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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 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
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SWISHER INTERNATIONAL GROUP INC.
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(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
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(Address of principal executive offices)
203-656-8000
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(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 July 31, 1997 was 6,000,000.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
Numbers
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income
Six Months and Three Months Ended June 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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 16
Signatures 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- -------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 6,419 $ 1,744
Accounts receivable, less allowance for doubtful accounts of
$2,033 and $1,783, respectively 34,301 22,365
Inventories 57,618 54,936
Deferred income taxes 2,032 1,512
Prepaid income taxes -- 323
Other current assets 3,407 2,247
-------- --------
Total current assets 103,777 83,127
-------- --------
Property, plant and equipment:
Land 1,319 1,319
Buildings and improvements 10,054 10,054
Machinery and equipment 47,427 46,284
Construction in progress 7,796 2,848
-------- --------
66,596 60,505
Less, accumulated depreciation 5,652 3,642
-------- --------
60,944 56,863
-------- --------
Goodwill, net of accumulated amortization of $2,396 and
$1,808, respectively 47,871 48,437
Prepaid pension cost 4,660 4,660
Other assets 6,125 6,152
-------- --------
Total assets $223,377 $199,239
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 18,557 $17,102
Accounts payable 6,982 4,927
Accrued expenses 7,463 8,087
Income taxes payable 895 --
-------- --------
Total current liabilities 33,897 30,116
Long-term debt 100,083 100,583
Deferred income taxes 7,012 4,898
Accrued postretirement and postemployment benefits 14,192 13,788
Other liabilities 3,308 3,311
-------- --------
Total liabilities 158,492 152,696
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 341 341
Paid-in capital 45,428 45,428
Retained earnings 19,039 774
Translation adjustments 77 --
-------- --------
Total stockholders' equity 64,885 46,543
-------- --------
Total liabilities and stockholders' equity $223,377 $199,239
======== ========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
3
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- ------------------------
1997 1996 1997 1996
-------- -------- ------ -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $134,468 $107,606 $70,669 $58,978
Cost of sales 68,244 53,851 34,924 28,900
-------- -------- ------- -------
Gross profit 66,224 53,755 35,745 30,078
Selling, general and administrative
expenses 31,807 28,661 16,275 14,679
-------- -------- ------- -------
Operating profit 34,417 25,094 19,470 15,399
Interest expense, net 4,250 4,635 2,120 2,321
Other (income) expense, net (12) 101 4 37
-------- -------- ------- -------
Income before income taxes 30,179 20,358 17,346 13,041
Provision for income taxes 11,914 7,986 6,846 5,116
-------- -------- ------- -------
Net income $ 18,265 $ 12,372 $10,500 $ 7,925
======== ======== ======= =======
Earnings per share $ .54 $ .36 $ .31 $ .23
======== ======== ======= =======
Weighted average shares outstanding 34,100 34,100 34,100 34,100
======== ======== ======= =======
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
4
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 18,265 $ 12,372
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,207 2,923
Deferred income taxes 1,594 1,306
Changes in assets and liabilities:
Accounts receivable (11,937) (4,673)
Inventories (2,682) (6,499)
Other current assets (1,161) (671)
Other assets (601) (873)
Accounts payable and accrued expenses 1,430 5
Income taxes 1,217 (1,295)
Long-term liabilities 400 1,008
Other, net 79 (134)
--------- ----------
Net cash provided by operating activities 9,811 3,469
--------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (6,091) (3,804)
--------- ----------
Net cash used in investing activities (6,091) (3,804)
---------- ----------
Cash flows from financing activities:
Change in short-term debt -- (20,000)
Long-term borrowings 44,600 96,404
Payments of long-term debt (43,645) (66,050)
Dividends paid to Hay Island -- (12,212)
--------- ----------
Net cash provided by (used in) financing activities 955 (1,858)
--------- ----------
Net increase (decrease) in cash and cash equivalents 4,675 (2,193)
Cash and cash equivalents, beginning of period 1,744 3,250
--------- ----------
Cash and cash equivalents, end of period $ 6,419 $ 1,057
========= ==========
The accompanying notes are an integral part of the condensed consolidated financial statements.
