<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
<TABLE>
<S> <C>
- ---------------------------- ----------------------------
For the 13 Weeks Ended Commission File No.
MAY 31, 1997 1-12757
</TABLE>
GENERAL CIGAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-3922128
(state or other jurisdiction of incorporation (IRS Employer
or organization) Identification
Number)
387 PARK AVENUE SOUTH, NEW YORK, NY 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
</TABLE>
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 JUNE 30, 1997: 27,167,940
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
FORM 10Q
<TABLE>
<CAPTION>
PART I / / FINANCIAL INFORMATION PAGE
- ---------------------------------------------------------------------------------------------------------- ---------
<S> <C>
Consolidated Statement of Operations
13 Weeks Ended
May 31, 1997 and June 1, 1996..................................................................... 3
Consolidated Statement of Operations
26 Weeks Ended
May 31, 1997 and June 1, 1996..................................................................... 4
Consolidated Balance Sheet
May 31, 1997 and November 30, 1996................................................................ 5
Consolidated Statement of Cash Flows
26 Weeks Ended
May 31, 1997 and June 1, 1996..................................................................... 6
Notes to Consolidated Financial Statements........................................................ 7-13
Management's Discussion and Analysis of
Financial Condition and Results of Operations..................................................... 14-15
<CAPTION>
PART II / / OTHER INFORMATION............................................................................. 16
<S> <C>
SIGNATURES................................................................................................ 17
</TABLE>
2
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED,
--------------------------
<S> <C> <C>
MAY 31, 1997 JUNE 1, 1996
------------ ------------
Net sales and other revenue........................................................... $ 58,908 $ 34,851
Cost of goods sold.................................................................... 32,435 19,608
------------ ------------
Gross profit.......................................................................... 26,473 15,243
Selling, general and administrative expenses.......................................... 15,873 10,627
------------ ------------
Operating profit...................................................................... 10,600 4,616
Nonoperating income (expense)......................................................... 153 (28)
Interest expense...................................................................... 447 268
------------ ------------
Income before income taxes............................................................ 10,306 4,320
Income tax provision.................................................................. 3,916 1,670
------------ ------------
Net income............................................................................ $ 6,390 $ 2,650
------------ ------------
------------ ------------
Pro forma net income per common share................................................. $ 0.22 $ 0.09
------------ ------------
------------ ------------
Pro forma weighted average common shares and equivalents outstanding.................. 28,700,000 28,200,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED,
--------------------------
<S> <C> <C>
MAY 31, 1997 JUNE 1, 1996
------------ ------------
Net sales and other revenue........................................................... $ 108,706 $ 63,683
Cost of goods sold.................................................................... 59,950 35,850
------------ ------------
Gross profit.......................................................................... 48,756 27,833
Selling, general and administrative expenses.......................................... 30,301 19,213
------------ ------------
Operating profit...................................................................... 18,455 8,620
Nonoperating income................................................................... 470 134
Interest expense...................................................................... 1,721 530
------------ ------------
Income before income taxes............................................................ 17,204 8,224
Income tax provision.................................................................. 6,537 3,179
------------ ------------
Net income............................................................................ $ 10,667 $ 5,045
------------ ------------
------------ ------------
Pro forma net income per common share................................................. $ 0.37 $ 0.18
------------ ------------
------------ ------------
Pro forma weighted average common shares and equivalents outstanding.................. 28,450,000 28,200,000
------------ ------------
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 31, 1997 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents....................................................... $ 3,340 $ 409
Receivables, less allowance of $565 (1996-$482)................................. 32,119 31,295
Inventories..................................................................... 76,253 53,702
Other current assets............................................................ 4,329 3,673
------------ --------
Total current assets............................................................ 116,041 89,079
Property and equipment, net..................................................... 59,687 52,507
Intangible assets, net.......................................................... 69,125 --
Other assets.................................................................... 4,341 3,456
------------ --------
Total assets.................................................................... $ 249,194 $ 145,042
------------ --------
------------ --------
LIABILITIES, CULBRO INVESTMENT AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued liabilities........................................ $ 23,693 $ 22,827
Long-term debt due within one year.............................................. 1,266 1,131
Income taxes.................................................................... 6,056 --
------------ --------
Total current liabilities....................................................... 31,015 23,958
Long-term debt.................................................................. 26,007 11,079
Accrued retirement benefits..................................................... 16,214 12,525
Deferred income taxes........................................................... 7,797 1,057
Other noncurrent liabilities.................................................... 3,832 2,704
------------ --------
Total liabilities............................................................... 84,865 51,323
------------ --------
Culbro Investment............................................................... -- 93,719
Class A common stock, par value $0.01...........................................
