<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10Q
Quarterly Report
Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
- --------------- --------------------
For the 13 Weeks Ended Commission File
MARCH 1, 1997 NO. 33-18791
GENERAL CIGAR HOLDINGS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-3922128
(state or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
387 PARK AVENUE SOUTH, NEW YORK, NEW YORK 10016-8899
(Address of principal executive offices) (Zip code)
Registrant's Telephone Number including Area Code (212) 448-3800
Former name, former address and former fiscal year,
if changed since last report Not Applicable
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
------------ ------------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT MARCH 31, 1997: 26,987,182
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
----------------------------
Form 10Q
PART I FINANCIAL INFORMATION
Consolidated Statement of Operations
13 Weeks Ended
March 1, 1997 and March 2, 1996...........................................3
Consolidated Balance Sheet
March 1, 1997 and November 30, 1996 ......................................4
Consolidated Statement of Cash Flows
13 Weeks Ended
March 1, 1997 and March 2, 1996...........................................5
Notes to Consolidated Financial Statements.............................6-11
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........................12-13
SIGNATURES...................................................................14
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GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands except per share data)
(unaudited)
13 WEEKS ENDED
---------------------
MARCH 1, MARCH 2,
1997 1996
---- ----
Net sales and other revenue $49,798 $28,832
Cost of goods sold 27,515 16,242
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Gross profit 22,283 12,590
Selling, general and administrative expenses 14,428 8,586
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Operating profit 7,855 4,004
Nonoperating income 317 162
Interest expense 1,274 262
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Income before income taxes 6,898 3,904
Income tax provision 2,621 1,509
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Net income $ 4,277 $ 2,395
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------- -------
Pro forma net income per common share $ 0.15 $ 0.08
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------- -------
Pro forma weighted average common shares
and equivalents outstanding 28,200,000 28,200,000
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands)
MARCH 1, NOVEMBER 30,
1997 1996
---- ----
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 6,061 $ 409
Receivables, less allowance of $514 (1996 - $482) 32,086 31,295
Inventories 64,135 53,702
Other current assets 4,537 3,673
------ ------
Total current assets 106,819 89,079
Property and equipment, net 57,790 52,507
Intangible assets, net 70,617 -
Other assets 5,381 3,456
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Total assets $240,607 $145,042
-------- --------
-------- --------
LIABILITIES AND CULBRO INVESTMENT
Current Liabilities
Accounts payable and accrued liabilities $ 21,257 $ 22,827
Long-term debt due within one year 75,499 1,131
Income taxes 2,396 -
------ ------
Total current liabilities 99,152 23,958
Long-term debt 66,551 11,079
Accrued retirement benefits 15,760 12,525
Deferred income taxes 6,770 1,057
Other noncurrent liabilities 4,610 2,704
------ ------
Total liabilities 192,843 51,323
Culbro Investment 47,764 93,719
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Total liabilities and Culbro Investment $240,607 $145,042
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-------- --------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
--------------------
MARCH 1, MARCH 2,
1997 1996
---- ----
OPERATING ACTIVITIES:
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<S> <C> <C>
Net income $ 4,277 $ 2,395
Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization 867 801
Changes in assets and liabilities, net of Villazon Acquisition
and Liability Assumption (see Note 6):
Decrease in accounts receivable 5,134 6,142
Increase in inventories (3,969) (6,088)
Decrease in accounts payable and accrued liabilities (4,879) (7,455)
Increase (decrease) in deferred income taxes 490 (1,064)
Other, net 1,298 (118)
------ ------
Net cash provided by (used in) operating activities 3,218 (5,387)
------ ------
INVESTING ACTIVITIES:
- --------------------
Acquisition of Villazon, net of cash acquired (56,243) -
Additions to property and equipment (1,932) (1,952)
-------- --------
Net cash used in investing activities (58,175) (1,952)
-------- --------
FINANCING ACTIVITIES:
- --------------------
Net transactions with Culbro, excluding Liability
Assumption (see Note 6) (215) 7,267
Increase in debt, principally from Villazon
Acquisition in 1997 62,450 273
Payments of debt (180) (147)
Other, net (1,446) -
-------- -------
Net cash provided by financing activities 60,609 7,393
-------- -------
Net increase in cash and cash equivalents 5,652 54
Cash and cash equivalents at beginning of period 409 322
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Cash and cash equivalents at end of period $ 6,061 $ 376
------- -------
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</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
(unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
The unaudited financial statements of General Cigar Holdings, Inc.
