FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
[ ] 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 1-12521
SWISHER INTERNATIONAL GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3857632
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
20 Thorndal Circle, Darien, CT 06820
(Address of principal executive offices)
203-656-8000
(Telephone Number)
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] No [ ]
The number of shares of Class A Common Stock (par value $.01) outstanding
at October 31, 1997 was 6,000,000.
<PAGE>
TABLE OF CONTENTS
Page
Numbers
-------
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996..................... 3
Condensed Consolidated Statements of Income
Nine and Three Months Ended September 30, 1997 and 1996...... 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996................ 5
Notes to Condensed Consolidated Financial Statements........... 6-9
Item 2. Management's Discussion and Analysis of the Results
of Operations and Financial Condition........................ 10-15
Part II. Other Information
Item 1. Legal Proceedings.............................................. 16
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures ............................................................... 18
2
<PAGE>
PART I. FINANCIAL INFORMATION
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,684 $ 1,744
Accounts receivable, less allowance for doubtful accounts of
$2,163 and $1,783, respectively 39,180 22,365
Inventories 54,189 54,936
Deferred income taxes 2,030 1,512
Prepaid income taxes -- 323
Other current assets 4,039 2,247
-------- --------
Total current assets 102,122 83,127
-------- --------
Property, plant and equipment:
Land 1,299 1,319
Buildings and improvements 10,792 10,054
Machinery and equipment 48,259 46,284
Construction in progress 9,022 2,848
-------- --------
69,372 60,505
Less, accumulated depreciation 6,603 3,642
-------- --------
62,769 56,863
-------- --------
Goodwill, net of accumulated amortization of $2,709 and
$1,808, respectively 47,558 48,437
Prepaid pension cost 4,660 4,660
Other assets 6,292 6,152
-------- --------
Total assets $223,401 $199,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 19,785 $ 17,102
Accounts payable 6,345 4,927
Accrued expenses 7,793 8,087
Income taxes payable 2,676 --
-------- --------
Total current liabilities 36,599 30,116
Long-term debt 84,830 100,583
Deferred income taxes 8,114 4,898
Accrued postretirement and postemployment benefits 14,604 13,788
Other liabilities 3,495 3,311
-------- --------
Total liabilities 147,642 152,696
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 341 341
Paid-in capital 45,428 45,428
Retained earnings 29,963 774
Translation adjustments 27 --
-------- --------
Total stockholders' equity 75,759 46,543
-------- --------
Total liabilities and stockholders' equity $223,401 $199,239
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- -------------------------
1997 1996 1997 1996
---------- --------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $209,959 $168,818 $75,491 $61,212
Cost of sales 106,024 85,883 37,780 32,032
-------- -------- ------- -------
Gross profit 103,935 82,935 37,711 29,180
Selling, general and administrative
expenses 49,456 44,515 17,649 15,854
-------- -------- ------- -------
Operating profit 54,479 38,420 20,062 13,326
Interest expense, net 6,135 7,088 1,885 2,453
Other expense, net 97 126 109 25
-------- -------- ------- -------
Income before income taxes 48,247 31,206 18,068 10,848
Provision for income taxes 19,058 12,242 7,144 4,256
-------- -------- ------- -------
Net income $ 29,189 $ 18,964 $10,924 $ 6,592
======== ======== ======= =======
Earnings per share $ .86 $ .56 $ .32 $ .19
======== ======== ======= =======
Weighted average shares outstanding 34,100 34,100 34,100 34,100
======== ========= ======== =======
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1997 1996
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 29,189 $ 18,964
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 4,808 4,383
Deferred income taxes 2,698 1,959
Gain on disposal of property, plant and equipment (29) --
Changes in assets and liabilities:
Accounts receivable (16,815) (1,567)
Inventories 747 (3,546)
Other current assets (1,792) (431)
Other assets (1,056) (1,294)
Accounts payable and accrued expenses 1,124 1,635
Income taxes 2,999 (1,573)
Long-term liabilities 1,001 1,813
Other, net 25 (14)
--------- ---------
Net cash provided by operating activities 22,899 20,329
--------- ---------
Cash flows from investing activities:
Proceeds from disposal of property, plant and equipment 563 --
Additions to property, plant and equipment (9,450) (4,298)
--------- ---------
Net cash used in investing activities (8,887) (4,298)
--------- ---------
Cash flows from financing activities:
Change in short-term debt -- (20,000)
Long-term borrowings 56,000 100,888
Payments of long-term debt (69,072) (84,275)
Dividends paid to Hay Island -- (12,475)
