================================================================================
________________________________________________________________________________
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 May 29, 1999
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 June 30, 1999, 12,864,279 shares of Class A common stock, par value $0.01
per share, and 13,690,866 shares of Class B common stock, par value $0.01 per
share, were outstanding.
________________________________________________________________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
Item 1. FINANCIAL STATEMENTS (UNAUDITED):
-------------------------------------------
Consolidated Statement of Operations for the 13 Weeks
ended May 29, 1999 and May 30, 1998 and for the
26 Weeks ended May 29, 1999 and May 30, 1998............ Page 3
Consolidated Balance Sheet as of May 29, 1999
and November 28, 1998................................... Page 4
Consolidated Statement of Cash Flows for the 26 Weeks
ended May 29, 1999 and May 30, 1998..................... Page 5
Consolidated Statement of Stockholders' Equity
for the 26 Weeks ended May 29, 1999..................... 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
-----------------------------------
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
-------------------------------------------------
ABOUT MARKET RISK...................................... Page 14
-----------------
PART II. OTHER INFORMATION:
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.... Page 15
------------------------------------------------------------
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................... Page 16
------------------------------------------
SIGNATURE.......................................................... Page 17
EXHIBIT INDEX...................................................... Page E-1
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ----------------------------
GENERAL CIGAR HOLDINGS, INC.
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED
---------------- -----------------
MAY 29, MAY 30, MAY 29, MAY 30,
1999 1998 1999 1998
------- ------- ------- -------
NET SALES................................ $35,122 $44,104 $69,232 $93,258
Cost of goods sold....................... 17,346 21,142 33,958 44,571
------ ------ ------ ------
GROSS PROFIT............................. 17,776 22,962 35,274 48,687
Selling, general and
administrative expenses................ 14,464 14,693 27,196 29,073
------ ------ ------ ------
OPERATING PROFIT......................... 3,312 8,269 8,078 19,614
Nonoperating income...................... 103 206 210 370
Interest income.......................... 745 - 745 -
Interest expense......................... 547 1,026 1,646 1,859
------ ------ ------ ------
Income from continuing operations
before provision for income taxes..... 3,613 7,449 7,387 18,125
Provision for income taxes............... 1,229 2,644 2,512 6,435
------ ------ ------ ------
INCOME FROM CONTINUING OPERATIONS........ 2,384 4,805 4,875 11,690
Income from discontinued operations,
net of income taxes.................. 789 1,961 2,264 2,763
Gain on sale of discontinued operations,
net of income taxes.................. 94,402 - 94,402 -
------ ------ ------- ------
NET INCOME............................... $97,575 $ 6,766 $101,541 $14,453
====== ====== ======= ======
BASIC EARNINGS PER SHARE:
Continuing operations................. $ 0.09 $ 0.17 $ 0.18 $ 0.42
Discontinued operations............... 0.03 0.07 0.09 0.10
Gain on sale of discontinued
operations.......................... 3.56 - 3.57 -
----- ----- ----- -----
Basic net income per share.......... $ 3.68 $ 0.24 $ 3.84 $ 0.52
===== ===== ===== =====
Weighted average common
shares outstanding.................. 26,488 27,621 26,472 27,606
====== ====== ====== ======
DILUTED EARNINGS PER SHARE:
Continuing operations................. $ 0.09 $ 0.17 $ 0.18 $ 0.41
Discontinued operations............... 0.03 0.07 0.08 0.10
Gain on sale of discontinued
operations.......................... 3.48 - 3.48 -
----- ----- ----- -----
Diluted net income per share........ $ 3.60 $ 0.24 $ 3.74 $ 0.51
===== ===== ===== =====
Weighted average common shares
and equivalents outstanding...... 27,120 28,444 27,142 28,558
====== ====== ====== ======
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)
MAY 29, NOV. 28,
ASSETS 1999 1998
-------- -------
CURRENT ASSETS: (UNAUDITED)
Cash and cash equivalents............................... $143,334 $3,985
Receivables, less allowance of $831 (1998-- $1,327)..... 27,289 39,666
Inventories............................................. 151,207 157,862
Other current assets.................................... 10,183 7,852
------- -------
TOTAL CURRENT ASSETS............................ 332,013 209,365
Property and equipment, net................................ 58,246 76,809
Intangible assets, net, principally
trademarks and goodwill.................................. 69,342 71,170
Other assets............................................... 1,562 1,959
------- -------
TOTAL ASSETS.................................... $461,163 $359,303
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................ $42,164 $41,518
Long-term debt due within one year...................... 229 1,457