(the "Company") included in this report have been prepared in conformity
with the standards of accounting measurement set forth in Accounting
Principles Board Opinion No. 28 and any amendments thereto adopted by the
Financial Accounting Standards Board ("FASB"). The accompanying financial
statements should be read in conjunction with the Company's 1996 financial
statements included in Form S-1, as filed with the Securities and Exchange
Commission on February 26, 1997, and should be read in conjunction with the
Notes to Financial Statements appearing in that report. All adjustments
which are, in the opinion of management, necessary for a fair presentation
of results for the interim periods reported herein have been reflected.
The results of operations for the quarter ended March 1, 1997 are not
necessarily indicative of the results to be expected for the full year.
The Company was formed on December 12, 1996. Up until the Company's
initial public offering (See Note 2) on February 28, 1997, the Company was
a wholly owned subsidiary of Culbro Corporation ("Culbro"). The
accompanying consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries General Cigar Co., Inc.
("General Cigar"), Club Macanudo, Inc. ("Club Macanudo"), 387 PAS Corp.
("387 PAS") and GCH Transportation, Inc., a non-operating entity which owns
certain of the Company's transportation equipment. Club Macanudo and 387
PAS were not material to the Company's results of operations in any of the
periods presented. All of these businesses and assets, and certain
liabilities, were transferred to the Company by Culbro pursuant to a
Distribution Agreement among the Company, Culbro, and Culbro's wholly owned
subsidiary, Griffin Land & Nurseries, Inc. ("Griffin"). Prior to March
18, 1997, Griffin was known as Culbro Land Resources, Inc.
INVENTORIES
The Company's inventories are stated at the lower of cost or market
using the average cost method. Raw materials include tobacco in the
process of aging, a substantial amount of which will not be used or sold
within one year. It is industry practice to include such inventories in
current assets. Raw materials also include tobacco in bond which is
subject to customs duties payable upon withdrawal from bond. Following
industry practice, the Company does not include such duties in inventories
until paid.
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PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Depreciation is
determined on a straight-line basis over the estimated useful asset lives
for financial reporting purposes and principally on accelerated methods for
tax purposes.
REVENUE RECOGNITION
Sales and the related cost of sales are recognized upon shipment of
products. The Company generally accepts returns of cigars that are stale
or damaged in transit. Sales revenue is recorded net of anticipated
returns based on historical experience. Sales returns are not material.
ADVERTISING AND PROMOTION EXPENSE
Advertising and promotion costs are expensed when incurred.
Production costs of future media advertising are deferred until the
advertising first occurs.
EARNINGS PER SHARE
For the periods presented herein, the Company was a wholly owned
subsidiary of Culbro. Accordingly, earnings per share are presented on a
pro forma basis.
Pro forma net income per common share in the 1997 quarter, and in the
1996 quarter, was computed assuming that the Company's Class B common
shares outstanding, which totaled 20,087,182, plus related stock options,
and the Company's 6,900,000 Class A shares outstanding at the Offering date
were all outstanding at the beginning of these respective quarters. The
options included in these calculations were based on the treasury stock
method.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of ("SFAS 121"). This Statement requires that long-lived assets and
certain intangibles held and used by a business entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Prior to the
issuance of this Statement the Company periodically reviewed its
long-lived assets considering future performance of those assets and the
need for adjustments to their carrying values. The Company has adopted
SFAS No. 121 and performs such reviews in accordance with the methods
prescribed by this Statement.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation." This Statement establishes a fair value method
of accounting for, or disclosing, stock-based compensation plans. The
Company intends to adopt the disclosure provisions of this standard which
require disclosing the pro forma effect on net income and earnings per
share of the fair value method of accounting for stock-based compensation.
The adoption of the disclosure provisions will not affect consolidated
financial condition, results of operations, or cash flows.
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USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and revenue and expenses during the period reported.
