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________________________________________________________________________________
FORM 10-Q
_______________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the 13 Weeks ended August 29, 1998
OR
[ ] 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: (1-12757)
_______________
GENERAL CIGAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3922128
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
_______________
387 Park Avenue South 10016-8899
New York, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 448-3800
_______________
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 [ ]
As of September 30, 1998, 11,997,432 shares of Class A common stock, par value
$0.01 per share, and 14,773,617 shares of Class B common stock, par value $0.01
per share, were outstanding.
________________________________________________________________________________
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS:
-------------------------------
Consolidated Statement of Operations for the 13 Weeks
ended August 29, 1998 and August 30, 1997 and for the
39 Weeks ended August 29, 1998 and August 30, 1997...... Page 3
Consolidated Balance Sheet as of August 29, 1998
and November 29, 1997................................... Page 4
Consolidated Statement of Cash Flows for the 39 Weeks
ended August 29, 1998 and August 30, 1997............... Page 5
Consolidated Statement of Changes in Stockholders' Equity
for the 39 Weeks ended August 29, 1998.................. Page 6
Notes to Consolidated Financial Statements................ Page 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
---------------------------------------------------------------------
AND RESULTS OF OPERATIONS.............................. Page 11
-------------------------
PART II. OTHER INFORMATION:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................... Page 15
------------------------------------------
SIGNATURES......................................................... Page 16
INDEX TO EXHIBITS.................................................. Page E-1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(dollars in thousands except per share data)
(Unaudited)
__________________ __________________
13 Weeks Ended 39 Weeks Ended
Aug. 29, Aug. 30, Aug. 29, Aug. 30,
------------------ ------------------
1998 1997 1998 1997
-------- -------- -------- --------
NET SALES............................... $63,398 $70,660 $199,383 $179,366
Cost of goods sold...................... 32,441 35,393 103,549 95,343
------ ------ ------- -------
GROSS PROFIT............................ 30,957 35,267 95,834 84,023
Selling, general and
administrative expenses.............. 22,113 16,470 63,093 46,771
------ ------ ------- -------
OPERATING PROFIT........................ 8,844 18,797 32,741 37,252
Nonoperating income..................... 145 157 515 627
Interest expense........................ 1,217 617 3,076 2,338
------ ------ ------- -------
Income before provision
for income taxes..................... 7,772 18,337 30,180 35,541
Provision for income taxes.............. 2,759 6,968 10,714 13,505
------ ------ ------- -------
NET INCOME.............................. $ 5,013 $11,369 $ 19,466 $ 22,036
====== ====== ======= =======
Basic net income per share.............. $ 0.18 $ 0.42 $ 0.71 $ 0.81
===== ===== ===== =====
Weighted average common shares
outstanding (in thousands)........... 27,179 27,172 27,464 27,087
====== ====== ====== ======
Diluted net income per share............ $ 0.18 $ 0.40 $ 0.69 $ 0.77
===== ===== ===== =====
Weighted average common shares
and equivalents outstanding
(in thousands)....................... 27,856 28,700 28,324 28,600
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
3
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands except per share data)
___________ ____________
August 29, November 29,
ASSETS 1998 1997
----------- ------------
CURRENT ASSETS: (Unaudited)
Cash and cash equivalents........................... $ 2,100 $ 8,976
Receivables, less allowance of $1,273 (1997-$1,331). 36,015 50,963
Inventories:
Raw materials and supplies........................ 108,757 83,884
Work-in-process................................... 7,278 9,202
Finished goods.................................... 43,649 14,272
------- -------
159,684 107,358
Other current assets................................ 7,425 8,779
------- -------
TOTAL CURRENT ASSETS......................... 205,224 176,076
------- -------
Property and equipment................................ 127,575 113,041
Less: accumulated depreciation....................... 49,439 45,552
------- -------
Net property and equipment................... 78,136 67,489
Intangible assets, net, principally
trademarks and goodwill............................. 71,808 73,740
Other assets.......................................... 2,715 2,900
------- -------
TOTAL ASSETS................................. $357,883 $320,205
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities............ $ 38,511 $ 40,397
Long-term debt due within one year.................. 1,177 1,224
Income taxes........................................ 2,345 1,326
------- -------
TOTAL CURRENT LIABILITIES.................... 42,033 42,947
Long-term debt........................................ 74,629 47,540
Accrued retirement benefits........................... 14,351 15,923
Deferred income taxes................................. 7,461 5,317
Other noncurrent liabilities.......................... 8,818 10,974
------- -------
TOTAL LIABILITIES............................ 147,292 122,701
------- -------
Commitments and Contingencies (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01-- authorized:
20,000,000 shares; Issued: none.................... - -
Class B common stock, par value $0.01--authorized:
25,000,000 shares;
Issued: 14,877,747 shares at August 29, 1998;
Issued: 15,707,226 shares at November 29, 1997... 149 157
Class A common stock, par value $0.01--authorized:
50,000,000 shares;
Issued: 12,755,102 shares at August 29, 1998;
Issued: 11,876,729 shares at November 29, 1997... 127 119
Additional paid-in capital.......................... 165,700 165,441
Retained earnings................................... 51,253 31,787
------- -------
217,229 197,504
Less: cost of Class A common stock held
in treasury, 770,600 shares................ (6,638) -
------- -------
Total stockholders' equity................... 210,591 197,504
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY... $357,883 $320,205
======= =======
See Notes to Consolidated Financial Statements.