--------- ---------
Net cash used in financing activities (13,072) (15,862)
--------- ---------
Net increase in cash and cash equivalents 940 169
Cash and cash equivalents, beginning of period 1,744 3,250
--------- ---------
Cash and cash equivalents, end of period $ 2,684 $ 3,419
========= =========
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. ACCOUNTING POLICIES
The accompanying Condensed Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and the Notes thereto
contained in Swisher International Group Inc.'s (the "Company's") 1996 Annual
Report to Stockholders. The interim statements are unaudited but include all
normal recurring adjustments that management considers necessary to fairly
present the results for the interim periods. Results for interim periods are not
necessarily indicative of results for a full year. The year end balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
2. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
"Net cash provided by operating activities" includes the following cash
payments for interest and income taxes:
Nine Months Ended
September 30,
------------------------
1997 1996
---- ----
Interest, net of amount capitalized $ 6,664 $ 6,526
Income taxes 13,220 10,934
3. EARNINGS PER SHARE
Earnings per share for the nine months and three months ended September 30,
1997 have been computed based on the weighted average number of shares of common
stock outstanding during such periods. Earnings per share for the nine months
and three months ended September 30, 1996 have been computed based on the number
of shares of common stock outstanding subsequent to the completion of the
Initial Public Offering in December 1996.
4. INVENTORIES
Inventories consist of the following:
September 30, December 31,
1997 1996
------------ ----------
Finished goods $10,440 $12,489
Work-in-process 2,790 2,809
Raw materials 33,098 31,023
Stores and supplies 7,861 8,615
-------- --------
$54,189 $54,936
======== =======
All tobacco inventory is included in current assets in conformity with
standard industry practice, notwithstanding the fact that significant quantities
of inventory are carried for several years for purposes of the curing process.
6
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
5. DIVIDENDS
During the nine months and three months ended September 30, 1996, cash
dividends of $12,475 and $263 were declared and paid to Hay Island Holding
Corporation ("Hay Island"), respectively.
6. PRO FORMA RESULTS OF OPERATIONS
The following summarizes the unaudited pro forma results of operations, for
the nine months and three months ended September 30, 1996, as if a management
services agreement between the Company and Hay Island, dated January 1, 1997,
had been in effect on January 1, 1996. In addition, certain one-time special
bonuses to management in connection with the Initial Public Offering have been
excluded from the pro forma results of operations.
Nine Months Three Months
Ended Ended
-------------- ------------
September 30, 1996
----------------------------
Net sales $168,818 $61,212
Net income 22,468 7,760
Earnings per share .66 .23
7. CONTINGENCIES
The tobacco industry has experienced and is experiencing significant
health-related litigation. Plaintiffs in such litigation typically seek
compensation and, in some cases, punitive damages, for various injuries
allegedly resulting from the use of tobacco products or the exposure to tobacco
smoke, including health care costs. The Company is not aware of any adverse
decision or judgment against smokeless tobacco or cigar manufacturers.
The Company is named in one action brought by plaintiffs against a number
of smokeless tobacco manufacturers and certain other organizations. This action
seeks damages and other relief in connection with injuries allegedly sustained
as a result of plaintiff's use of the Company's products. The Company believes
that it has a number of meritorious defenses to the action and will continue to
defend against it vigorously.
The Company is also subject to other litigation, claims and contractual
agreements arising in the ordinary course of business. In the opinion of
management, the cost, if any, of resolving all litigation and contingencies
should not have a significant impact on the Company's consolidated financial
position. There can be no assurance, however, that the Company may not be named
as a defendant in future suits, nor can there be any assurance that existing or
future litigation will not result in an adverse judgment against the Company
which could have a material adverse effect on the Company's business, future
results of operations or cash flows. The Company does not carry insurance to
protect against health-related product liability because the cost of obtaining
such insurance is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product and any related products, could preclude the
further sale of such products, the result of which could have a material adverse
effect on the Company's business.