Actual results could differ from those estimates. Estimates are used when
accounting for allowance for uncollectible accounts receivable,
depreciation and amortization, employee benefit plans, taxes, and
contingencies, among others.
2. STOCK OFFERING
On February 28, 1997, the Company sold 6.9 million shares of its Class
A Common Stock in an initial public offering (the "Offering"), reflecting
approximately 26% of its common equity ownership. The net proceeds from the
Offering, after underwriters' discounts and commissions and estimated other
expenses, were approximately $113 million and were received on March 5,
1997 (subsequent to the end of the first quarter). The proceeds were used
to reduce debt, a substantial portion of which was incurred in connection
with the Villazon Acquisition (see Notes 3 and 4). Each share of Class A
Common Stock entitles its holder to one vote. Culbro owns the remaining
equity ownership of the Company in the form of Class B Common Stock, which
entitles its holder to ten votes for each share. Accordingly, Culbro holds
approximately 97% of the combined voting power of the Company's outstanding
common stock.
3. VILLAZON ACQUISITION
On January 21, 1997, the Company completed the acquisitions of two
affiliated companies, Villazon & Company, Inc., a U.S. corporation, and
Honduras American Tabaco, S.A. de C. V., a Honduran corporation
(collectively "Villazon"), for approximately $80.6 million consisting of
$90.5 million of purchase price and direct acquisition costs less $9.9
million of cash acquired at closing. Cash paid to the sellers was $64.6
million and $24.4 million aggregate principal amount of seller notes were
issued (the "Villazon Acquisition"). Both companies are engaged in the
cigar business. The Villazon Acquisition is accounted for using the
purchase method of accounting. Cost in excess of net assets acquired,
primarily trade names and other intangible assets, is approximately $70
million (see unaudited pro forma condensed financial information in Note
4). The Company entered into a Credit Agreement to finance the
acquisition. Proceeds from the Offering were used to reduce amounts
outstanding under the Credit Agreement and to repay $14.4 million of the
seller notes. The remaining $10 million of seller notes bear interest at
prime plus 1/2% and are due January 2002.
4. CONSOLIDATED CONDENSED PRO FORMA FINANCIAL INFORMATION
The following consolidated condensed unaudited pro forma financial
statement of operations reflects the Villazon Acquisition, including the
associated borrowings to finance the acquisition, the Liability
Assumption (see Note 6) and the Offering as if these transaction were
completed at the beginning of the respective periods. The unaudited
consolidated condensed pro forma balance sheet
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reflects the effect of the Offering as if it had taken place at the
balance sheet date. The Villazon Acquisition and the Liability Assumption
are already reflected in the Company's balance sheet at March 1, 1997. The
unaudited pro forma consolidated condensed financial information presented
herein may not necessarily reflect the results of operations and financial
position that actually would have been achieved had the transactions
discussed above actually taken place at the assumed dates.
CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS (UNAUDITED)
13 WEEKS ENDED,
--------------------------
MARCH 1, MARCH 2,
1997 1996
---- ----
Net sales $55,390 $35,282
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Operating profit 8,974 5,429
Other nonoperating income 317 162
Interest expense 550 657
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Income before taxes 8,741 4,934
Income tax expense 3,340 1,911
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Net income $ 5,401 $ 3,023
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Net income per common share $ 0.19 $ 0.11
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Weighted average common shares
and equivalents outstanding 28,200,000 28,200,000
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CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET (UNAUDITED)
MARCH 1,
1997
-----
Current assets $106,819
Property and equipment, net 57,790
Intangible assets 70,617
Other assets 5,381
--------
Total assets $240,607
--------
--------
Current liabilities $ 24,782
Long-term debt 27,921
All other noncurrent liabilities 27,140
--------
Total liabilities 79,843
Shareholders' equity 160,764
--------
Total liabilities and shareholders' equity $240,607
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--------
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<PAGE>
5. LONG-TERM DEBT
On January 21, 1997, the Company entered into a Credit Agreement with
certain banks which provided financing of $120 million principally for
the Villazon Acquisition and repayment of Culbro's general corporate
debt. The Credit Agreement, which expires in January 2000, included a
$60 million term loan and a revolving credit facility of $60 million.