4
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(Unaudited)
__________________
39 Weeks Ended
Aug. 29, Aug. 30,
------------------
1998 1997
------ ------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................. $19,466 $22,036
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 6,498 4,992
Changes in assets and liabilities, net of Villazon
Acquisition and Liability Assumption in 1997:
Decrease (Increase) in accounts receivable............ 14,948 (6,337)
Increase in inventories............................... (52,326) (32,851)
(Decrease) Increase in accounts payable
and accrued liabilities............................. (1,886) 1,471
Increase in income taxes payable...................... 1,019 8,959
Increase in deferred income taxes..................... 2,144 2,913
Other, net............................................ (1,802) 2,112
------ ------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.. (11,939) 3,295
------ ------
CASH FLOW FROM INVESTING ACTIVITIES:
Acquisition of Villazon, net of cash acquired.......... - (70,068)
Additions to property and equipment.................... (15,044) (8,807)
------ ------
NET CASH USED IN INVESTING ACTIVITIES................ (15,044) (78,875)
------ ------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from Offering............................. - 112,600
Increase in debt....................................... 27,000 -
Purchase of treasury stock............................. (6,638) -
Payments of debt....................................... (514) (26,854)
Proceeds from exercise of stock options................ 129 -
Tax benefit from exercise of stock options............. 130 -
Net transactions with Culbro, excluding
Liability Assumption................................. - (2,240)
Other, net............................................. - (1,000)
------ ------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 20,107 82,506
------ ------
Net (decrease) increase in cash and cash equivalents...... (6,876) 6,926
Cash and cash equivalents at beginning of period.......... 8,976 409
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $ 2,100 $ 7,335
====== ======
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
<CAPTION>
_______ _______ __________ ________ ________ _____________
Class B Class A Additional Total
Common Common Paid-in Retained Treasury Stockholders'
Stock Stock Capital Earnings Stock Equity
------- ------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 29, 1997... $ 157 $ 119 $165,441 $ 31,787 $ - $197,504
Exercise of stock options...... - - 129 - - 129
Exchange of shares............. (8) 8 - - - -
Tax benefit arising from
exercise of employee
stock options................ - - 130 - - 130
Purchase of treasury stock..... - - - - (6,638) (6,638)
Net income..................... - - - 19,466 - 19,466
----- ----- ------- ------- ------- -------
BALANCE AT AUGUST 29, 1998..... $ 149 $ 127 $165,700 $ 51,253 $ (6,638) $210,591
===== ===== ======= ======= ======= =======
See Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
PART I (CONT.)
GENERAL CIGAR HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands except per share data)
(Unaudited)
(1) INTERIM FINANCIAL PRESENTATION
The interim Consolidated Financial Statements are unaudited; however, they
have been prepared in accordance with Rule 10-01 of Regulation S-X adopted
by the Securities and Exchange Commission ("Commission") and in the opinion
of management reflect all adjustments (all of which are of a normal,
recurring nature) which are necessary for a fair statement of the financial
condition, results of operations, cash flows and changes in stockholders'
equity for the periods presented. Results of operations for the 39 weeks
ended August 29, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending November 28, 1998.