Income taxes............................................ 59,020 3,087
------- -------
TOTAL CURRENT LIABILITIES....................... 101,413 46,062
Long-term debt............................................. 10,465 66,291
Accrued retirement benefits................................ 13,025 12,892
Deferred income taxes...................................... 10,333 9,852
Other noncurrent liabilities............................... 10,808 9,033
------- -------
TOTAL LIABILITIES............................... 146,044 144,130
------- -------
Commitments and Contingencies (Note 6)
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: 13,735,892 shares
(1998 -- 13,997,799 shares)........................... 137 140
Class A common stock, par value $0.01 -- authorized:
50,000,000 shares; Issued: 14,052,953 shares
(1998 -- 13,635,050 shares)........................... 141 136
Additional paid-in capital.............................. 166,407 165,598
Retained earnings....................................... 159,143 57,602
------- -------
325,828 223,476
Less: Cost of Class A common stock held in treasury,
1,233,700 shares (1998-- 974,800 shares).......... (10,709) (8,303)
------- -------
TOTAL STOCKHOLDERS' EQUITY...................... 315,119 215,173
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $461,163 $359,303
======= =======
See Notes to Consolidated Financial Statements.
4
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
26 WEEKS ENDED
------------------
MAY 29, MAY 30,
1999 1998
-------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.............................................. $101,541 $14,453
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Income from discontinued operations.................... (2,264) (2,763)
Gain on sale of discontinued operations................ (94,402) -
Depreciation and amortization.......................... 4,528 3,685
Changes in assets and liabilities net
of effects from disposition:
Decrease in accounts receivable...................... 12,377 12,683
Increase in inventories.............................. (6,315) (35,018)
Decrease in accounts payable
and accrued liabilities............................ (14,742) (6,978)
(Decrease) increase in income taxes payable.......... (1,926) 1,491
Increase in deferred income taxes.................... 481 1,790
Other, net........................................... (1,018) (249)
------- ------
NET CASH (USED IN) OPERATING ACTIVITIES............... (1,740) (10,906)
------- ------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of discontinued operations........... 200,000 -
Additions to property and equipment..................... (1,627) (7,864)
------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 198,373 (7,864)
------- ------
CASH FLOW FROM FINANCING ACTIVITIES:
Net (repayment) borrowing under
revolving credit facility............................. (51,000) 15,000
Purchase of treasury stock.............................. (2,406) (2,422)
Payments of other debt.................................. (4,330) (483)
Proceeds from exercise of stock options................. 452 129
------- ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (57,284) 12,224
------- ------
Net increase (decrease) in cash and cash equivalents....... 139,349 (6,546)
Cash and cash equivalents at beginning of period........... 3,985 8,976
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $143,334 $ 2,430
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest................................................ $ 1,778 $ 1,794
Income taxes............................................ $ 4,320 $ 6,094
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
<CAPTION>
Class B Class A
Common Stock Common Stock Additional Total
------------------ ------------------ Paid-in Retained Treasury Stockholders'
Shares Amount Shares Amount Capital Earnings Stock Equity
---------- ------ ---------- ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT NOVEMBER 28, 1998..... 13,997,799 $140 13,635,050 $136 $165,598 $57,602 $(8,303) $215,173
Exercise of stock options........ - - 155,996 2 450 - - 452
Exchange of shares............... (261,907) (3) 261,907 3 - - - -
Tax benefit arising from
exercise of employee
stock options.................. - - - - 359 - - 359
Purchase of treasury stock....... - - - - - - (2,406) (2,406)
Net income....................... - - - - - 101,541 - 101,541
---------- --- ---------- --- ------- ------- ------ -------
BALANCE AT MAY 29, 1999.......... 13,735,892 $137 14,502,953 $141 $166,407 $159,143 $(10,709) $315,119
========== === ========== === ======= ======= ====== =======
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 (the "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 13 weeks ended May 29, 1999 are not necessarily indicative of the
results that may be expected for the entire year ending November 27, 1999.
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"), GCMM Co.,
Inc. ("GCMM"), 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. The
operations of Club Macanudo, which operates cigar bars in New York City and
Chicago, and 387 PAS, which owns and operates the Company's headquarters
building, were not material to the Company's results of operations in any
of the periods presented.