Authorized: 50,000,000 shares; Issued: 6,900,000 shares......................... 69 --
Class B common stock, par value $0.01...........................................
Authorized: 25,000,000 shares; Issued: 20,267,940 shares........................ 203 --
Additional paid in capital...................................................... 157,667 --
Retained earnings............................................................... 6,390 --
------------ --------
Total Culbro Investment and stockholders' equity................................ 164,329 93,719
------------ --------
Total liabilities, Culbro Investment and stockholders' equity................... $ 249,194 $ 145,042
------------ --------
------------ --------
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED,
-------------------------
<S> <C> <C>
MAY 31,1997 JUNE 1,1996
------------ -----------
OPERATING ACTIVITIES
Net income............................................................................. $ 10,667 $ 5,045
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization.......................................................... 3,100 1,542
Changes in assets and liabilities, net of Villazon Acquisition and Liability Assumption
in 1997 (see Note 6):
Decrease in accounts receivable........................................................ 5,138 4,133
Increase in inventories................................................................ (16,087) (9,350)
Decrease in accounts payable and accrued liabilities................................... (2,447) (4,350)
Increase in income taxes payable....................................................... 3,660 --
Increase (decrease) in deferred income taxes........................................... 1,517 (1,064)
Other, net............................................................................. 1,500 (96)
------------ -----------
Net cash provided by (used in) operating activities.................................... 7,048 (4,140)
------------ -----------
INVESTING ACTIVITIES
Acquisition of Villazon, net of cash acquired (see Note 8)............................. (70,068) --
Additions to property and equipment.................................................... (4,872) (4,663)
------------ -----------
Net cash used in investing activities.................................................. (74,940) (4,663)
------------ -----------
FINANCING ACTIVITIES
Net transactions with Culbro, excluding Liability Assumption........................... (2,640) 8,848
Net proceeds from issuance of stock.................................................... 112,600 --
Increase in debt....................................................................... -- 273
Payments of debt....................................................................... (38,137) (294)
Other, net............................................................................. (1,000) --
------------ -----------
Net cash provided by financing activities.............................................. 70,823 8,827
------------ -----------
Net increase in cash and cash equivalents.............................................. 2,931 24
Cash and cash equivalents at beginning of period....................................... 409 322
------------ -----------
Cash and cash equivalents at end of period............................................. $ 3,340 $ 346
------------ -----------
------------ -----------
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
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 audited 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, comprising only normal recurring
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 and six-month period ended May 31,
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.
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.
7
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
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 1997 period through the Offering (see Note 2) and for all of 1996,
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 second quarter and
six-month period, and in the 1996 second quarter and six-month period, was
computed assuming that the Company's Class B common shares outstanding, plus
related stock options, and the Company's 6,900,000 Class A common shares issued
on the Offering date were all outstanding at the beginning of these respective
periods. 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 No. 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" ("SFAS No. 123"). 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 SFAS No. 123 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.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS No. 128"). This statement requires companies to present basic earnings
per share and, if applicable, diluted earnings per share instead of primary and
fully diluted earnings per share. Basic earnings per share include the weighted
average number of common shares outstanding during the period, and does not
include common stock equivalents. Under SFAS No. 128, diluted earnings per share
include the weighted average shares outstanding and common stock equivalents.