As used in these Notes, references to the "Company" mean General Cigar
Holdings, Inc. and its direct and indirect subsidiaries General Cigar Co.,
Inc. ("General Cigar"), Villazon & Company, Inc. ("Villazon"), Club
Macanudo, Inc. and Club Macanudo (Chicago), Inc. (collectively "Club
Macanudo"), and 387 PAS Corp. ("387 PAS"). The accompanying financial
statements reflect the results of operations of these businesses and assets
for all of the periods presented. Club Macanudo, operates cigar bars in New
York City and Chicago, and 387 PAS owns and operates the Company's
headquarters building.
The accompanying Consolidated Financial Statements should be read in
conjunction with the Company's audited 1997 financial statements included
in Form 10-K, as filed with the Commission on February 27, 1998, and should
be read in conjunction with the Notes to Consolidated Financial Statements
appearing in that report.
(2) 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 $81.2 million consisting of
$91.1 million of purchase price and direct acquisition costs, less $9.9
million of cash acquired at closing. At closing, $64.3 million of cash was
paid 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 was accounted for using the
purchase method of accounting. Acquisition cost in excess of the fair value
of net tangible assets was approximately $69 million, representing
principally trademarks and goodwill (see unaudited pro forma condensed
financial information in Note 4). The Company entered into a Credit
Agreement to finance the acquisition. Proceeds from the Company's initial
public offering (the "Offering") in February 1997, were used to reduce
amounts outstanding under the Credit Agreement.
7
<PAGE>
(3) EARNINGS PER SHARE
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share ("EPS") with
basic and diluted EPS. EPS amounts for all prior periods presented have
been restated to conform with SFAS 128. For the periods presented, the only
difference between the basic and diluted EPS calculation is the dilutive
impact of stock options which are included in the diluted EPS calculations.
(4) CONSOLIDATED CONDENSED PRO FORMA FINANCIAL INFORMATION
The following consolidated condensed unaudited pro forma financial
statement of operations reflects the Villazon Acquisition, including the
effect of the associated borrowings to finance the acquisition, the
Liability Assumption and the Offering, as if these transactions were
completed at the beginning of 1997. The Villazon Acquisition and the
Liability Assumption are already reflected in the Company's balance sheet
at August 30, 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 date.
Consolidated Condensed Pro Forma Statement of Operations
(Unaudited)
39 Weeks Ended
August 30, 1997
---------------
Net sales........................................... $184,958
-------
Operating profit.................................... 38,371
Nonoperating income................................. 627
Interest expense.................................... 1,570
-------
Income before provision for income taxes............ 37,428
Provision for income taxes.......................... 14,241
-------
Net income.......................................... $ 23,187
=======
Basic net income per share.......................... $ 0.86
=====
Diluted net income per share........................ $ 0.81
=====
8
<PAGE>
(5) COMMITMENTS AND CONTINGENCIES
As of August 29, 1998, the Company had commitments for capital expenditures
of approximately $5.9 million for the improvement of manufacturing and
distribution facilities, the addition of machinery and equipment, and the
implementation of a new computer system.
The Company believes that the outcome of currently pending legal
proceedings will not, in the aggregate, have a material adverse effect on
the Company's financial position.
(6) SUPPLEMENTAL CASH FLOW INFORMATION
Prior to the Offering, General Cigar had been included in Culbro
Corporation ("Culbro") consolidated federal income tax returns.
Accordingly, tax payments made by Culbro in the period prior to the
Offering are reflected in net transactions with Culbro in the consolidated
statement of cash flows. Income taxes paid by the company during the nine
months ended August 29, 1998 was $7.4 million.
Interest paid in the nine months period of 1998 and 1997 were $3.0 million
and $2.3 million, respectively.
At August 30, 1997, the estimated cash and noncash activities related to
the Villazon Acquisition were summarized as follows:
Estimated fair value 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
======
9
<PAGE>
(7) AMENDMENTS TO CREDIT FACILITIES
On April 29, 1998, the Company amended its Credit Agreement to increase the
commitment of the revolving credit facility to $92.5 million from $50
million. Borrowings under the revolving credit facility bear interest, at
the Company's option, of either (1) the ABR (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.
(8) STOCK REPURCHASE PROGRAM
On May 21, 1998, the Company announced a program to repurchase up to 5% of
the Company's common stock from time to time in open market transactions.
The maximum amount authorized of 5% represents approximately 8% of the
outstanding common stock after excluding the common stock owned by the
Cullman and Ernst group, the Company's principal shareholders. Through
August 29, 1998, the Company repurchased 770,600 shares of Class A common
stock for $6.6 million under this program.