The accompanying Consolidated Financial Statements should be read in
conjunction with the Company's audited 1998 financial statements included
in Form 10-K, as filed with the Commission on February 26, 1999, and should
be read in conjunction with the Notes to Consolidated Financial Statements
appearing in that report.
(2) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash deposited in demand deposits at
banks and highly liquid investments with original maturities of 90 days or
less. The cost of these investments approximates fair value. Cash and cash
equivalents are placed with major international banks.
7
<PAGE>
(3) DISCONTINUED OPERATIONS
On April 30, 1999, the Company completed the sale of its Mass-Market Cigar
business to Swedish Match North America Inc., for $200 million in cash. A
portion of the proceeds was used to prepay $54.8 million of bank debt and a
$3.8 million equipment loan. The Company recorded a gain on the sale of
$152.3 million ($94.4 million, or $3.48 per diluted share, after tax). The
results of the Mass-Market Cigar business have been reported separately as
discontinued operations and prior periods have been restated in the
Consolidated Statement of Operations.
Net sales and income from the discontinued operations are as follows:
13 WEEKS ENDED 26 WEEKS ENDED
---------------- ----------------
MAY 29, MAY 30, MAY 29, MAY 30,
1999 1998 1999 1998
------- ------- ------- -------
Net sales........................... $13,987 $24,144 $32,372 $42,727
Operating profit.................... 1,196 3,040 3,431 4,283
Provision for income taxes.......... 407 1,079 1,167 1,520
Net income from
discontinued operations........... 789 1,961 2,264 2,763
Net assets of discontinued operations at November 28, 1998 are summarized
as follows:
Nov. 28,
1998
--------
Current assets, primarily inventory............................. $10,867
Property and equipment, net...................................... 11,960
Current liabilities.............................................. (2,164)
Long-term debt................................................... (1,195)
------
Net assets of discontinued operations........................ $19,468
======
8
<PAGE>
(4) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share", adopted in 1998, using the following data:
13 WEEKS ENDED 26 WEEKS ENDED
---------------------- ----------------------
MAY 29, MAY 30, MAY 29, MAY 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average common
shares outstanding
for basic calculation......... 26,487,626 27,620,694 26,471,603 27,605,621
Add:Effect of stock options... 632,574 823,732 670,605 952,386
---------- ---------- ---------- ----------
Weighted average common shares
outstanding, adjusted for
diluted calculation........... 27,120,200 28,444,426 27,142,208 28,558,007
========== ========== ========== ==========
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for
1,067,662 shares in the 1999 second quarter and 900,436 shares in the 1998
second quarter, because the options' exercise prices were greater than the
average market price of the common shares.
(5) STOCK REPURCHASE PROGRAM
During 1998 and the 1999 first quarter, the Company repurchased 974,800 and
258,900 shares of Class A common stock for an aggregate of $8.3 million and
$2.4 million, respectively, under its stock repurchase program. No shares
were repurchased during the 1999 second quarter.
(6) COMMITMENTS AND CONTINGENCIES
As of May 29, 1999, the Company had commitments for capital expenditures of
approximately $1.0 million.
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.
9
<PAGE>
(7) RECLASSIFICATIONS
Certain amounts in the prior periods financial statements have been
reclassified to conform to the current periods' presentation.
(6) INVENTORIES
Inventories consist of:
May 29, Nov. 28,
1999 1998
-------- --------
Raw materials and supplies....................... $110,202 $108,327
Work-in-process................................... 8,383 6,968
Finished goods.................................... 32,622 42,567
------ -------
$151,207 $157,862
======= =======
(9) 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, costs 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.
(10) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
This statement requires that all derivative instruments be recognized at
fair value as either assets or liabilities. SFAS No. 133 is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Company is currently evaluating the impact of adopting SFAS No. 133.
10
<PAGE>
PART I (CONT.)
GENERAL CIGAR HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
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"), GCMM Co., Inc. ("GCMM"), Club
Macanudo, Inc. and Club Macanudo (Chicago), Inc. (collectively, "Club
Macanudo"), and 387 PAS Corp. ("387 PAS").
LIQUIDITY AND CAPITAL RESOURCES
On April 30, 1999, the Company completed the sale of its Mass-Market Cigar
business to Swedish Match North America Inc., for $200 million in cash. Proceeds
from the sale were used to prepay $54.8 million of bank debt, a $3.8 million
equipment loan, pay transaction expenses, and provide funds for operations. The
remaining cash is invested principally in highly liquid investments. The sale of
the Mass-Market Cigar business significantly strengthened the Company's
financial position.