Subsequent to the end of the quarter, net proceeds of approximately $113
million were received from the Offering and used to repay the term loan
and amounts outstanding under the revolving credit facility. After the
Offering, the commitment under the revolving credit facility is $50
million. In accordance with the terms of the Credit Agreement,
borrowings under the revolving credit facility bear interest, at the
Company's option, of either (1) 1% above the prime rate, (2) the
Eurodollar rate plus 0.75% or (3) a combination thereof. The Company
pays a commitment fee of 1/4 of 1% on the unused portion of the
revolving credit facility. The Credit Agreement includes limitations on
indebtedness, investments and other significant transactions, as defined.
6. RELATED PARTY TRANSACTIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The consolidated statement of operations reflects general and
administrative expenses of approximately $1.8 million in the 1997 first
quarter and $1.6 million in the 1996 first quarter, allocated by Culbro to
the Company for services performed by Culbro. The charges were based
principally on the Company's proportionate share of expenses relating to
the Culbro corporate activities associated with the Company's operations
and are considered by management to be reasonable.
CULBRO INVESTMENT
Changes in the Culbro Investment account are summarized as follows:
13 WEEKS ENDED,
-------------------------
MARCH 1, MARCH 2,
1997 1996
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Balance beginning of period $93,719 $66,095
Net income 4,277 2,395
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97,996 68,490
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Transactions with Culbro:
Liability Assumption (see below) (50,017) -
Net operating cash flow transferred (to)
from Culbro (4,640) 4,126
Allocated Culbro general and administrative
expenses 1,804 1,632
Intercompany income taxes 2,621 1,509
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Total transactions with Culbro, net (50,232) 7,267
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Balance end of period $47,764 $75,757
------- -------
------- -------
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<PAGE>
On February 27, 1997, pursuant to the Distribution Agreement, the
Company consummated the Liability Assumption, in which the Company
assumed Culbro liabilities of approximately $50 million, including
principally Culbro's general corporate debt, accrued retirement
obligations, accounts payable and other items.
7. SUPPLEMENTAL FINANCIAL INFORMATION
INVENTORIES
Inventories consist of:
MARCH 1, NOVEMBER 30,
1997 1996
-------- --------
Raw materials and supplies $ 46,248 $ 43,704
Work-in-process 4,983 4,529
Finished goods 12,904 5,469
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$ 64,135 $ 53,702
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PROPERTY AND EQUIPMENT
Property and equipment consist of:
MARCH 1, NOVEMBER 30,
1997 1996
----- ----
Land $ 2,479 $ 2,534
Buildings 61,068 58,225
Machinery and equipment 38,220 33,470
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101,767 94,229
Accumulated depreciation (43,977) (41,722)
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$ 57,790 $ 52,507
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CASH FLOW
The cash and noncash activities related to the Villazon Acquisition are
summarized as follows:
Estimated fair values of net assets acquired $90,520
Notes issued to sellers (24,370)
--------
Payments in connection with the acquisition 66,150
Cash acquired (9,907)
--------
Payments in connection with acquisition,
net of cash acquired $56,243
-------
-------
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $3.2 million in the 1997
first quarter compared to net cash of $(5.4) million used in operations in
the 1996 first quarter. The cash generated in 1997 reflected principally the
higher earnings, a lower increase in inventories and a lower reduction in
accounts payable compared to the 1996 quarter. Investing activities in the
1997 quarter reflected the acquisition cost of Villazon, excluding the
portion financed with seller notes. The financing activities reflected the
bank borrowings used to finance the Villazon Acquisition.
The Company expects that it will make capital expenditures in excess of
$10.0 million in fiscal 1997, $5.0 million of which will be made in connection
with the expansion of its premium cigar manufacturing facilities. The Company
has continued to increase its inventory of long filler tobacco needed for
making premium cigars.
On March 5, 1997, the Company received approximately $113 million of net
proceeds from the Offering completed on February 28, 1997. The proceeds were
used to repay bank borrowings that had been used to fund the Villazon
Acquisition and the assumed Culbro general corporate debt, and to repay
certain of the Villazon seller notes. Immediately following such debt
repayments, the Company's total outstanding debt was approximately $29
million, consisting principally of $10 million of seller notes related to the
Villazon Aquisition, mortgage and equipment financing of $12 million and $7
million remaining on the bank credit agreement, which was subsequently repaid
from the Company's cash flow. The Company has available $50 million under the
three-year revolving bank credit agreement which it entered into on January
21, 1997.