(9) NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income", and SFAS 131, "Disclosures About
Segments of an Enterprise and Related Information". In February 1998, the
FASB issued SFAS 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits". All of these statements are effective for fiscal
years beginning after December 15, 1997. These statements address
presentation and disclosure matters that currently have no material impact
on the Company's financial position or results of operations.
10
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ---------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
include, without limitations, the Company's beliefs about trends in the cigar
industry and its views about the long-term future of the industry and the
Company. The following factors, among others, could cause the Company's
financial performance to differ materially from that expressed in such
statements (i) changes in consumer preferences resulting in a decline in the
demand for and consumption of cigars, (ii) an increase in the price of raw
materials, (iii) additional governmental regulation of tobacco or further
tobacco litigation, (iv) enactment of new or significant increases in existing
excise taxes, (v) political and/or economic instability in foreign countries
where the Company has operations, (vi) failure to remediate Year 2000 issues and
(vii) other risks and uncertainties set forth in the Company's other filings
with the Securities and Exchange Commission.
As used herein, references to the "Company" mean General Cigar Holdings, Inc.
and its direct and indirect subsidiaries General Cigar Co., Inc. ("General
Cigar"), Villazon & Company, Inc. ("Villazon"), Club Macanudo, Inc. and Club
Macanudo (Chicago), Inc. (collectively, "Club Macanudo"), and 387 PAS Corp.
("387 PAS").
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $11.9 million in the nine months ended
August 29, 1998 (the "1998 Period") compared to net cash of $3.3 million
provided by operations in the nine months ended August 30, 1997 (the "1997
Period). The use of cash in the 1998 Period compared to cash flow generated in
the 1997 Period reflected substantially higher level of inventories partially
offset by decreases in other working capital requirements. The substantial
increase in cigar demand created shortages of tobacco in 1997 and its effect
continued into early 1998. Accordingly, the Company increased substantially its
inventory of filler and binder tobacco needed for making high quality premium
cigars. However, due to the lower rate of growth in cigar sales currently being
experienced, the Company has begun to curtail its tobacco purchases, but will
continue to secure supplies of its primary tobacco requirements under existing
arrangements with suppliers. The increase in inventories of finished goods
reflected principally the availability of certain premium cigars previously in
short supply, and higher levels of certain brands which were produced in
anticipation of higher sales. The Company has downsized its manufacturing
workforce and reduced production of cigars to bring inventory levels in line
with current demand. Accounts receivable decreased $14.9 million during the 1998
Period as a result of cash receipts from seasonal sales in the fourth quarter of
1997.
Cash used in investing activities was $15.0 million in the 1998 Period compared
to $78.9 million in the 1997 Period. In the 1998 Period, investing activities
consisted of purchases of property and equipment to complete the manufacturing
capacity expansion projects. In the 1997 Period, investing activities reflected
principally the acquisition of Villazon ($70.1 million) and purchases of
property and equipment ($8.8 million).
11
<PAGE>
Cash provided by financing activities was $20.1 million in the 1998 Period
compared to $82.5 million in the 1997 Period. The financing activities in the
1997 Period reflected the net proceeds from the Offering, and the repayments of
bank borrowings used to finance the Villazon Acquisition and the assumed Culbro
general corporate debt. In the 1998 Period, the Company increased its long-term
borrowings by $27.0 million to finance the manufacturing capacity expansion
projects and higher working capital requirements. In April 1998, the Company
increased its commitment under the revolving line of credit from $50.0 million
to $92.5 million principally to provide more working capital financing, and
extended the term to April 29, 2001. As of September 30, 1998, $31.5 million was
available under the facility.
The Company's Board of Directors has authorized the purchase of up to 5% of the
Company's common stock from time to time in open market transactions. As of
September 30, 1998, 861,800 shares with a cumulative cost of $7.2 million had
been repurchased under this program.
The Company's working capital increased to $163.2 million at August 29, 1998,
from $133.1 million at November 29, 1997, principally due to higher level of
inventories and related increase in long-term borrowings.
Based on its current projection of cash flows, management believes that cash
from operations combined with its revolving credit facility will be sufficient
to fund its operations.
