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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 June 30, 1998
[ ] 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
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(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, 1998 was 5,778,300.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Numbers
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Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997..................................................... 3
Condensed Consolidated Statements of Income
Six Months and Three Months Ended June 30, 1998 and 1997 ............................... 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997................................................. 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>
2
<PAGE>
PART I. FINANCIAL INFORMATION
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,090 $ 1,057
Accounts receivable, less allowance for doubtful accounts of
$1,842 and $1,643, respectively 39,583 32,348
Inventories 75,872 60,714
Deferred income taxes 1,218 1,218
Other current assets 4,684 3,096
--------- ---------
Total current assets 122,447 98,433
--------- ---------
Property, plant and equipment:
Land 1,299 1,299
Buildings and improvements 20,969 10,812
Machinery and equipment 53,846 51,300
Construction in progress 4,511 11,998
--------- ---------
80,625 75,409
Less, accumulated depreciation 9,323 7,155
--------- ---------
71,302 68,254
--------- ---------
Goodwill, net of accumulated amortization of $4,144 and
$3,512, respectively 46,102 46,733
Investment in Affiliates 14,674 13,315
Prepaid pension cost 4,972 4,972
Other assets 5,447 6,050
--------- ---------
Total assets $ 264,944 $ 237,757
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 10,000 $ --
Short-term debt 10,000 --
Accounts payable 8,263 8,102
Accrued expenses 8,379 8,657
Due to Affiliates -- 5,900
Income taxes payable 5,042 2,863
--------- ---------
Total current liabilities 41,684 25,522
Long-term debt 96,081 101,092
Deferred income taxes 8,847 7,296
Accrued postretirement and postemployment benefits 14,991 14,241
Other liabilities 3,707 3,657
--------- ---------
Total liabilities 165,310 151,808
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock 341 341
Paid-in capital 45,428 45,428
Retained earnings 56,693 40,069
Treasury stock, at cost, 221,700 shares (2,895) --
Cumulative translation adjustments 67 111
--------- ---------
Total stockholders' equity 99,634 85,949
--------- ---------
Total liabilities and stockholders' equity $ 264,944 $ 237,757
========= =========
</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 amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------ ---------------------------
1998 1997 1998 1997
------------ ----------- --------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 130,506 $ 134,468 $ 70,223 $ 70,669
Cost of sales 65,113 68,244 35,661 34,924
--------- --------- --------- ---------
Gross profit 65,393 66,224 34,562 35,745
Selling, general and administrative expenses 34,642 31,807 18,246 16,275
--------- --------- --------- ---------
Operating profit 30,751 34,417 16,316 19,470
Interest expense, net 3,695 4,250 1,899 2,120
Other (income) expense, net (124) (12) 34 4
--------- --------- --------- ---------
Income before income taxes 27,180 30,179 14,383 17,346
Provision for income taxes 10,556 11,914 5,627 6,846
--------- --------- --------- ---------
Net income $ 16,624 $ 18,265 $ 8,756 $ 10,500
========= ========= ========= =========
Earnings per share:
Basic $ .49 $ .54 $ .26 $ .31
========= ========= ========= =========
Diluted $ .49 $ .54 $ .26 $ .31
========= ========= ========= =========
Weighted average shares outstanding:
Basic 33,942 34,100 33,878 34,100
========= ========= ========= =========
Diluted 33,942 34,100 33,878 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>
Six Months Ended
June 30,
------------------------------------
1998 1997
------------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 16,624 $ 18,265
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,424 3,207
Deferred income taxes 1,551 1,594
Changes in assets and liabilities:
Accounts receivable (7,245) (11,937)
Inventories (15,173) (2,682)
Other current assets (1,589) (1,161)
Other assets (24) (601)
Accounts payable and accrued expenses (123) 1,430
Income taxes 2,178 1,217
Other liabilities 800 400
Other, net -- 79
--------- ---------
Net cash provided by operating activities 423 9,811
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,216) (6,091)
Investments in Affiliates (7,259) --
--------- ---------
Net cash used in investing activities (12,475) (6,091)
--------- ---------
Cash flows from financing activities:
Long-term borrowings 291,200 44,600
Payments of long-term debt (286,211) (43,645)
Change in short-term debt 10,000 --
Repurchase of common stock (2,895) --
--------- ---------
Net cash provided by financing activities 12,094 955
--------- ---------
Effect of foreign exchange rate on cash (9) --
--------- ---------
Net increase in cash and cash equivalents 33 4,675
Cash and cash equivalents, beginning of period 1,057 1,744
--------- ---------
Cash and cash equivalents, end of period $ 1,090 $ 6,419
========= =========
</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 share data)
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") 1997
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, as presented here, 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,
---------------------
1998 1997
------- -------
Interest, net of amount capitalized $2,750 $3,143
Income taxes 6,813 9,062
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share". SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously required fully diluted earnings per share.
All earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements. Weighted
average shares used in computing diluted earnings per share may differ from the
weighted average shares used in computing basic earnings per share as a result
of employee stock options.
4. INVENTORIES
Inventories consist of the following:
June 30, December 31,
1998 1997
-------- ----------
Finished goods $24,823 $16,908
Work-in-process 2,635 2,871
Raw materials 39,220 33,485
Stores and supplies 9,194 7,450
-------- -------
$75,872 $60,714
======= =======
6
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES
The tobacco industry continues to experience significant health-related
litigation. Plaintiffs in such cases typically seek compensation and, in some
cases, punitive damages, for various injuries allegedly sustained from the use
of tobacco products or 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 a defendant, along with other defendants in an action
brought by an individual plaintiff in Louisiana seeking damages and other relief
in connection with injuries allegedly resulting from use of the Company's and
the other defendants' products. In addition, the Company together with other
defendants has been named in a Texas action brought by another individual
seeking damages and other relief in connection with injuries allegedly caused to
plaintiff by products manufactured by the Company and the other defendants. The
Company believes that it has meritorious defenses and is vigorously defending
these lawsuits.
The Company is also a defendant along with multiple other defendants in
three actions brought under California Proposition 65 and the California Unfair
Competition Act (see "Legal Proceedings").
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 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
coverage is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product or any related products could preclude the
further sale of such product, which could have a material adverse effect on the
Company's business.
In 1996, the federal Food and Drug Administration ("FDA") for the first
time asserted jurisdiction over nicotine in tobacco as a "drug" and issued
regulations purporting to regulate smokeless tobacco products as "medical
devices." These regulations prohibit the sale of smokeless tobacco products to
minors and severely restrict advertising, marketing and promotion of smokeless
tobacco products. The regulations also require the Company and other
manufacturers to comply with a wide range of labeling, reporting and other
requirements. In 1997, ruling in a case filed by the Company and other smokeless
tobacco manufacturers to challenge the FDA's authority, a federal court held
that the FDA as a matter of law is not precluded from regulating smokeless
tobacco products as "medical devices" or from implementing certain labeling and
access restrictions. At the same time, however, the court said that the FDA has
no authority to restrict the advertising and promotion of smokeless tobacco
products and stayed the effectiveness of any of the restrictions related to
labeling, access, advertising and promotion due to take effect in 1997 and 1998
pending further order of the court. The court's opinion was appealed to the U.S.
Court of Appeals for the Fourth Circuit in 1997. Due to the death of one of the
Appeals Court judges who originally heard the appeal, the appeal was reargued on
June 9, 1998 before a reconstituted appellate panel. The Company is unable to
predict the outcome of the appeal or its impact on those portions of the
7
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES (continued)
regulations that have not been given effect. 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 significant increases, to fund various
legislative initiatives. The Balanced Budget Act adopted by Congress in 1997,
provides for increases in federal excise taxes on all tobacco products in two
stages, beginning in 2000. Management does not believe that these increases will
have a material adverse effect on the Company's operations; however, enactment
of new or significant further increases in existing federal, state or local
excise taxes could have a material adverse effect on the Company's business.
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 upon the Company's
consolidated financial position, results of operations or cash flows.