As of May 29, 1999, cash and cash equivalents of $143.3 million included in the
accompanying consolidated balance sheet included principally money market funds
and time deposits with maturities of 90 days or less, and yielding approximately
5% annually. The Company is considering a number of business investment options
including acquisitions of selected premium cigar brands, and expansion of its
distribution and marketing activities, in both international and domestic
markets. In June 1999, the Company utilized cash of $20.9 million to acquire
certain longer-term investments, principally debt instruments at a deep discount
from their face amount. The Company anticipates a higher return on these
investments, which are also considered to be of a significantly higher risk
category, than the Company's cash equivalents.
The Company also plans to complete purchases of approximately $40 million of
tobacco over the next twelve months, under earlier existing commitments. Tobacco
commitments have been significantly curtailed effective with the 2000 crop year
and such curtailment will continue until inventories are reduced to normal
levels.
Net cash used in operating activities was $1.7 million in the six months ended
May 29, 1999 (the "1999 Period") compared to net cash of $10.9 million in the
six months ended May 30, 1998 (the "1998 Period"). The cash used in the 1999
Period compared with the use of cash in the 1998 Period reflected principally a
lower increase in inventories which more than offset the decrease in accounts
payable and accrued liabilities compared to the 1998 Period. In response to the
substantial increase in cigar demand in 1997 and early 1998, the Company
increased its purchases of filler and binder tobacco needed for making high
quality premium cigars. The combination of lower cigar sales and the higher
tobacco purchases has resulted in the increase in inventories of raw tobacco.
The Company has begun to curtail its tobacco purchases and its commitments for
future supplies. Accounts receivable decreased $12.4 million during the 1999
Period principally as a result of seasonal sales in the fourth quarter of 1998
and lower sales in the 1999 Period.
Net cash provided by investing activities was $198.4 million in the 1999 Period
compared to net cash of $7.9 million used in the 1998 Period. Investing
activities in the 1999 Period include proceeds of $200 million for the sale of
the Mass-Market Cigar business and $1.6 million of purchases of property and
equipment including purchases of software to complete the computer system
replacement project. In the 1998 Period, investing activities consisted of
purchases of property and equipment.
11
<PAGE>
Net cash used in financing activities was $57.3 million in the 1999 Period
compared to net cash of $12.2 million provided in the 1998 Period. The financing
activities in the 1999 Period included a $58.6 million prepayment of outstanding
debt and repurchase of the Company's Class A common shares for $2.4 million.
Prepayment of outstanding debt was funded by the cash proceeds from the sale of
the Company's Mass-Market Cigar business.
As of May 29, 1999, 1,233,700 shares at an aggregate cost of $10.7 million,
representing approximately 4.5% of the outstanding shares, had been repurchased
under a repurchase program announced by the Company's Board of Directors on May
21, 1998. This program has authorized the purchase of up to 5% of the Company's
common stock from time to time in open market transactions. No shares were
repurchased during the 1999 second quarter.
The Company's working capital increased to $230.6 million at May 29, 1999, from
$163.3 million at November 28, 1998, principally due to net proceeds from the
sale of the Company's Mass-Market Cigar business.
As a result of the sale of the Mass-Market Cigar business, the Company reduced
its previous commitment under the revolving line of credit from $92.5 million to
$50.0 million and terminated its related interest rate swap agreements with
commercial banks.
Based on its current cash position and existing credit facility, management
believes the Company has adequate financial resources to meet its expected
business requirements.
RESULTS OF OPERATIONS
Three Month and Six Month Periods Ended May 29, 1999 as Compared to Three
Month and Six Month Periods Ended May 30, 1998
In the second quarter of 1999, the Company reported net income of $97.6 million,
or $3.60 per diluted share, compared with $6.8 million, or $0.24 per diluted
share, for the prior years' second quarter. The results reflect a $94.4 million
net gain on the sale of the Company's Mass-Market Cigar business and $0.8
million income from this business, which has been reported separately as
discontinued operations. Prior periods have been restated to reflect the results
of such business as income from discontinued operations.
Net sales decreased 20.4%, or $9.0 million, to $35.1 million in the second
quarter of 1999 ("1999 Second Quarter") from $44.1 million in the second quarter
of 1998 ("1998 Second Quarter"). Net sales in the 1999 Period were $69.2
million, a decrease of 25.8% compared to net sales of $93.3 million in the 1998
Period. The decrease in sales was due to a slow-down in the growth of demand for
cigars and the higher sales in the 1998 Period when customers continued to
purchase cigars in excess of demand in order to avoid potential short supply.