SFAS No. 128 must be adopted by the Company in the 1998 first quarter. Early
adoption of SFAS No. 128 is not permitted. See Note 7.
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
8
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (CONTINUED)
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.
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.
The increase in additional paid in capital reflects the Offering proceeds in
excess of the par value of the Class A Common Stock and the excess of the Culbro
Investment over the par value of the Class B Common Stock. The Culbro Investment
was reclassified to Class B Common Stock and additional paid in capital upon
completion of the Offering. The increase in retained earnings reflects the net
income subsequent to the Offering.
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 $80.1 million consisting of $90 million of
purchase price and direct acquisition costs less $9.9 million of cash acquired
at closing (the "Villazon Acquisition"). Cash paid to the sellers was $64.1
million and $24.4 million aggregate principal amount of seller notes were
issued. 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. 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 UNAUDITED 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 transactions were completed at the beginning of the
respective periods. The Villazon Acquisition, the Liability Assumption and the
Offering are already reflected in the Company's balance sheet at May 31, 1997.
The unaudited pro forma consolidated condensed financial information presented
herein may not necessarily reflect the results of operations that
9
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
4. CONSOLIDATED CONDENSED UNAUDITED PRO FORMA FINANCIAL INFORMATION (CONTINUED)
actually would have been achieved had the transactions discussed above actually
taken place at the assumed dates.
CONSOLIDATED CONDENSED UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED,
----------------------------
<S> <C> <C>
MAY 31,1997 JUNE 1, 1996
------------- -------------
Net sales and other revenue.................................... $ 114,298 $ 78,769
------------- -------------
Operating profit............................................... 19,574 11,152
Other nonoperating income...................................... 470 134
Interest expense............................................... 953 1,387
------------- -------------
Income before income taxes..................................... 19,091 9,899
Income tax provision........................................... 7,273 3,831
------------- -------------
Net income..................................................... $ 11,818 $ 6,068
------------- -------------
------------- -------------
Net income per common share.................................... $ 0.42 $ 0.22
------------- -------------
------------- -------------
Weighted average common shares and equivalents outstanding..... 28,450,000 28,200,000
------------- -------------
------------- -------------
</TABLE>
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. In the 1997 second quarter,
net proceeds of approximately $113 million were received from the Offering and
used to repay the term loan and reduce 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) 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.
On April 16, 1997, the Company repaid the $5 million mortgage on its New
York City headquarters office building. The Company used borrowings under its
revolving credit facility to repay the building mortgage, which carried an
interest rate of the Eurodollar rate plus 2%.
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 1997 through the date of the Offering
and $2.0 million and $3.6 million in the 1996
10
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
second quarter and six-month period, respectively, 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
Through the date of the Offering, the Company's retained earnings, capital
stock and intercompany account with Culbro were presented as Culbro Investment
in the Company's consolidated balance sheet. Changes in the Culbro Investment
account are summarized as follows:
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED,
--------------------------
<S> <C> <C>
MAY 31,1997 JUNE 1, 1996
------------ ------------
Balance beginning of period....................................... $ 93,719 $ 66,095
Net income through March 1, 1997.................................. 4,277 5,045
------------ ------------
97,996 71,140
------------ ------------
Liability Assumption (see below).................................. (50,017) --
Transactions with Culbro.......................................... (2,640) 8,848
Reclassification of remaining balance in Culbro Investment to
Class B common stock and additional paid in capital............. (45,339) --
------------ ------------
(97,996) 8,848
------------ ------------
Balance end of period............................................. $ -- $ 79,988
------------ ------------
------------ ------------
</TABLE>
On February 27, 1997, pursuant to the Distribution Agreement, the Company
completed the Liability Assumption, in which the Company assumed Culbro
liabilities of approximately $50 million, including principally Culbro's general
corporate debt, accrued retirement obligations, and certain accounts payable and
accrued liabilities.