In June 1997, the five largest tobacco companies announced an agreement
with trial lawyers and the Attorneys General of several states suing to recoup
Medicare and Medicaid expenses (the "Proposed Settlement"). Although the Company
was not a party to any of the actions being settled (the "State AG Actions"),
legislation introduced in Congress in the wake of the Proposed Settlement sought
to raise the price of cigarettes and other tobacco products significantly and to
regulate all tobacco products (including smokeless tobacco and, in some cases,
cigars) by imposing full FDA regulation and by adopting new and highly
restrictive marketing requirements. The legislation was defeated in June 1998;
however, press reports indicate that alternative legislation is being developed
in the Congress and that the tobacco companies which were parties to the
Proposed Settlement have entered into new negotiations with the state Attorneys
General to settle the State AG Actions. The Company cannot anticipate whether
the new legislation, if introduced, will be adopted; whether the State AG
Actions will be settled; or the extent to which such potential legislation or
settlement may impact the Company's business.
On February 9, 1998, the Company was notified by the Federal Trade
Commission ("FTC") of the adoption by the FTC of an Order to File a Special
Report on the Company's advertising and marketing expenditures with regard to
its cigar business for 1997 and 1996. This information which is similar to
information the Company has filed with the FTC for many years with respect to
its smokeless tobacco products, was filed on April 9, 1998.
6. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130, which the Company
adopted in the first quarter of 1998, establishes standards for reporting and
displaying comprehensive income and its components. The Company's comprehensive
income consists of net income and foreign currency translation adjustments.
Comprehensive Income for the six months and three months ended June 30, 1998 was
$16,580 and $8,755, respectively.
8
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
7. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, "Disclosure 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's disclosure
requirements become effective for the Company as of the end of the 1998 fiscal
year. The Company is in the process of evaluating the disclosure requirements
under this standard.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends SFAS No. 87, 88,
and 106, and is intended to standardize the disclosure requirements for employer
sponsored retirement plans and other retiree benefits. SFAS No. 132 will require
new information from plan sponsors, eliminate certain information that is no
longer considered useful, but will not modify recognition or measurement
requirements. The Company has not yet evaluated the effects of this standard on
the 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, 1998 Compared to Three Months Ended June 30, 1997
Net Sales. Net sales decreased $0.4 million or 0.6 % to $70.2 million for
the three months ended June 30, 1998 from $70.7 million for the three months
ended June 30, 1997. The decrease in net sales was due to lower sales of cigars
and smokeless tobacco products and higher returns. Cigar sales decreased
principally due to unit volume decline, in all categories except little cigars,
offset partially by price increases in all cigar categories. Cigar sales also
decreased as a result of a shift in sales mix to lower priced cigars. Smokeless
tobacco sales decreased as a result of volume decline, offset partially by price
increases in all smokeless tobacco categories. Higher returns were due to excess
wholesale inventories of premium and mass market large cigars and a moderation
in the growth of retail sales.
Gross Profit. Gross profit decreased $1.2 million or 3.3% to $34.6 million
(49.2% of net sales) for the three months ended June 30, 1998 from $35.7 million
(50.6% of net sales) for the three months ended June 30, 1997. As a percentage
of net sales, gross profit decreased due to a shift in sales mix.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $2.0 million or 12.1% to $18.2 million (26.0% of net sales ) for the
three months ended June 30, 1998 from $16.3 million (23.0% of net sales) for the
three months ended June 30, 1997. The increase of $2.0 million is principally
due to an increase in selling and marketing expenses.
Operating Profit. Operating profit decreased $3.2 million or 16.2% to $16.3
million (23.2% of net sales) for the three months ended June 30, 1998 from $19.5
million (27.6% of net sales) for the three months ended June 30, 1997. The
decrease, as a percentage of net sales, was primarily due to lower gross profit
margins, and an increase in SG&A expenses as a percentage of net sales.
Interest Expense, Net. Interest expense, net decreased $0.2 million or
10.4% to $1.9 million for the three months ended June 30, 1998 from $2.1 million
for the three months ended June 30, 1997. For the three months ended June 30,
1998, the average debt balance was $118.7 million, with an average effective
interest rate of 6.40%. 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%.
