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________________________________________________________________________________
AMENDMENT NO. 1
TO
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 28, 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 September 30, 1999, 12,926,136 shares of Class A common stock, par value
$0.01 per share, and 13,629,009 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 (UNAUDITED):
-------------------------------------------
Condensed Consolidated Statement of Operations for the
13 Weeks ended August 28, 1999 and August 29, 1998 and
for the 39 Weeks ended August 28, 1999 and August 29, 1998... Page 3
Condensed Consolidated Balance Sheet as
of August 28, 1999 and November 28, 1998..................... Page 4
Condensed Consolidated Statement of Cash Flows for the
39 Weeks ended August 28, 1999 and August 29, 1998........... Page 5
Condensed Consolidated Statement of Stockholders' Equity
for the 39 Weeks ended August 28, 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 15
-----------------
PART II. OTHER INFORMATION:
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.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands except per share data)
(Unaudited)
13 WEEKS ENDED 39 WEEKS ENDED
------------------ ------------------
AUG. 28, AUG. 29, AUG. 28, AUG. 29,
1999 1998 1999 1998
-------- -------- -------- --------
NET SALES............................... $38,698 $63,398 $140,302 $199,383
Cost of goods sold...................... 18,747 32,441 72,743 103,549
------ ------ ------- -------
GROSS PROFIT............................ 19,951 30,957 67,559 95,834
Selling, general and
administrative expenses............... 13,442 22,113 49,541 63,093
------ ------ ------- -------
OPERATING PROFIT........................ 6,509 8,844 18,018 32,741
Gain on sale of business (Note 4)....... - - 152,261 -
Nonoperating income..................... 88 145 298 515
Interest income......................... 1,833 34 2,588 127
Interest expense........................ 317 1,251 1,973 3,203
------ ------ ------- -------
Income before provision
for income taxes...................... 8,113 7,772 171,192 30,180
Provision for income taxes.............. 2,758 2,759 64,296 10,714
------ ------ ------- -------
NET INCOME.............................. $ 5,355 $ 5,013 $106,896 $ 19,466
====== ====== ======= =======
Basic net income per share.............. $ 0.20 $ 0.18 $ 4.03 $ 0.71
====== ====== ====== ======
Weighted average common
shares outstanding.................... 26,555 27,179 26,500 27,464
====== ====== ====== ======
Diluted net income per share............ $ 0.20 $ 0.18 $ 3.94 $ 0.69
====== ====== ====== ======
Weighted average common shares
and equivalents outstanding........... 27,129 27,856 27,138 28,324
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
3
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(dollars in thousands except per share data)
(Unaudited)
________ ________
AUG. 28, NOV. 28,
ASSETS 1999 1998
-------- --------
CURRENT ASSETS:
Cash and cash equivalents............................... $104,864 $ 3,985
Receivables, less allowance of $1,109 (1998-- $1,327).. 26,854 39,666
Inventories............................................. 165,119 157,862
Other current assets.................................... 8,939 7,852
------- -------
TOTAL CURRENT ASSETS........................... 305,776 209,365
Property and equipment, net............................... 59,051 76,809
Intangible assets, net,
principally trademarks and goodwill..................... 68,684 71,170
Investments............................................... 24,250 -
Other assets.............................................. 1,009 1,959
------- -------
TOTAL ASSETS................................... $458,770 $359,303
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities................ $ 36,168 $ 41,518
Long-term debt due within one year...................... 220 1,457
Income taxes............................................ 53,875 3,087
------- -------
TOTAL CURRENT LIABILITIES...................... 90,263 46,062
Long-term debt............................................ 10,447 66,291
Accrued retirement benefits............................... 12,629 12,892
Deferred income taxes..................................... 10,877 9,852
Other noncurrent liabilities.............................. 10,780 9,033
------- -------
TOTAL LIABILITIES.............................. 134,996 144,130
------- -------
Minority interest in preferred stock of subsidiary........ 3,300 -
------- -------
Commitments and Contingencies (Note 8)
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: 13,682,147 shares
(1998 -- 13,997,799 shares)........................... 137 140
Class A common stock, par value $0.01 -- authorized:
50,000,000 shares; Issued: 14,106,698 shares
(1998 -- 13,635,050 shares)........................... 141 136
Additional paid-in capital.............................. 166,407 165,598
Retained earnings....................................... 164,498 57,602
------- -------
331,183 223,476
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..................... 320,474 215,173
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $458,770 $359,303
======= =======
See Notes to Consolidated Financial Statements.