RESULTS OF OPERATIONS
Three Month and Nine Month Periods Ended August 29, 1998 as Compared to Three
Month and Nine Month Periods Ended August 30, 1997
Net sales decreased 10.3%, or $7.3 million, to $63.4 million in the third
quarter of 1998 ("1998 Third Quarter") from $70.7 million in the third quarter
of 1997 ("1997 Third Quarter"). The decrease in net sales reflected lower unit
sales of premium and mass market cigars, principally due to the maintenance of
lower inventory levels at wholesalers and retailers who previously had
overcompensated in their ordering to address earlier cigar shortages. These
trends could continue through the end of 1998 and possibly beyond depending on
when normal customer ordering patterns resume.
Net sales in the 1998 Period were $199.4 million, an increase of 11.2% over net
sales of $179.4 million in the 1997 Period. The increase in net sales reflected
principally the full benefit in the 1998 Period of price increases implemented
in 1997.
Gross profit decreased 12.2%, or $4.3 million to $31.0 million in the 1998 Third
Quarter from $35.3 million in the 1997 Third Quarter. Gross margin decreased to
48.8% from 49.9% in the same periods. The decrease in gross margin reflected
lower unit sales of premium cigars and manufacturing inefficiencies related to
the transfer of certain domestic production to offshore facilities. In the 1998
Period, gross profit increased 14.1%, or $11.8 million to $95.8 million from
$84.0 million in the 1997
12
<PAGE>
Period. Gross margin also increased to 48.1% from 46.8% in the same periods. The
increase in gross margin was due principally to the full benefit of price
increases implemented in 1997.
Selling, general and administrative expenses ("SG&A") increased to $22.1 million
in the 1998 Third Quarter from $16.5 million in the 1997 Third Quarter. For the
1998 Period, SG&A expenses increased to $63.1 million from $46.8 million in the
1997 Period. As a percentage of net sales, SG&A expenses were 34.9% and 31.6%,
in the 1998 Third Quarter and 1998 Period, respectively, compared to 23.3% and
26.1%, in the 1997 Third Quarter and 1997 Period, respectively. SG&A expenses
increased as a percentage of net sales principally due to higher marketing
expenses and higher general and administrative expenses, including certain
non-recurring charges, associated with business development activities that did
not generate the expected volume increases.
Operating profit decreased 52.9% in the 1998 Third Quarter and 12.1% in the 1998
Period. As a result of the higher SG&A expenses and lower sales, operating
margins were 13.9% and 16.4% in the 1998 Third Quarter and 1998 Period,
respectively compared to 26.6% and 20.8%, respectively in the comparable periods
last year.
Interest expense increased to $1.2 million in the 1998 Third Quarter from $0.6
million in the 1997 Third Quarter. This increase was due to higher average
borrowings during the 1998 Third Quarter. For the 1998 Period, interest expense
increased to $3.0 million from $2.3 million in the 1997 Period. The interest
expense in the 1997 Period reflected 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.
The provision for income taxes was $2.8 million in the 1998 Third Quarter as
compared to $7.0 million in the 1997 Third Quarter. For the 1998 Period income
tax provision was $10.7 million as compared to $13.5 million in the 1997 Period.
The lower effective tax rate of 35.5% in 1998 compared to 38.0% in 1997 reflects
a change in the geographical composition of earnings.
As a result of the changes described above, principally lower gross profit and
higher expenses, net income decreased 55.9% to $5.0 million compared to $11.4
million in the 1997 Third Quarter. Net income for the 1998 Period was $19.5
million, a decrease of 11.7% from net income of $22.0 million in the 1997
Period.
YEAR 2000
The Company is addressing the Year 2000 issue by both replacing and modifying
its existing critical computer systems. In 1997, the Company began a companywide
system replacement project with Oracle Corporation to install a new Enterprise
Resource Planning ("ERP") system. The new Oracle ERP system will provide
significantly enhanced systems capabilities and address the Year 2000 issue. The
new system is expected to make the Company's critical business computer
applications Year 2000 compliant and is scheduled for completion by mid-1999.
The Company has initiated a companywide review of the remaining non-critical
internal processes, including hardware, software and control systems.
13
<PAGE>
The cost of the Oracle ERP system is estimated at $7 million and the Company has
incurred $3.5 million, or approximately 23% of the total capital expenditures
incurred of $15.0 million. The cost of the modifications for its remaining
non-critical internal processes is not expected to be material to the Company.
The Company has begun to communicate with its major customers, suppliers and
financial institutions to determine the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
Most of those contacted have indicated that they have Year 2000 readiness
programs or they anticipate being Year 2000 compliant on or before December 31,
1999. We are continuing to assess the progress of our critical business partners
in reaching Year 2000 readiness.
