v)
additional governmental regulation of tobacco products or further tobacco
industry litigation; (vi) enactment of new or significant increases in existing
excise taxes on cigars and pipe tobacco; (vii) the failure to receive a tax
credit with respect to the Company's Puerto Rico taxable earnings or the
elimination of an exemption from Puerto Rican income taxes; and (viii)
difficulties, delays or unanticipated costs in achieving Year 2000 compliance
or unanticipated consequences from non-compliance by the Company or one or more
of its customers, suppliers or other strategic business partners. The Company
does not undertake any responsibility to update the forward-looking statements
contained in this Form 10-Q filing.
-16-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*27.0 Financial Data Schedule.
(a) Reports on Form 8-K
Consolidated Cigar Holdings Inc. filed no reports on
Form 8-K during the fiscal quarter ended October 3, 1998.
* Filed herein.
-17-
<PAGE>
CONSOLIDATED CIGAR HOLDINGS INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Consolidated Cigar Holdings Inc.
(Registrant)
DATE: November 13, 1998 /s/ Theo W. Folz
----------------
Theo W. Folz
Chief Executive Officer
DATE: November 13, 1998 /s/ Gary R. Ellis
-----------------
Gary R. Ellis
Chief Financial Officer
-18-
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
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