7
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
7. CONTINGENCIES (continued)
In 1996, the federal Food and Drug Administration ("FDA") promulgated new
regulations prohibiting the sale of smokeless tobacco products to persons under
the age of 18 years, restricting certain marketing and manufacturing practices
and placing limitations on access to such products. The portions of the
regulations requiring age identification took effect in February 1997. On April
25, 1997, a U.S. District Court in North Carolina held that the FDA was
authorized to regulate tobacco products, but invalidated the portions of the
regulations that sought to restrict advertising and promotion and stayed the
effectiveness of the access provisions due to become effective in August 1997
pending further order of the court. The District Court decision has been
appealed to the United States Court of Appeals for the Fourth Circuit. See "Part
II. Other Information - Item 1. Legal Proceedings". The remaining provisions of
the regulation are due to take effect in 1998. Any further provisions of these
regulations that become effective could have a materially adverse effect on the
Company's business.
Cigars and smokeless tobacco products have long been subject to federal,
state and local excise taxes. Such taxes are frequently subject to proposed
increases, in some cases significantly, to fund various legislative initiatives.
The Balanced Budget Act adopted by Congress in July 1997, provides for increases
in the federal excise taxes on all tobacco products in two stages beginning in
2000.
The Company is subject to laws and regulations relating to the protection
of the environment. While it is not possible to quantify with certainty the
potential impact of future actions regarding environmental matters, in the
opinion of management, compliance with the present environmental protection
laws, will not have a material adverse impact, if any, upon the Company's
consolidated financial position, results of operations or cash flows.
In June 1997, the five largest U.S. tobacco companies announced an
agreement with trial lawyers and the Attorneys General of the various states
suing those tobacco companies for Medicare/Medicaid reimbursement. The
settlement proposed the adoption of new federal legislation which would, among
other things, provide for the payment of substantial penalties by tobacco
companies and subject tobacco companies to regulation by the FDA.
The Company has not been advised as to the extent, if any, to which the
participants in the settlement negotiations intended for the Company to be
effected by the agreement or the resulting legislation. However, press reports
indicate that the focus of the legislation will be directed at manufacturers of
cigarettes and smokeless tobacco.
8
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
7. CONTINGENCIES (continued)
The Company was not a participant in the negotiations leading to the
agreement nor is it a party to any of the class actions or State lawsuits the
agreement was designed to settle. Accordingly, the Company believes that it
should not be required to make any payments under the legislation resulting from
the settlement, and intends to defend itself vigorously against being subject to
these obligations.
In November 1997, several pieces of legislation were introduced in the U.S.
Senate in response to proposals set forth in the settlement. That legislation
appears to cover all tobacco products. There can be no assurance that any of
this new legislation will be adopted or, if adopted, whether it will survive in
the form introduced. Therefore, the Company cannot anticipate the impact, if
any, of such proposed legislation on it's business.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128, "Earnings Per Share", which is effective for periods ending after
December 15, 1997, including interim periods. SFAS No. 128 establishes standards
for computing and presenting earnings per share ("EPS") by replacing primary EPS
with the presentation of basic EPS and requiring dual presentation of basic and
diluted EPS on the face of the income statement. The Company estimates the
calculations will not have a material impact on EPS.
In September 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which requires that changes in comprehensive income be shown in a
financial statement that is displayed with the same prominence as other
financial statements. This statement is effective for the Company's 1998 fiscal
year. Management has not yet evaluated the effects of this change on the
Company's financial statements.
In September 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information", which changes the way public
companies report information about segments. SFAS No. 131, which is based on the
management approach to segment reporting, includes requirements to report
selected segment information quarterly and entity-wide disclosures about
products and services, major customers, and the material countries in which the
entity holds assets and reports revenues. This statement is effective for the
Company's 1998 fiscal year. Management has not yet evaluated the effects of this
change on the Company's financial statements.