Income Taxes. The effective income tax rate was 39.1% and 39.5 % for the
three month periods ended June 30, 1998 and 1997, respectively. The lower
effective income tax rate for the three month period ended June 30, 1998
reflects a change in the geographical composition of earnings.
Net Income. Net income decreased $1.7 million or 16.6% to $8.8 million
(12.5% of net sales), for the three months ended June 30, 1998 from $10.5
million (14.9% of net sales), for the three months ended June 30, 1997.
10
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Net Sales. Net sales decreased $4.0 million or 2.9% to $130.5 million for
the six months ended June 30, 1998 from $134.5 million for the six months ended
June 30, 1997. The decrease in net sales was due to lower sales of cigars and
smokeless tobacco products and higher returns. Cigar sales decreased principally
due to unit volume decline, in all categories except little cigars, offset
partially by price increases in all cigar categories. Cigar sales also decreased
as a result of a shift in sales mix to lower priced cigars. Smokeless tobacco
sales decreased as a result of volume decline, offset partially by price
increases in all smokeless tobacco categories. Higher returns were due to excess
wholesale inventories of premium and mass market large cigars and a moderation
in the growth of retail sales.
Gross Profit. Gross profit decreased $0.8 million or 1.3% to $65.4 million
(50.1% of net sales) for the six months ended June 30, 1998 from $66.2 million
(49.2% of net sales) for the six months ended June 30, 1997. The decrease in
gross profit for 1998 was due to the decrease in net sales. As a percentage of
net sales, gross profit increased due to a shift in sales mix .
SG&A Expenses. SG&A expenses increased $2.8 million or 8.9% to $34.6
million (26.5% of net sales) for the six months ended June 30, 1998 from $31.8
million (23.7% of net sales) for the six months ended June 30, 1997. The
increase of $2.8 million is principally due to an increase in selling and
marketing expenses.
Operating Profit. Operating profit decreased $3.7 million or 10.7% to $30.8
million (23.6% of net sales) for the six months ended June 30, 1998 from $34.4
million (25.6% of net sales) for the six months ended June 30, 1997. The
decrease, as a percentage of net sales, was primarily due to an increase in SG&A
expenses.
Interest Expense, Net. Interest expense, net decreased $0.6 million or
13.1% to $3.7 million for the six months ended June 30, 1998 from $4.3 million
for the six months ended June 30, 1997. For the six months ended June 30, 1998,
the average debt balance was $108.6 million, with an average effective interest
rate of 6.81%. 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%.
Income Taxes. The effective income tax rate was 38.8% and 39.5% for the six
month periods ended June 30, 1998 and 1997, respectively. The lower effective
income tax rate for the six month period ended June 30, 1998 reflects a change
in the geographical composition of earnings.
Net Income. Net income increased $1.6 million or 9.0% to $16.6 million
(12.7% of net sales), for the six months ended June 30, 1998 from $18.3 million
(13.6% of net sales), for the six months ended June 30, 1997.
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 $0.4 million and $9.8
million for the six month periods ended June 30, 1998 and 1997, respectively.
The decrease of $9.4 million was primarily due to higher working capital
requirements resulting from increased accounts receivable and inventory levels,
and lower net income.
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. Therefore, inventories at year end and at the
end of the first quarter are typically higher than during the rest of the 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 $12.5 million and $6.1 million
for the six month periods ended June 30, 1998 and 1997, respectively. Cash flows
used in 1998 were primarily related to investments in joint ventures for the
production of premium cigars, and purchases of property, plant and equipment.
Cash flows used in 1997 were for the purchases of property, plant and equipment.
For all of 1998, the Company currently expects that capital expenditures will be
between $10 million and $15 million and will be used to expand its smokeless
tobacco production capacity in moist snuff, expand its domestic production
capacity in mass market cigars and continue its capital improvement program.
Capital expenditures are estimated to be between $5 million and $8 million for
each of 1999 and 2000 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 and,
if needed, bank borrowings.
Cash flows provided by financing activities were $12.1 million and $1.0
million for the six month periods ended June 30, 1998 and 1997, respectively.