12
<PAGE>
Gross profit decreased 22.6%, or $5.2 million to $17.8 million in the 1999
Second Quarter from $23.0 million in the 1998 Second Quarter. Gross margin
decreased to 50.6% in the 1999 Second Quarter from 52.1% in the 1998 Second
Quarter. The decrease in gross margin reflected lower unit sales of large
premium cigars and the effect of relatively higher costs of raw materials. In
the 1999 Period, gross profit decreased 27.5%, or $13.4 million to $35.3 million
from $48.7 million in the 1998 Period. Gross margin also decreased to 51.0% in
the 1999 Period from 52.2% in the 1998 Period.
Selling, general and administrative expenses ("SG&A") decreased to $14.5 million
in the 1999 Second Quarter from $14.7 million in the 1998 Second Quarter. For
the 1999 Period, SG&A expenses decreased to $27.2 million from $29.1 million in
the 1998 Period. As a percentage of net sales, SG&A expenses were 41.2% and
39.3%, in the 1999 Second Quarter and 1999 Period, respectively, compared to
33.3% and 31.2%, in the 1998 Second Quarter and 1998 Period, respectively. The
increases in SG&A expenses as a percentage of net sales reflect higher marketing
expenses and higher selling expenses associated with new marketing and selling
initiatives, and the effect of lower sales.
Operating profit decreased 59.9%, or $5.0 million, to $3.3 million in the 1999
Second Quarter from $8.3 million in the 1998 Second Quarter primarily as a
result of lower sales. Operating margin decreased to 9.4% from 18.7% in the 1999
Second Quarter. In the 1999 Period, operating profit was $8.1 million, or 11.7%
of net sales, as compared to $19.6 million, or 21.0% of net sales, in the 1998
Period.
Interest expense decreased to $0.5 million in the 1999 Second Quarter from $1.0
million in the 1998 Second Quarter. For the 1999 Period, interest expense
decreased to $1.6 million from $1.9 million in the 1998 Period. This decrease
was due to lower average borrowings during the 1999 Second Quarter as a result
of prepaying $58.6 of outstanding debt.
The provision for income taxes was $1.2 million in the 1999 Second Quarter as
compared to $2.6 million in the 1998 Second Quarter. For the 1999 Period income
tax provision was $2.5 million as compared to $6.4 million in the 1998 Period.
The lower effective tax rate of 34.0% in 1999 compared to 35.5% in 1998 reflects
an increase in earnings in lower tax jurisdictions.
The gain of $94.4 million, net of taxes, on sale of discontinued operations is
comprised of proceeds less transaction and disposition costs, including employee
severance and stay bonuses, facilities and asset write-off, and adjustments to
lease commitments.
As a result of the changes described above and excluding the results of
discontinued operations, income from continuing operations in the 1999 Second
Quarter decreased 50.4% to $2.4 million compared to $4.8 million in the 1998
Second Quarter. Income from continuing operations for the 1999 Period was $4.9
million, a decrease of 58.3% from net income of $11.7 million in the 1998
Period. The decrease principally reflects lower sales as discussed previously.
YEAR 2000 COMPLIANCE
The Company is addressing the Year 2000 issue by both replacing and modifying
its existing critical computer systems. In 1997, the Company began a company
wide system replacement project with Oracle Corporation to install a new
Enterprise Resource Planning ("ERP") system. The new Oracle ERP system is
expected to provide significantly enhanced systems capabilities and make the
Company's critical business computer applications Year 2000 compliant. The
Company has completed its company wide review of the remaining non-critical
systems, including hardware, software and control systems.
13
<PAGE>
The cost of the Oracle ERP system will be approximately $7 million. Through the
1999 Second Quarter, $6.0 million has been incurred on this project. The cost of
the modifications for its non-critical systems is not expected to be material to
the Company. The Company has communicated 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. The Company is continuing to assess the progress of its 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.