</TABLE>
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 adjustments, which consist of only normal recurring accruals, 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:
Six Months Ended
June 30,
-----------------------
1997 1996
------ -------
Interest, net of amount capitalized $3,143 $3,534
Income taxes 9,062 7,480
3. EARNINGS PER SHARE
Earnings per share for the six months and three months ended June 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 six months and
three months ended June 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:
June 30, December 31,
1997 1996
------- --------
Finished goods $12,605 $12,489
Work-in-process 2,806 2,809
Raw materials 34,384 31,023
Stores and supplies 7,823 8,615
------- -------
$57,618 $54,936
======= =======
5. DIVIDENDS
During the six months and three months ended June 30, 1996, cash
dividends of $12,212 and $12,000 were declared and paid to Hay Island Holding
Corporation ("Hay Island"), respectively.
6
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
6. PRO FORMA RESULTS OF OPERATIONS
The following summarizes the unaudited pro forma results of operations,
for the six months and three months ended June 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.
Six Months Three Months
Ended Ended
--------- ----------
June 30, 1996
---------------------------
Net sales $107,606 $58,978
Net income 14,708 9,093
Earnings per share .43 .27
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 having been rendered against smokeless tobacco or cigar
manufacturers.
The Company is named in two actions brought by plaintiffs against a
number of smokeless tobacco manufacturers and certain other organizations. These
actions seek damages and other relief in connection with injuries allegedly
sustained as a result of their use of the Company's products. The Company
believes that it has a number of meritorious defenses to such pending
litigation. Both cases are being, and will continue to be, vigorously defended.
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 any future suits, nor can there be any assurance that such
suits, if brought against the Company, or the Company's existing 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.
The legislation proposed by the settlement has not been introduced, and
even if it is introduced, there can be no assurance that it will be adopted.
Therefore, the Company can not anticipate the impact, if any, of such
legislation on the Company'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 June 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 June 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 June 30, 1997 Compared to Three Months Ended June 30, 1996
Net Sales. Net sales increased $11.7 million or 19.8% to $70.7 million for
the three months ended June 30, 1997 from $59.0 million for the three months
ended June 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 category and, to a lesser extent, price increases in all smokeless
tobacco categories.
Gross Profit. Gross profit increased $5.7 million or 18.8% to $35.7 million
(50.6% of net sales) for the three months ended June 30, 1997 from $30.1 million
(51.0% of net sales) for the three months ended June 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
decreased due to a shift in sales mix, and 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 $1.6 million or 10.9% to $16.3 million (23.0% of net sales ) for the
three months ended June 30, 1997 from $14.7 million (24.9% of net sales) for the
three months ended June 30, 1996. The increase of $1.6 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 $4.1 million or 26.4% to $19.5
million (27.6% of net sales) for the three months ended June 30, 1997 from $15.4
million (26.1% of net sales) for the three months ended June 30, 1996. The
increase, as a percentage of net sales, was primarily due to a decrease in SG&A
expenses as a percentage of net sales offset partially by lower gross profit
margins.
Interest Expense, Net. Interest expense, net decreased $.2 million or 8.7%
to $2.1 million for the three months ended June 30, 1997 from $2.3 million for
the three months ended June 30, 1996. For the three months ended June 30, 1997,
the average debt balance was $119.2 million, with an average effective interest
rate of 7.12%. For the three months ended June 30, 1996, the average debt
balance was $133.7 million, with an average effective interest rate of 6.94%.
Income Taxes. The effective income tax rate was 39.5% and 39.2% for the
three month periods ended June 30, 1997 and 1996, respectively.
Net Income. Net income increased $2.6 million or 32.5% to $10.5 million
(14.9% of net sales), for the three months ended June 30, 1997 from $7.9 million
(13.4% of net sales), for the three months ended June 30, 1996.