The 1998 amount is due principally to changes in long-term and short-term
borrowings and the repurchase of common stock. The 1997 amount is due
principally to changes in long-term borrowings.
As of June 30, 1998, borrowings under the Credit Agreement were $106.0
million, and the Company had $22.825 million of unused availability thereunder,
after taking into account approximately $1.175 million utilized to support
letters of credit. Short-term debt consists of a $10.0 million Term Promissory
Note due October 15, 1998.
12
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Liquidity and Capital Resources (continued)
To convert floating rate debt into fixed rate debt, the Company previously
entered into two interest rate swap agreements. As of June 30, 1998, the total
notional amount covered by existing swap agreements was $50.0 million. The
notional amount decreases to $15.0 million on November 16, 1998, and the
remaining agreement terminates on July 2, 1999. Under the terms of these
agreements, the Company receives a variable interest rate equal to three-month
LIBOR and pays a fixed rate of approximately 5.9%, as of June 30, 1998. If the
Company terminated these agreements on June 30, 1998 or 1997, 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 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,
however, there is no assurance 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 federal Food and Drug Administration ("FDA") for the first
time asserted jurisdiction over nicotine in tobacco as a "drug" and issued
regulations purporting to regulate smokeless tobacco products as "medical
devices." These regulations prohibit the sale of smokeless tobacco products to
minors and severely restrict advertising, marketing and promotion of smokeless
tobacco products. The regulations also require the Company and other
manufacturers to comply with a wide range of labeling, reporting and other
requirements. In 1997, ruling in a case filed by the Company and other smokeless
tobacco manufacturers to challenge the FDA'a authority, a federal court held
that the FDA as a matter of law is not precluded from regulating smokeless
tobacco products as "medical devices" or from implementing certain labeling and
access restrictions. At the same time, however, the court said that the FDA has
no authority to restrict the advertising and promotion of smokeless tobacco
products and stayed the effectiveness of any of the restrictions related to
labeling, access, advertising and promotion due to take effect in 1997 and 1998
pending further order of the court. The court's opinion was appealed to the U.S.
Court of Appeals for the Fourth Circuit in 1997. Due to the death of one of the
Appeals Court judges who originally heard the appeal, the appeal was reargued on
June 9, 1998 before a reconstituted appellate panel. The Company is unable to
predict the outcome of the appeal or its impact on those portions of the
regulations that have not been given effect. 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
Regulation (continued)
In June 1997, the five largest tobacco companies announced an agreement
with trial lawyers and the Attorneys General of several states suing to recoup
Medicare and Medicaid expenses (the "Proposed Settlement"). Although the Company
was not a party to any of the actions being settled (the "State AG Actions"),
legislation introduced in Congress in the wake of the Proposed Settlement sought
to raise the price of cigarettes and other tobacco products significantly and to
regulate all tobacco products (including smokeless tobacco and, in some cases,
cigars) by imposing full FDA regulation and by adopting new and highly
restrictive marketing requirements. The legislation was defeated in June 1998;
however, press reports indicate that alternative legislation is being developed
in the Congress and that the tobacco companies which were parties to the
Proposed Settlement have entered into new negotiations with the state Attorneys
General to settle the State AG Actions. The Company cannot anticipate whether
the new legislation, if introduced, will be adopted; whether the State AG
Actions will be settled; or the extent to which such potential legislation or
settlement may impact the Company's business.
On February 9, 1998, the Company was notified by the Federal Trade
Commission ("FTC") of the adoption by the FTC of an Order to File a Special
Report on the Company's advertising and marketing expenditures with regard to
its cigar business for 1997 and 1996. This information, which is similar to
information the Company has filed with the FTC for many years with respect to
its smokeless tobacco products, was filed on April 9, 1998.
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 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 significant increases, to fund various legislative
initiatives. The Balanced Budget Act adopted by Congress in 1997, provides for
increases in federal excise taxes on all tobacco products in two stages,
beginning in 2000. Management does not believe that these increases will have a
material adverse effect on the Company's operations. However, enactment of new
or significant further increases in existing federal, state or local excise
taxes could have a material adverse effect on the Company's business.