11
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
7. EARNINGS PER SHARE
The following pro forma results reflect income (loss) per share in
accordance with the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
FOR THE 13 WEEKS ENDED,
--------------------------
<S> <C> <C>
MAY 31, 1997 JUNE 1, 1996
------------ ------------
Pro forma basic net income per share.............................. $ 0.24 $ 0.10
------------ ------------
------------ ------------
Pro forma weighted average shares outstanding..................... 27,100,000 27,000,000
------------ ------------
------------ ------------
Pro forma diluted net income per share............................ $ 0.23 $ 0.09
------------ ------------
------------ ------------
Pro forma weighted average shares and equivalents outstanding..... 28,700,000 28,200,000
------------ ------------
------------ ------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE 26 WEEKS ENDED,
--------------------------
<S> <C> <C>
MAY 31, 1997 JUNE 1, 1996
------------ ------------
Pro forma basic net income per share.............................. $ 0.39 $ 0.19
------------ ------------
------------ ------------
Pro forma weighted average shares outstanding..................... 27,100,000 27,000,000
------------ ------------
------------ ------------
Pro forma diluted net income per share............................ $ 0.38 $ 0.18
------------ ------------
------------ ------------
Pro forma weighted average shares and equivalents outstanding..... 28,450,000 28,200,000
------------ ------------
------------ ------------
</TABLE>
12
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
8. SUPPLEMENTAL FINANCIAL INFORMATION
INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, 1997 1996
------------ ------------
<S> <C> <C>
Raw materials and supplies.................................. $ 52,760 $ 43,704
Work in process............................................. 11,153 4,529
Finished goods.............................................. 12,340 5,469
------------ -------
$ 76,253 $ 53,702
------------ -------
------------ -------
</TABLE>
PROPERTY AND EQUIPMENT
Property and equipment consist of:
<TABLE>
<CAPTION>
MAY 31, 1997 NOVEMBER 30, 1996
------------ -----------------
<S> <C> <C>
Land........................................................ $ 2,477 $ 2,534
Buildings................................................... 61,909 58,225
Machinery and equipment..................................... 40,183 33,470
------------ --------
104,569 94,229
Accumulated depreciation.................................... (44,882) (41,722)
------------ --------
............................................................ $ 59,687 $ 52,507
------------ --------
------------ --------
</TABLE>
CASH FLOW
The cash and noncash activities related to the Villazon Acquisition are
summarized as follows:
<TABLE>
<S> <C>
Estimated fair values of net assets acquired...................... $ 89,975
Notes issued to sellers........................................... (24,370)
Payment of short-term seller notes................................ 14,370
---------
Payments in connection with the acquisition....................... 79,975
Cash acquired..................................................... (9,907)
---------
Payments in connection with acquisition, net of cash acquired..... $ 70,068
---------
---------
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $7.0 million compared to net
cash of $(4.1) million used in operations in the 1996 period. The cash generated
in 1997 reflected principally higher earnings and lower increases in certain
working capital items which together more than offset higher tobacco
inventories. Investing activities in 1997 reflected the acquisition cost of
Villazon, excluding the portion financed with seller notes. The financing
activities reflected the proceeds of the Offering, which were used to repay bank
borrowings that had been utilized principally to finance the Villazon
Acquisition and the debt assumed from Culbro.
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 in 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 Acquisition,
mortgage and equipment financing of $12 million and $7 million remaining
outstanding on the bank credit agreement, which was subsequently repaid from the
Company's cash flow. On April 16, 1997, the Company repaid the $5 million
mortgage on its New York City headquarters office building with borrowings under
its revolving credit facility. The Company has available a $50 million
three-year revolving bank credit agreement which it entered into on January 21,
1997.
Prior to the Offering, 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, the Company's retained earnings and historical capital accounts were
included in the accompanying financial statements as Culbro Investment.