9
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Three Months Ended September 30, 1997 Compared to Three Months Ended
September 30, 1996
Net Sales. Net sales increased $14.3 million or 23.3% to $75.5 million for
the three months ended September 30, 1997 from $61.2 million for the three
months ended September 30, 1996. The increase in net sales was due to higher
sales of cigars and smokeless tobacco products. Cigar sales increased
principally due to unit volume growth and, to a lesser extent, price increases
in all cigar categories. Cigar sales also increased as a result of a shift in
sales mix to higher priced cigars. Smokeless tobacco sales increased as a result
of volume growth in the moist snuff and loose leaf chew categories and, to a
lesser extent, price increases in all smokeless tobacco categories.
Gross Profit. Gross profit increased $8.5 million or 29.2% to $37.7 million
(50.0% of net sales) for the three months ended September 30, 1997 from $29.2
million (47.7% of net sales) for the three months ended September 30, 1996. The
increase in gross profit for 1997 was due to the increase in net sales in all
cigar and smokeless tobacco product categories. As a percentage of net sales,
gross profit increased due to a shift in sales mix, offset partially by an
increase in labor training costs as a result of adding a third production shift
and little cigar production at the Company's facility in Jacksonville, Florida.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $1.8 million or 11.3% to $17.7 million (23.4% of net sales ) for the
three months ended September 30, 1997 from $15.9 million (25.9% of net sales)
for the three months ended September 30, 1996. The increase of $1.8 million is
principally due to an increase in marketing expenses, offset in part by a
reduction in administrative expenses, as a result of the management services
agreement between the Company and Hay Island and the one-time special bonuses
paid to management in 1996. The decrease, as a percentage of net sales, was
primarily due to SG&A expenses increasing at a lower rate relative to the
increase in net sales as a consequence of management's effort to monitor and
reduce expenses.
Operating Profit. Operating profit increased $6.7 million or 50.5% to $20.1
million (26.6% of net sales) for the three months ended September 30, 1997 from
$13.3 million (21.8% of net sales) for the three months ended September 30,
1996. The increase, as a percentage of net sales, was primarily due to higher
gross profit margins and a decrease in SG&A expenses as a percentage of net
sales.
Interest Expense, Net. Interest expense, net decreased $.6 million or 23.2%
to $1.9 million for the three months ended September 30, 1997 from $2.5 million
for the three months ended September 30, 1996. For the three months ended
September 30, 1997, the average debt balance was $111.6 million, with an average
effective interest rate of 6.75%. For the three months ended September 30, 1996,
the average debt balance was $131.7 million, with an average effective interest
rate of 7.45%.
Income Taxes. The effective income tax rate was 39.5% and 39.2% for the
three month periods ended September 30, 1997 and 1996, respectively.
Net Income. Net income increased $4.3 million or 65.7% to $10.9 million
(14.5% of net sales), for the three months ended September 30, 1997 from $6.6
million (10.8% of net sales), for the three months ended September 30, 1996.
10
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Nine Months Ended September 30, 1997 Compared to Nine Months Ended
September 30, 1996
Net Sales. Net sales increased $41.1 million or 24.4% to $210.0 million for
the nine months ended September 30, 1997 from $168.8 million for the nine months
ended September 30, 1996. The increase in net sales was due to higher sales of
cigars and smokeless tobacco products. Cigar sales increased principally due to
unit volume growth and, to a lesser extent, price increases in all cigar
categories. Cigar sales also increased as a result of a shift in sales mix to
higher priced cigars. Smokeless tobacco sales increased as a result of volume
growth in all smokeless tobacco categories and, to a lesser extent, price
increases in all smokeless tobacco categories.
Gross Profit. Gross profit increased $21.0 million or 25.3% to $103.9
million (49.5% of net sales) for the nine months ended September 30, 1997 from
$82.9 million (49.1% of net sales) for the nine months ended September 30, 1996.
The increase in gross profit for 1997 was due to the increase in net sales in
all cigar and smokeless tobacco product categories. As a percentage of net
sales, gross profit increased due to a shift in sales mix, offset partially by
an increase in labor training costs as a result of adding a third production
shift and little cigar production at the Company's facility in Jacksonville,
Florida.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $4.9 million or 11.1% to $49.5 million (23.6% of net sales) for the
nine months ended September 30, 1997 from $44.5 million (26.4% of net sales) for
the nine months ended September 30, 1996. The increase of $4.9 million is
principally due to an increase in marketing expenses, offset in part by a
reduction in administrative expenses, as a result of the management services
agreement between the Company and Hay Island and the one-time special bonuses
paid to management in 1996. The decrease, as a percentage of net sales, was
primarily due to SG&A expenses increasing at a lower rate relative to the
increase in net sales as a consequence of management's effort to monitor and
reduce expenses.