Litigation
The tobacco industry continues to experience significant health-related
litigation. Plaintiffs in such cases typically seek compensation and, in some
cases, punitive damages, for various injuries allegedly sustained from the use
of tobacco products or exposure to tobacco smoke, including health care costs.
The Company is not aware of any adverse decision or judgment having been
rendered against smokeless or cigar manufacturers.
The Company is a defendant, along with other defendants in an action
brought by an individual plaintiff in Louisiana seeking damages and other relief
in connection with injuries allegedly resulting
14
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Litigation (continued)
from use of the Company's and the other defendants' products. In addition, the
Company together with other defendants has been named in a Texas action brought
by another individual seeking damages and other relief in connection with
injuries allegedly caused to plaintiff by products manufactured by the Company
and the other defendants. The Company believes that it has meritorious defenses
and is vigorously defending these lawsuits.
The Company is also a defendant along with multiple other defendants in
three actions brought under California Proposition 65 and the California Unfair
Competition Act (see "Legal Proceedings").
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 coverage is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product or any related products could preclude the
further sale of such product, which could have a material adverse effect on the
Company's business.
Other
Due to industry-wide excess retail inventory levels of premium cigars, the
Company has reduced production at its offshore facilities.
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
On March 31, 1998, City and County of San Francisco et. al. v. United
States Tobacco Company, Inc. et. al. was filed in Superior Court of the State of
California for the County of San Francisco against the Company, five other
smokeless tobacco manufacturers and eleven retailers. The plaintiffs in the
action, Environmental Law Foundation and the City and County of San Francisco,
allege that the defendants violated California Proposition 65 and the California
Unfair Competition Act by (a) selling products that expose California residents
(without providing a "clear and reasonable warning" thereof) to substances known
to the State of California to cause cancer, birth defects and reproductive harm,
and (b) engaging in fraudulent and unfair business practices by marketing
smokeless tobacco products to "young consumers". Plaintiffs claim uncalculated
penalties under Proposition 65 and seek disgorgement of unspecified amount of
revenues obtained through wrongful sales. The Company believes that it has
meritorious defenses and is vigorously defending against the action.
On July 14, 1998, The People of the State of California et. al. v. Philip
Morris Incorporated et. al. was filed in Superior Court of the State of
California for the County of Los Angeles against the Company, six other cigar
manufacturers, six cigarette manufacturers, fifteen retailers and one pipe
tobacco manufacturer. The plaintiffs in the action, the Los Angeles City
Attorney on behalf of the People of California and American Environmental Safety
Institute, allege that the defendants violated California Proposition 65 and the
California Unfair Competition Act by (a) selling products that expose California
non-smokers to environmental tobacco smoke (resulting in exposure without
warning "to chemicals known to the State of California to cause cancer and/or
and reproductive toxicity"), and (b) thereby engaging in fraudulent and unfair
business practices. Plaintiffs claim uncalculated penalties under Proposition 65
and seek disgorgement of unspecified amount of revenues obtained through
wrongful sales. The Company believes that it has meritorious defenses and is
vigorously defending against the action.
On July 28, 1998, The People of the State of California et. al. v.
General Cigar Co., Inc. et. al. was filed in Superior Court of the State of
California for the County of San Francisco against the Company, nine other
manufacturers of cigars and pipe tobacco. The plaintiffs in the action, the San
Jose City Attorney on behalf of the People of California and Lexington Law
Group, allege that the defendants violated California Proposition 65 and the
California Unfair Competition Act by (a) selling products that expose California
non-smokers to environmental tobacco smoke (resulting in exposure without
warning "to chemicals known to the State of California to cause cancer and/or
and reproductive toxicity"), and (b) thereby engaging in fraudulent and unfair
business practices. Plaintiffs claim uncalculated penalties under Proposition 65
and seek disgorgement of unspecified amount of revenues obtained through
wrongful sales. The Company believes that it has meritorious defenses and is
vigorously defending against the action.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 --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, 1998.
16
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
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 10, 1998 By: /s/ William Ziegler, III
--------------------- ------------------------------
William Ziegler, III
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date: August 10, 1998 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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This Schedule contains summary financial information extracted from the Balance
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