The Company currently believes that its efforts to address the Year 2000 issue
should be successful. However, a failure of critical third parties to adequately
address their respective Year 2000 issues could have a material adverse effect
on the Company's business, financial condition and results of operations.
Therefore, the Company's Year 2000 Program includes the development of
contingency plans for continuing operations in the event such problems arise.
However, there can be no assurance that such contingency plans will be
sufficient to address all problems which may arise.
14
<PAGE>
PART II. OTHER INFORMATION
GENERAL CIGAR HOLDINGS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
The exhibits listed in the following table have been filed as part of this
Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this
Quarterly Report on Form 10-Q is filed.
15
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
SIGNATURES
Pursuant to the requirement 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: October 13, 1998 By: /s/ Jay M. Green
----------------
Jay M. Green
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date: October 13, 1998 By: /s/ Joseph C. Aird
------------------
Joseph C. Aird
Senior Vice President,
Controller
16
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION PAGE
- --------------------------------------------------------------------------------
11 Statement re: computation of per share earnings............. E-2
27 Financial Data Schedule..................................... E-3
E-1
Exhibit 11
GENERAL CIGAR HOLDINGS, INC.
COMPUTATION OF PER SHARE EARNINGS
(dollars in thousands except per share data)
FOR THE 13 WEEKS ENDED FOR THE 39 WEEKS ENDED
======================= =======================
AUGUST 29, AUGUST 30, AUGUST 29, AUGUST 30,
1998 1997 1998 1997
BASIC EPS COMPUTATION ---------- ---------- ---------- ----------
Numerator:
Income available to
common stockholders...... $ 5,013 $ 11,369 $ 19,466 $ 22,036
---------- ---------- ---------- ----------
Denominator:
Common shares outstanding.. 27,179,416 27,172,000 27,463,553 27,087,035
---------- ---------- ---------- ----------
Basic EPS.......... $ 0.18 $ 0.42 $ 0.71 $ 0.81
========== ========== ========== ==========
DILUTED EPS COMPUTATION
Numerator:
Income available to
common stockholders...... $ 5,013 $ 11,369 $ 19,466 $ 22,036
---------- ---------- ---------- ----------
Denominator:
Common shares outstanding.. 27,179,416 27,172,000 27,463,553 27,087,035
Effect of stock options.... 676,562 1,528,000 860,444 1,512,965
---------- ---------- ---------- ----------
Total shares............. 27,855,978 28,700,000 28,323,997 28,600,000
---------- ---------- ---------- ----------
Diluted EPS........ $ 0.18 $ 0.40 $ 0.69 $ 0.77
========== ========== ========== ==========
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS OF GENERAL CIGAR HOLDINGS, INC. INCLUDED
IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE 13 WEEKS ENDED AUGUST 29, 1998 AND
ITS QUARTERLY REPORT ON FORM 10-Q FOR THE 13 WEEKS ENDED AUGUST 30, 1997, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0001029456
<NAME> GENERAL CIGAR HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> NOV-28-1998 NOV-29-1997
<PERIOD-END> AUG-29-1998 AUG-30-1997
<CASH> 2,100 7,335
<SECURITIES> 0 0
<RECEIVABLES> 37,288 44,356
<ALLOWANCES> 1,273 762
<INVENTORY> 159,684 93,017
<CURRENT-ASSETS> 205,224 148,155
<PP&E> 127,575 109,263
<DEPRECIATION> 49,439 46,777
<TOTAL-ASSETS> 357,883 283,042
<CURRENT-LIABILITIES> 42,033 40,204
<BONDS> 74,629 37,318
0 0
0 0
<COMMON> 276 272
<OTHER-SE> 210,315 175,826
<TOTAL-LIABILITY-AND-EQUITY> 357,883 283,042
<SALES> 199,383 179,366
<TOTAL-REVENUES> 199,383 179,366
<CGS> 103,549 95,343
<TOTAL-COSTS> 103,549 95,343
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 983 655
<INTEREST-EXPENSE> 3,076 2,338
<INCOME-PRETAX> 30,180 35,541
<INCOME-TAX> 10,714 13,505
<INCOME-CONTINUING> 19,466 22,036
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,466 22,036
<EPS-PRIMARY> 0.71 0.81
<EPS-DILUTED> 0.69 0.77
</TABLE>