Subsequent to receipt of the Offering proceeds, the Company's capital structure
reflects the effect of the issuance of the Class A shares in the Offering, the
Class B shares owned by Culbro, and retained earnings for the ensuing periods.
Management believes that cash flow from operations and current borrowing
capacity are sufficient to fund the Company's operations and its anticipated
future growth.
RESULTS OF OPERATIONS
Net sales increased 69.0%, or $24.0 million to $58.9 million, in the 1997
second quarter from $34.9 million in the 1996 second quarter. For the six-month
period, net sales increased 70.7%, or $45.0 million to $108.7 million from $63.7
million in the 1996 period. These increases reflected principally higher unit
sales of cigars, principally premiums, and higher prices in all cigar
categories. Both the quarter and the six-month periods included sales of the
newly acquired Villazon business as of January 1997.
Gross profit for the quarter increased 73.7%, or $11.3 million, to $26.5
million from $15.2 million in the 1996 quarter. In the six-month period, gross
profit increased 75.2%, or $21.0 million to $48.8 million from $27.8 million in
the prior year's comparable period. Gross margin increased to 44.9% in the 1997
second quarter from 43.7% in the 1996 second quarter. In the 1997 six-month
period gross margin also
14
<PAGE>
increased to 44.9% from 43.7% last year. The increase in gross margin reflected
higher prices and the benefit of relatively higher unit sales of premium cigars.
Selling, general and administrative expenses increased 49.4%, or $5.3
million, to $15.9 million in the 1997 second quarter from $10.6 million in the
1996 second quarter. For the six-month period selling, general and
administrative expenses increased 57.7%, or $11.1 million, to $30.3 million from
$19.2 million in the 1996 period. As a percentage of net sales, selling, general
and administrative expenses were 26.9% and 27.9%, in the 1997 second quarter and
six-month period, respectively, compared to 30.5% and 30.2% in the 1996 second
quarter and six-month period, respectively. The decreases in selling, general
and administrative expenses as a percentage of net sales in 1997 were due to the
lower rates of increase in these expenses compared to the rates of the sales
increase. Operating profits in the second quarter and six-month period were more
than twice the profits in comparable periods last year. As a result of the
higher gross margin and lower expense to sales ratio, operating margins were
18.0% and 17.0%, in the second quarter and six- month period, respectively
compared to 13.2% and 13.5%, respectively in the comparable periods last year.
The higher interest expense in the 1997 six-month period reflects
principally the cost of financing the Villazon Acquisition. The bank financing
for the acquisition and certain of the sellers notes were repaid with the net
proceeds from the Offering, which were received early in the second quarter.
Net income more than doubled in the quarter and six-month period.
15
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
In June 1997 the Registrant's subsidiary, General Cigar Co. Inc. ("General
Cigar"), entered into a conciliation agreement with the Federal Election
Commission ("Commission") as the result of certain campaign contributions made
by several General Cigar executives in 1994 and 1995. The contributions were
described in Forms previously filed by the Registrant and its parent, Culbro
Corporation.
As part of the agreement, in which the company and the executives denied any
intent to violate federal election law, General Cigar paid $80,000 to the
Commission. The company said the campaign contributions totaled $11,000 to three
campaigns. Once the error was detected, the company said it notified the various
campaigns involved and the contributions were refunded. The company said it
cooperated fully with the Commission and entered into the conciliation agreement
to avoid the time and expense that a further investigation would require and the
costly litigation that might follow it.
16
<PAGE>
SIGNATURES
PURSUANT to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENERAL CIGAR HOLDINGS,
INC.
/s/ JAY M. GREEN
---------------------------
JAY M. GREEN
Date: July 15, 1997 EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER AND
TREASURER
/s/ JOSEPH AIRD
---------------------------
Date: July 15, 1997 JOSEPH AIRD
SENIOR VICE PRESIDENT,
CONTROLLER
17
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<PERIOD-END> MAY-31-1997
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<RECEIVABLES> 32,684
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