Operating Profit. Operating profit increased $16.1 million or 41.8% to
$54.5 million (25.9% of net sales) for the nine months ended September 30, 1997
from $38.4 million (22.8% of net sales) for the nine months ended September 30,
1996. The increase, as a percentage of net sales, was primarily due to higher
gross profit margins, and a decrease in SG&A expenses as a percentage of net
sales.
Interest Expense, Net. Interest expense, net decreased $1.0 million or
13.4% to $6.1 million for the nine months ended September 30, 1997 from $7.1
million for the nine months ended September 30, 1996. For the nine months ended
September 30, 1997, the average debt balance was $111.2 million, with an average
effective interest rate of 7.36%. For the nine months ended September 30, 1996,
the average debt balance was $126.5 million, with an average effective interest
rate of 7.47%.
Income Taxes. The effective income tax rate was 39.5% and 39.2% for the
nine month periods ended September 30, 1997 and 1996, respectively.
Net Income. Net income increased $10.2 million or 53.9% to $29.2 million
(13.9% of net sales), for the nine months ended September 30, 1997 from $19.0
million (11.2% of net sales), for the nine months ended September 30, 1996.
11
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Liquidity and Capital Resources
Net cash flows provided by operating activities were $22.9 million and
$20.3 million for the nine month periods ended September 30, 1997 and 1996,
respectively. The increase of $2.6 million was primarily due to an increase in
net income, offset partially by higher working capital requirements resulting
from increased accounts receivable and inventory levels associated with higher
sales volumes. Historically, the Company's capital requirements have
approximated its depreciation expense. As the Company expands its manufacturing
operations, depreciation expense will increase, but in the near term will be
less than expenditures on capital projects. The Company will fund its projects
using internal cash flow and, if needed, bank borrowings.
Working capital requirements can be expected to grow as the Company's
business grows. The Company's raw material inventory requirements for cigar
production are relatively modest due to its long standing relationships with
major tobacco suppliers who commit to supply tobacco inventory as needed by the
Company. The Company's largest working capital requirements are driven by its
smokeless tobacco operations. The tobacco for dry and moist snuff and loose leaf
chewing tobacco requires aging of two to three years before being processed into
finished products. The Company maintains sufficient smokeless tobacco raw
material inventories to ensure proper aging and an adequate supply. Although the
Company's business is not seasonal, purchases of smokeless tobacco raw material
inventory typically occur from the middle of the fourth quarter through the end
of the first quarter of each year. The Company will fund its seasonal working
capital requirements through operating cash flows, and, if needed, bank
borrowings.
Cash flows used in investing activities were $8.9 million and $4.3 million
for the nine month periods ended September 30, 1997 and 1996, respectively. For
all of 1997, the Company expects that capital expenditures will be approximately
$16 million and will be used to expand its off-shore premium cigar production
capacity, expand its domestic production capacity in mass market large cigars
and little cigars, expand its smokeless tobacco production capacity and continue
its current maintenance capital program. Cash flows used in 1996 related to
investments in manufacturing equipment to expand the Company's manufacturing
capacity in mass market large cigars and little cigars. Capital expenditures are
estimated to be between $10 million and $15 million in 1998 and between $5
million and $8 million in 1999 and are expected to be used to maintain existing
equipment and facilities as well as increase production capacity. The capital
expenditures referred to above are expected to be funded by cash flows from
operations.
Cash flows used in financing activities were $13.1 million and $15.9
million for the nine month periods ended September 30, 1997 and 1996,
respectively. The 1997 use is due principally to changes in long-term
borrowings. The 1996 use is due principally to changes in long-term borrowings
and short-term debt, and dividends paid to Hay Island.
12
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
As of September 30, 1997, borrowings under the A Term Loan were $76.250
million, borrowings under the B Term Loan were $28.250 million, and the Company
had $25.825 million of unused availability thereunder, after taking into account
approximately $1.175 million utilized to support letters of credit.
