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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 March 31, 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
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 April 30, 1998 was 5,778,300.
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<PAGE>
TABLE OF CONTENTS
Page
Numbers
-------
Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997...................... 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1998 and 1997................ 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 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..................... 10-14
Part II. Other Information
Item 1. Legal Proceedings........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
Signatures.......................................................... 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,527 $ 1,057
Accounts receivable, less allowance for doubtful accounts of
$1,967 and $1,643, respectively 36,359 32,348
Inventories 73,939 60,714
Deferred income taxes 1,219 1,218
Other current assets 4,364 3,096
-------- --------
Total current assets 117,408 98,433
-------- --------
Property, plant and equipment:
Land 1,299 1,299
Buildings and improvements 10,902 10,812
Machinery and equipment 52,391 51,300
Construction in progress 14,487 11,998
-------- --------
79,079 75,409
Less, accumulated depreciation 8,239 7,155
-------- --------
70,840 68,254
-------- --------
Goodwill, net of accumulated amortization of $3,827 and
$3,512, respectively 46,418 46,733
Investment in Affiliates 14,639 13,315
Prepaid pension cost 4,972 4,972
Other assets 5,768 6,050
-------- --------
Total assets $260,045 $237,757
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,300 $ -
Accounts payable 9,415 8,102
Accrued expenses 5,861 8,657
Due to Affiliates - 5,900
Income taxes payable 6,229 2,863
-------- --------
Total current liabilities 27,805 25,522
Long-term debt 114,989 101,092
Deferred income taxes 8,072 7,296
Accrued postretirement and postemployment benefits 14,616 14,241
Other liabilities 3,683 3,657
-------- --------
Total liabilities 169,165 151,808
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 341 341
Paid-in capital 45,428 45,428
Retained earnings 47,937 40,069
Treasury stock, at cost, 221,700 shares (2,895) -
Cumulative translation adjustments 69 111
-------- --------
Total stockholders' equity 90,880 85,949
-------- --------
Total liabilities and stockholders' equity $260,045 $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)
Three Months Ended
March 31,
---------------------------
1998 1997
---------- ---------
(unaudited)
Net sales $ 60,283 $ 63,799
Cost of sales 29,452 33,320
--------- ---------
Gross profit 30,831 30,479
Selling, general and administrative expenses 16,396 15,532
--------- ---------
Operating profit 14,435 14,947
Interest expense, net 1,796 2,130
Other (income) expense, net (158) (16)
---------- -----------
Income before income taxes 12,797 12,833
Provision for income taxes 4,929 5,068
--------- ----------
Net income $ 7,868 $ 7,765
========= ==========
Earnings per share:
Basic $ .23 $ .23
========= ==========
Diluted $ .23 $ .23
========= ==========
Weighted average shares outstanding:
Basic 34,006 34,100
========= ==========
Diluted 34,006 34,100
========= ==========
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>
Three Months Ended
March 31,
--------------------------
1998 1997
----------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,868 $ 7,765
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,712 1,591
Deferred income taxes 776 1,151
Changes in assets and liabilities:
Accounts receivable (4,019) (7,225)
Inventories (13,210) (4,215)
Other current assets (1,270) (858)
Other assets (32) (172)
Accounts payable and accrued expenses (1,488) (1,199)
Income taxes 3,365 3,285
Other liabilities 400 96
Other, net (31) 45
---------- -----------
Net cash (used in) provided by operating activities (5,929) 264
---------- -----------
Cash flows from investing activities:
Additions to property, plant and equipment (3,670) (2,482)
Investments in Affiliates (7,223) -
---------- -----------
Net cash used in investing activities (10,893) (2,482)
---------- -----------
Cash flows from financing activities:
Long-term borrowings 168,100 26,900
Payments of long-term debt (147,900) (24,925)
Repurchase of common stock (2,895) -
---------- -----------
Net cash provided by financing activities 17,305 1,975
---------- -----------
Effect of foreign exchange rate on cash (13) -
---------- -----------
Net increase (decrease) in cash and cash equivalents 470 (243)
Cash and cash equivalents, beginning of period 1,057 1,744
---------- -----------
Cash and cash equivalents, end of period $ 1,527 $ 1,501
========== ===========
</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 does not include all disclosures required by generally
accepted accounting principles.
2. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
"Net cash (used in) provided by operating activities" includes the
following cash payments for interest and income taxes:
Three months ended
March 31,
----------------------
1998 1997
---------- --------
Interest, net of amount capitalized $1,976 $2,214
Income taxes 772 617
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:
March 31, December 31,
1998 1997
------------- ------------
Finished goods $25,811 $16,908
Work-in-process 2,819 2,871
Raw materials 36,621 33,485
Stores and supplies 8,688 7,450
------- -------
$73,939 $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 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. Due to the death of one of the Appeals
Court judges who originally heard the appeal, a rehearing is scheduled for June
9, 1998. The Company is unable to predict the outcome of the appeal or its
impact on those portions of the regulation 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.
7
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES (continued)
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, legislation introduced in
Congress in the wake of the Proposed Settlement seeks to raise the price of
cigarettes and other tobacco products significantly (by levying new federal
excise taxes or by imposing significant new fees and penalties) and to regulate
all tobacco products (including cigars in some cases) by imposing full FDA
regulation and adopting new and highly restrictive marketing requirements. The
Company cannot anticipate whether any of this legislation will be adopted or the
extent to which it 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 three months ended March 31, 1998 was $7,826.
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
8
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
7. RECENTLY ISSUED ACCOUNTING STANDARDS (continued)
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>
Item 2. Management's Discussion and Analysis of the Results of Operations and
Financial Condition
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
Net Sales. Net sales decreased $3.5 million or 5.5% to $60.3 million for
the three months ended March 31, 1998 from $63.8 million for the three months
ended March 31, 1997. The decrease in net sales was due to lower sales of cigars
and smokeless tobacco products. 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.