FORWARD-LOOKING STATEMENTS
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 inability to reduce SG&A expenses
as expected, (iii) an increase in the price of raw materials, (iv) additional
governmental regulation of tobacco or further tobacco litigation, (v) enactment
of new or significant increases in existing excise taxes, (vi) political and/or
economic instability in foreign countries where the Company has operations,
(vii) failure to remediate Year 2000 issues and (viii) other risks and
uncertainties set forth in the Company's other filings with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to Market Risk in the Management's Discussion and Analysis section
included in the Company's Annual Report to Shareholders for the fiscal year
ended November 28, 1998.
14
<PAGE>
PART II. OTHER INFORMATION
GENERAL CIGAR HOLDINGS, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
On April 20, 1999, the Company held its annual meeting of stockholders in New
York, N.Y. The stockholders elected the following directors with corresponding
votes for and against. These votes reflect shares of the Company's Class A
common stock which entitles each stockholder to one vote for each share held and
shares of Class B common stock which entitles each stockholder to ten votes for
each share held.
Number of Number of
Name of Director Votes For Votes Against
-------------------------------------------------------------------------
Edgar M. Cullman.......................... 143,706,394 426,808
Bruce A. Barnet........................... 143,867,476 265,726
John L. Bernbach.......................... 143,738,455 394,747
Edgar M. Cullman, Jr...................... 143,755,846 377,356
Susan R. Cullman.......................... 143,743,187 390,015
John L. Ernst............................. 143,755,926 377,276
Thomas C. Israel.......................... 143,876,216 256,986
Dan W. Lufkin............................. 142,870,651 1,262,551
Graham V. Sherren......................... 143,852,780 280,422
Peter J. Solomon.......................... 143,738,319 394,883
Francis T. Vincent, Jr.................... 143,873,771 259,431
The stockholders approved the selection the Company's independent accountants
for 1999:
Number of Number of Number of
Votes For Votes Against Votes Abstained
----------- ------------- ---------------
PricewaterhouseCoopers LLP... 143,772,187 210,817 150,197
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) EXHIBITS
The exhibit listed in the following table has been filed as part of this
Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------
27 Financial Data Schedule for the Second Quarter of 1999
(for Commission use only)
(b) REPORTS ON FORM 8-K
On April 2, 1999, the Company filed a report on Form 8-K, reporting under
Item 5 and 7(c), disclosing the announcement that the Company and Swedish
Match North America Inc., had entered into a definitive Asset Purchase
Agreement for the sale of General Cigar's mass-market cigar business for
$200 million in cash.
On April 19, 1999, the Company filed a report on Form 8- K, reporting
under Items 5, 7(b) and 7(c), disclosing pro forma financial information
prior to the discussion of the sale of General Cigar's mass-market cigar
business and the presentation of such pro forma financial information at
the Annual Meeting of Shareholders of the Company on April 20, 1999.
On May 10, 1999, the Company filed a report on Form 8- K, reporting under
Item 2 and 7(c), disclosing that on April 30, 1999, the sale of General
Cigar's mass-market cigar business was completed.
16
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
SIGNATURE
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: July 13, 1999 By: /s/ Joseph C. Aird
------------------
Joseph C. Aird
Senior Vice President,
Chief Financial Officer,
Treasurer and Acting Controller
17
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
27 Financial Data Schedule for the Second Quarter of 1999
(for Commission use only)
E-1
<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 MAY 29, 1999 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>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-27-1999
<PERIOD-START> FEB-28-1999
<PERIOD-END> MAY-29-1999
<CASH> 143,334
<SECURITIES> 0
<RECEIVABLES> 28,120
<ALLOWANCES> 831
<INVENTORY> 151,207
<CURRENT-ASSETS> 332,013
<PP&E> 107,512
<DEPRECIATION> 49,266
<TOTAL-ASSETS> 461,163
<CURRENT-LIABILITIES> 101,413
<BONDS> 10,465
0
0
<COMMON> 278
<OTHER-SE> 314,841
<TOTAL-LIABILITY-AND-EQUITY> 461,163
<SALES> 35,122
<TOTAL-REVENUES> 35,122
<CGS> 17,346
<TOTAL-COSTS> 17,346
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 493
<INTEREST-EXPENSE> 547
<INCOME-PRETAX> 3,613
<INCOME-TAX> 1,229
<INCOME-CONTINUING> 2,384
<DISCONTINUED> 95,191
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 97,575
<EPS-BASIC> 3.68 <F1>
<EPS-DILUTED> 3.60 <F1>
<FN>
<F1> The EPS-PRIMARY amount represents basic net income per share and the
EPS-DILUTED amount represents diluted net income per share, computed in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."
</FN>
</TABLE>