To convert floating rate debt into fixed rate debt, the Company has two
interest rate swap agreements. As of September 30, 1997, the total notional
amount covered by existing swap agreements was $55.0 million. The agreements are
each for a period of three years expiring on November 16, 1998 and July 2, 1999.
The notional amount decreases to $50.0 million on November 16, 1997 and $15.0
million on November 16, 1998. Under the terms of these agreements, the Company
receives a variable interest rate equal to nine-month LIBOR and pays a fixed
rate of approximately 5.9%, as of September 30, 1997. If the Company had
terminated these agreements on September 30, 1997 or 1996, the effect, as of the
end of each period, would be insignificant.
The Company believes that net cash flow generated from future operations
and the availability of borrowings under the Revolver will be sufficient to fund
its working capital requirements, capital expenditures and debt service
requirements for the foreseeable future.
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
Although the Company's business is generally non-seasonal, consumption of
smokeless tobacco products increases slightly during the summer months.
Additionally, purchases of smokeless tobacco raw materials typically occur from
the middle of the fourth quarter to the end of the first quarter.
Regulation
In 1996, the FDA promulgated new regulations prohibiting the sale of
smokeless tobacco products to persons under the age of 18 years, restricting
certain marketing and manufacturing practices and placing limitations on access
to such products. The portions of the regulation requiring age identification
took effect in February 1997. On April 25, 1997, a U.S. District Court in North
Carolina held that the FDA was authorized to regulate tobacco products, but
invalidated the portions of the regulations that sought to restrict advertising
and promotion and stayed the effectiveness of the access provisions due to
become effective in August 1997 pending further order of the court. The District
Court decision has been appealed to the United States Court of Appeals for the
Fourth Circuit. See "Part II. Other Information - Item 1. Legal Proceedings".
The remaining provisions of the regulations are due to take effect in 1998. Any
further provisions of these regulations that become effective could have a
materially adverse effect on the Company's business.
13
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
The Company is subject to laws and regulations relating to the protection
of the environment. While it is not possible to quantify with certainty the
potential impact of future actions regarding environmental matters, in the
opinion of management, compliance with the present environmental protection
laws, will not have a material adverse impact, if any, upon the Company's
consolidated financial position, results of operations or cash flows.
Excise Taxes
Cigars and smokeless tobacco products have long been subject to federal,
state and local excise taxes. Such taxes are frequently subject to proposed
increases, in some cases significantly, to fund various legislative initiatives.
The Balanced Budget Act adopted by Congress in July 1997, provides for increases
in the federal excise taxes on all tobacco products in two stages beginning in
2000.
Litigation
The tobacco industry has experienced and is experiencing significant
health-related litigation. Plaintiffs in such litigation typically seek
compensation and, in some cases, punitive damages, for various injuries
allegedly resulting from the use of tobacco products or the exposure to tobacco
smoke, including health care costs. The Company is not aware of any adverse
decision or judgment having been rendered against smokeless tobacco or cigar
manufacturers.
The Company is named in one action brought by a plaintiff against a number
of smokeless tobacco manufacturers and certain other organizations. This action
seeks damages and other relief in connection with injuries allegedly sustained
as a result of plaintiff's use of the Company's products. The Company believes
that it has a number of meritorious defenses to the action and will continue to
defend against it vigorously.
The Company is also subject to other litigation, claims and contractual
agreements arising in the ordinary course of business. In the opinion of
management, the cost, if any, of resolving all litigation and contingencies
should not have a significant impact on the Company's consolidated financial
position. There can be no assurance, however, that the Company may not be named
as a defendant in future suits, nor can there be any assurance that existing or
future litigation will not result in an adverse judgment against the Company
which could have a material adverse effect on the Company's business, future
results of operations or cash flows. The Company does not carry insurance to
protect against health-related product liability because the cost of obtaining
such insurance is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product and any related products, could preclude the
further sale of such products, the result of which could have a material adverse
effect on the Company's business.
In June 1997, the five largest U.S. tobacco companies announced an
agreement with trial lawyers and the Attorneys General of the various states
suing those tobacco companies for Medicare/Medicaid reimbursement. The
settlement proposed the adoption of new federal legislation which would, among
other things, provide for the payment of substantial penalties by tobacco
companies and subject tobacco companies to regulation by the FDA.