During each of the fiscal quarters presented in the accompanying
financial statements, the cash management and treasury activities of the
Company were integrated with those of Culbro. The Company's cash receipts
were transferred daily into Culbro's cash account, and the Company's cash
disbursement accounts were reimbursed by Culbro on a daily basis. The Company
maintained an intercompany account with Culbro in which its net cash flow and
other transactions with Culbro were recorded. The intercompany account with
Culbro and the Company's retained earnings and historical accounts were
included in the accompanying financial statements as Culbro Investment.
Subsequent to receiving the Offering proceeds, the Company's capital structure
will reflect the effect of the issuance of the Class A shares in the Offering,
the Class B shares owned by Culbro, and retained earnings of the ensuing
periods.
Management believes that cash from operations and current borrowing
capacity are sufficient to fund its operations and its anticipated future
growth.
RESULTS OF OPERATIONS
Net sales increased 72.7%, or $21.0 million, to $49.8 million in the 1997
first quarter from $28.8 million in the 1996 first quarter. The increase in net
sales reflected principally higher unit sales of cigars,
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principally premium cigars, and higher prices in all cigar categories. The
1997 first quarter included sales from the newly acquired Villazon business
for two months of the quarter.
Gross profit increased 77.0%, or $9.7 million, to $22.3 million in the 1997
first quarter from $12.6 million in the 1996 first quarter. Gross margin
increased to 44.7 % in the 1997 first quarter from 43.7% in the 1996 first
quarter. The increase in gross margin reflected higher prices and the benefit
of relatively higher sales of premium cigars.
Selling, general and administrative expenses increased 68.0%, or $5.8
million, to $14.4 million in the 1997 first quarter from $8.6 million in the
1996 first quarter. As a percentage of net sales, selling, general and
administrative expenses were 29.0% in the 1997 first quarter compared to
29.7% in the 1996 first quarter. The decrease in selling, general and
administrative expenses as a percentage of sales in the 1997 first quarter was
due to the lower rate of increase in these expenses compared to the rate of
the sales increase. Operating profit almost doubled to $7.8 million in the
1997 first quarter, from $4.0 million in the 1996 first quarter. As a result
of the higher gross margin and lower expense to sales ratio, operating
margin increased to 15.8% in the 1997 first quarter compared to 13.9% in the
prior year's quarter.
The higher interest expense in the 1997 first quarter reflects principally
the cost of financing the Villazon Acquisition. The bank financing for the
acquisition and certain of the seller notes were repaid with the net proceeds
from the Offering, which were received early in the second quarter.
Net income increased 78.6% to $4.3 million compared to $2.4 million in the
1996 first quarter.
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<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.
GENERAL CIGAR HOLDINGS, INC.
DATE: April 15, 1997 /s/ Jay M. Green
-----------------------------
Jay M. Green
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER AND TREASURER
DATE: April 15, 1997 /s/ Joseph Aird
----------------------------
Joseph Aird
SENIOR VICE PRESIDENT - CONTROLLER
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-29-1997
<PERIOD-END> MAR-01-1997
<CASH> 6,061
<SECURITIES> 0
<RECEIVABLES> 32,600
<ALLOWANCES> (514)
<INVENTORY> 64,135
<CURRENT-ASSETS> 106,819
<PP&E> 101,767
<DEPRECIATION> (43,977)
<TOTAL-ASSETS> 240,607
<CURRENT-LIABILITIES> 99,152
<BONDS> 66,551
0
0
<COMMON> 0
<OTHER-SE> 47,764
<TOTAL-LIABILITY-AND-EQUITY> 240,607
<SALES> 49,798
<TOTAL-REVENUES> 49,798
<CGS> 27,515
<TOTAL-COSTS> 41,943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 450
<INTEREST-EXPENSE> 1,274
<INCOME-PRETAX> 6,898
<INCOME-TAX> 2,621
<INCOME-CONTINUING> 4,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,277
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