Gross Profit. Gross profit increased $.4 million or 1.2% to $30.8 million
(51.1% of net sales) for the three months ended March 31, 1998 from $30.5
million (47.8% of net sales) for the three months ended March 31, 1997. As a
percentage of net sales, gross profit increased due to a shift in sales mix.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $.9 million or 5.6% to $16.4 million (27.2% of net sales ) for the
three months ended March 31, 1998 from $15.5 million (24.3% of net sales) for
the three months ended March 31, 1997. The increase of $.9 million is
principally due to an increase in selling and marketing expenses. The increase,
as a percentage of net sales, was primarily due to the decrease in net sales.
Operating Profit. Operating profit decreased $.5 million or 3.4% to $14.4
million (23.9% of net sales) for the three months ended March 31, 1998 from
$14.9 million (23.4% of net sales) for the three months ended March 31, 1997.
The increase, as a percentage of net sales, was primarily due to higher gross
profit margins, offset partially by an increase in SG&A expenses as a percentage
of net sales.
Interest Expense, Net. Interest expense, net decreased $.3 million or 15.7%
to $1.8 million for the three months ended March 31, 1998 from $2.1 million for
the three months ended March 31, 1997. For the three months ended March 31,
1998, the average debt balance was $111.2 million, with an average effective
interest rate of 6.5%. For the three months ended March 31, 1997, the average
debt balance was $118.7 million, with an average effective interest rate of
7.2%.
Income Taxes. The effective income tax rate was 38.5% and 39.5% for the
three month periods ended March 31, 1998 and 1997, respectively. The lower
effective income tax rate for the three month period ended March 31, 1998
reflects a change in the geographical composition of earnings.
Net Income. Net income increased $.1 million or 1.3% to $7.9 million (13.1%
of net sales), for the three months ended March 31, 1998 from $7.8 million
(12.2% of net sales), for the three months ended March 31, 1997.
10
<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 (used in) provided by operating activities were $(5.9)
million and $.3 million for the three month periods ended March 31, 1998 and
1997, respectively. The decrease of $6.2 million was primarily due to higher
working capital requirements resulting from increased accounts receivable and
inventory levels.
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. 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 $10.9 million and $2.5 million
for the three month periods ended March 31, 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 $17.3 million and $2.0
million for the three month periods ended March 31, 1998 and 1997, respectively.
The 1998 amount is due principally to changes in long-term borrowings and the
repurchase of common stock. The 1997 amount is due principally to changes in
long-term borrowings.
As of March 31, 1998, borrowings under the Credit Agreement were $121.2
million, and the Company had $7.625 million of unused availability thereunder,
after taking into account approximately $1.175 million utilized to support
letters of credit.
11
<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 March 31, 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 March 31, 1998. If the
Company terminated these agreements on March 31, 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. Due to the death of one of the Appeals
Court judges who originally heard the appeal, a rehearing is scheduled for June
9, 1998. The Company is unable to predict the outcome of the appeal or its
impact on those portions of the regulation 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.
12
<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, legislation introduced in
Congress in the wake of the Proposed Settlement seeks to raise the price of
cigarettes and other tobacco products significantly (by levying new federal
excise taxes or by imposing significant new fees and penalties) and to regulate
all tobacco products (including cigars in some cases) by imposing full FDA
regulation and adopting new and highly restrictive marketing requirements. The
Company cannot anticipate whether any of this legislation will be adopted or the
extent to which it 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 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
13
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Litigation (continued)
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 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
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.
14
<PAGE>
SWISHER INTERNATIONAL GROUP INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a plaintiff (along with other manufacturers of tobacco
products, 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 in 1995.
Plaintiffs in the action 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. Ruling in 1997 on a motion for summary
judgment made by the plaintiffs, the Court found that the FDA did not lack
jurisdiction to regulate plaintiffs but held that the FDA was preempted by the
Comprehensive Smokeless Tobacco Health Education Act of 1986 from enforcing
regulations pertaining to advertising and promotion of plaintiffs' products. The
plaintiffs appealed the decision to the United States Court of Appeals for the
Fourth Circuit. In February 1998, however, before a decision was rendered on the
appeal, Judge Donald S. Russell, one of the panel who had heard the appeal,
died. A rehearing has been scheduled for June 9, 1998.
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.
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 three months ended
March 31, 1998.
15
<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: May 11, 1998 By: /s/ William Ziegler, III
------------------ ----------------------------
William Ziegler, III
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date: May 11, 1998 By: /s/ Robert A. Britton
------------------ ----------------------------
Robert A. Britton
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from
the balance sheet as of March 31, 1998 and statement of income for the three
months ended March 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001025834
<NAME> Swisher International Group Inc.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.000
<CASH> 1,527
<SECURITIES> 0
<RECEIVABLES> 36,359
<ALLOWANCES> 1,967
<INVENTORY> 73,939
<CURRENT-ASSETS> 117,408
<PP&E> 79,079
<DEPRECIATION> 8,239
<TOTAL-ASSETS> 260,045
<CURRENT-LIABILITIES> 27,805
<BONDS> 0
0
0
<COMMON> 341
<OTHER-SE> 90,539
<TOTAL-LIABILITY-AND-EQUITY> 260,045
<SALES> 0
<TOTAL-REVENUES> 60,283
<CGS> 0
<TOTAL-COSTS> 29,452
<OTHER-EXPENSES> (158)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,796
<INCOME-PRETAX> 12,797
<INCOME-TAX> 4,929
<INCOME-CONTINUING> 7,868
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,868
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