14
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
The Company has not been advised as to the extent, if any, to which the
participants in the settlement negotiations intended for the Company to be
effected by the agreement or the resulting legislation. However, press reports
indicate that the focus of the legislation will be directed at manufacturers of
cigarettes and smokeless tobacco.
The Company was not a participant in the negotiations leading to the
agreement nor is it a party to any of the class actions or State lawsuits the
agreement was designed to settle. Accordingly, the Company believes that it
should not be required to make any payments under the legislation resulting from
the settlement, and intends to defend itself vigorously against being subject to
these obligations.
In November 1997, several pieces of legislation were introduced in the U.S.
Senate in response to proposals set forth in the settlement. That legislation
appears to cover all tobacco products. There can be no assurance that any of
this new legislation will be adopted or, if adopted, whether it will survive in
the form introduced. Therefore, the Company cannot anticipate the impact, if
any, of such proposed legislation on it's business.
Other
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q contain
forward-looking statements that are based on current expectations, estimates and
projections about the industry in which the Company operates, management's
beliefs and assumptions made by management. Words such as "expects", "believes",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
15
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a plaintiff, along with other smokeless tobacco
manufacturers, in United States Tobacco, et al. v. Harshbarger, et al., a suit
commenced on August 7, 1996 in the United States District Court for the District
of Massachusetts. In 1996, the plaintiffs in the action filed a motion for
summary judgment arguing that Massachusetts was preempted by the federal
Comprehensive Smokeless Tobacco Health Education Act of 1986 ("CSTHEA") from
enforcing a statute requiring manufacturers to disclose the identity and
relative quantities of ingredients added to tobacco in the manufacturing process
on a brand specific basis. The defendant in the action, the Massachusetts
Commissioner of Public Health, filed a cross motion on the same subject. On
February 10, 1997, the Court denied the plaintiffs' motion and granted the
defendant's motion. The United States Court of Appeals for the Fourth Circuit
upheld the District Court decision. In September, 1997, plaintiffs moved for a
preliminary injunction on the grounds that enforcement of the statute would
constitute an unconstitutional taking of plaintiffs' proprietary information.
The Company is also a plaintiff (along with other manufacturers of tobacco
products, and certain organizations representing the advertising industry and
representatives of the retailing community) in United States Tobacco, et al. v.
United States Food and Drug Administration, et al., an action filed in the
United States District Court for the Middle District of North Carolina on
September 19, 1995, pursuant to which plaintiffs are challenging the FDA's
ability to enforce regulations promulgated in 1996, with respect to the
marketing of and public access to certain tobacco products. On October 15, 1996,
plaintiffs filed a motion for summary judgment in the suit arguing that the
FDA's enforcement of certain of the regulations pertaining to advertising and
promotion of plaintiffs' products was preempted by CSTHEA and , further, that
FDA lacked jurisdiction to regulate plaintiffs. On April 25, 1997, the Court
issued an opinion granting plaintiffs' motion with respect to the advertising
and promotion issue and denying the motion with respect to the FDA's
jurisdiction. The Company and the other tobacco manufacturers which were
plaintiffs in the action have filed an interlocutory appeal from the decision in
the United States Court of Appeals for the Fourth Circuit.
The Company, along with other tobacco manufacturers, wholesaler/retailers
and other defendants, was a defendant in Lonkowski v. R.J. Reynolds, et al., a
wrongful death action filed by decedent's surviving spouse and children which
alleged fraud, misrepresentation, breach of warranty and negligence among other
things, and which sought unspecified damages. The suit was filed in the 14th
Judicial District in Lake Charles, Louisiana in 1996 and was later removed to
the United States District Court for the Western District of Louisiana. On
October 27, 1997, by order of the U.S. District Court, the suit was dismissed
with prejudice.
16
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 --Financial Data Schedule.
27.2 --Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the nine months ended
September 30, 1997.
17
<PAGE>
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.
Swisher International Group Inc.
Date: November 14, 1997 By /s/ William Ziegler, III
--------------------------- ---------------------------
William Ziegler, III
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date: November 14, 1997 By /s/ Robert A. Britton
--------------------------- ------------------------
Robert A. Britton
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer
18
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