10
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Net Sales. Net sales increased $26.9 million or 25.0% to $134.5 million for
the six months ended June 30, 1997 from $107.6 million for the six months ended
June 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 and, to a
lesser extent, price increases in all smokeless tobacco categories.
Gross Profit. Gross profit increased $12.5 million or 23.2% to $66.2
million (49.2% of net sales) for the six months ended June 30, 1997 from $53.8
million (50.0% of net sales) for the six months ended June 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 decreased due to a shift in sales mix, and 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 $3.1 million or 11.0% to $31.8 million (23.7% of net sales ) for the
six months ended June 30, 1997 from $28.7 million (26.6% of net sales) for the
six months ended June 30, 1996. The increase of $3.1 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 $9.3 million or 37.2% to $34.4
million (25.6% of net sales) for the six months ended June 30, 1997 from $25.1
million (23.3% of net sales) for the six months ended June 30, 1996. The
increase, as a percentage of net sales, was primarily due to a decrease in SG&A
expenses as a percentage of net sales offset partially by lower gross profit
margins.
Interest Expense, Net. Interest expense, net decreased $.4 million or 8.3%
to $4.2 million for the six months ended June 30, 1997 from $4.6 million for the
six months ended June 30, 1996. For the six months ended June 30, 1997, the
average debt balance was $118.2 million, with an average effective interest rate
of 7.19%. For the six months ended June 30, 1996, the average debt balance was
$133.3 million, with an average effective interest rate of 6.95%.
Income Taxes. The effective income tax rate was 39.5% and 39.2% for the
six month periods ended June 30, 1997 and 1996, respectively.
Net Income. Net income increased $5.9 million or 47.6% to $18.3 million
(13.6% of net sales), for the six months ended June 30, 1997 from $12.4 million
(11.5% of net sales), for the six months ended June 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 $9.8 million and $3.5
million for the six month periods ended June 30, 1997 and 1996, respectively.
The increase of $6.3 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 $6.1 million and $3.8 million
for the six month periods ended June 30, 1997 and 1996, respectively. Cash flows
used in both periods related to investments in manufacturing equipment to expand
the Company's manufacturing capacity in mass market large cigars and little
cigars. For all of 1997, the Company currently expects that capital expenditures
will be between $12 million and $17 million and will be used to expand its
off-shore premium cigar production capacity (between $4.0 million and $5.0
million), 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. Capital expenditures are estimated to
be between $5 million and $8 million for each of 1998 and 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 provided by (used in) financing activities were $1.0 million and
$(1.9) million for the six month periods ended June 30, 1997 and 1996,
respectively. The 1997 amount is due principally to changes in long-term
borrowings. The 1996 amount 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 June 30, 1997, borrowings under the A Term Loan were $80.0 million,
borrowings under the B Term Loan were $28.5 million and borrowings under the
Revolver were $10.0 million and the Company had $15.825 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 June 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 six-month LIBOR and pays a fixed rate
of approximately 5.9%, as of June 30, 1997. If the Company had terminated these
agreements on June 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
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 two actions brought by plaintiffs against a
number of smokeless tobacco manufacturers and certain other organizations. These
actions seek damages and other relief in connection with injuries allegedly
sustained as a result of their use of the Company's products. The Company
believes that it has a number of meritorious defenses to such pending
litigation. Both cases are being, and will continue to be, vigorously defended.
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 any future suits, nor can there be any assurance that such
suits, if brought against the Company, or the Company's existing 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.
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.
14
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
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.
The legislation proposed by the settlement has not been introduced, and
even if it is introduced, there can be no assurance that it will be adopted.
Therefore, the Company can not anticipate the impact, if any, of such
legislation on the Company'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. In March 1997, plaintiffs filed an appeal from the District
Court's decision in the United States Court of Appeals for the First Circuit.
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.
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 six months ended
June 30, 1997.
16
<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: August 12, 1997 By /s/ William Ziegler, III
--------------------------- -------------------------------
William Ziegler, III
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date: August 12, 1997 By /s/ Robert A. Britton
--------------------------- ----------------------------
Robert A. Britton
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
17
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