4
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(Unaudited)
39 WEEKS ENDED
-------------------
AUG. 28, AUG. 29,
1999 1998
-------- -------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................................. $106,896 $19,466
Adjustments to reconcile net income to net cash
(used in) operating activities:
Gain on sale of business.............................. (152,261) -
Depreciation and amortization......................... 6,761 6,498
Changes in assets and liabilities net
of effects from the Sale:
Decrease in accounts receivable..................... 12,244 14,948
Increase in inventories............................. (20,756) (52,326)
Decrease in accounts payable
and accrued liabilities........................... (24,483) (1,886)
Increase in income taxes payable.................... 55,798 1,019
Increase in deferred income taxes................... 873 2,144
Other, net.......................................... (22) (1,672)
------- ------
NET CASH (USED IN) OPERATING ACTIVITIES............... (14,950) (11,809)
------- ------
CASH FLOW FROM INVESTING ACTIVITIES:
Proceeds from sale of business......................... 200,000 -
Purchase of marketable securities...................... (20,950) -
Additions to property and equipment.................... (5,910) (15,044)
------- ------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 173,140 (15,044)
------- ------
CASH FLOW FROM FINANCING ACTIVITIES:
Net (repayment) borrowing under
revolving credit facility............................ (51,000) 27,000
Purchase of treasury stock............................. (2,406) (6,638)
Payments of other debt................................. (4,357) (514)
Proceeds from exercise of stock options................ 452 129
------- ------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (57,311) 19,977
------- ------
Net increase (decrease) in cash and cash equivalents...... 100,879 (6,876)
Cash and cash equivalents at beginning of period.......... 3,985 8,976
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $104,864 $ 2,100
======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 2,104 $ 3,027
Income taxes........................................... $12,124 $ 7,421
Non-cash transaction:
Issuance of subsidiary preferred
stock in exchange for marketable securities.......... $ 3,300 $ -
See Notes to Consolidated Financial Statements.
5
<PAGE>
<TABLE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONDENSED 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................ (315,652) (3) 315,652 3 - - - -
Tax benefit arising from
exercise of employee
stock options................... - - - - 359 - - 359
Purchase of treasury stock........ - - - - - - (2,406) (2,406)
Net income........................ - - - - - 106,896 - 106,896
---------- --- ---------- --- ------- ------- ------ -------
BALANCE AT AUGUST 28, 1999........ 13,682,147 $137 14,106,698 $141 $166,407 $164,498 $(10,709) $320,474
========== === ========== === ======= ======= ====== =======
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
General Cigar Holdings, Inc., the Registrant, hereby amends its report on
Form 10-Q for the 13 weeks ended August 28, 1999 as filed with the SEC on
October 5, 1999 in order to revise Items 1 and 2 of Part I (Financial
Information) to reflect the sale of the Registrants' Mass-Market Cigar
business within continuing operations as opposed to presenting the sale as
a discontinued operation in accordance with APB Opinion No. 30: "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions", as was previously reported. Accordingly, the amounts
previously reported for 1999 as income from discontinued operations of $2.3
million, net of income taxes of $1.1 million, and gain on sale of
discontinued operations of $94.4 million, net of income taxes of $57.9
million, have been reclassified to continuing operations as follows: (i)
Net sales $32.4 million, (ii) Cost of goods sold $20.0 million, (iii)
Selling, general and administrative expense $8.9 million, and (iv) Gain on
sale of business $152.3 million. This reclassification has no impact on
previously reported net income or earnings per share.
The interim Condensed 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 and 39 weeks ended August 28, 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 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 Condensed 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) INVESTMENTS
During the third quarter of 1999, the Company invested $24.3 million in
marketable securities, including $21.3 million in certain bonds issued by
the Russian Federation. At August 28, 1999, all securities were classified
as held-to-maturity and carried at cost. The realization of interest and
principal is subject to credit and foreign exchange risks, including the
convertibility of the currency. Accretion of the bond discount will not be
recorded currently, and interest on the bonds, which carry a coupon of 14%
payable semiannually, will be recognized when interest proceeds are
converted into, and repatriated in, U.S. dollars.
The tax basis in the bonds is $157.0 million greater than the book basis.
The related tax benefit of approximately $60.0 million will be realized
upon maturity or earlier disposition of the bonds. The Company has
recognized the $60.0 million future tax benefit as a deferred tax asset in
its financial statements, but has offset this asset with a $60.0 million
valuation reserve until the actual benefit is reviewed, approved and
realized. Accordingly, the transaction had no effect on the Company's
results for the period ended August 28, 1999.
(4) GAIN ON SALE OF BUSINESS
On April 30, 1999, the Company sold 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).
Net sales and operating profit from the Mass-Market Cigar business are as
follows:
13 Weeks Ended 39 Weeks Ended
------------------ ------------------
Aug. 28, Aug. 29, Aug. 28, Aug. 29,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales...................... $ - $21,506 $32,372 $64,233
Operating profit............... - 2,949 3,431 7,232
Net assets of Mass-Market Cigar business 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 Mass-Market Cigar business.................. $19,468
======
In connection with the sale of the Mass-Market Cigar business, the Company
entered into a five year Supply Agreement with the buyer to supply tobacco
for use in the Mass-Market Cigar operations. Under the Agreement, tobacco
grown by General Cigar is sold at market value, and tobacco purchased from
third parties is sold at the purchase price. General Cigar also receives
interest calculated on the average balance of such tobacco in inventory.
8
<PAGE>
(5) MINORITY INTEREST IN PREFERRED STOCK OF SUBSIDIARY
The $3.3 million of preferred stock of subsidiary represents 3,300 shares
of convertible participating preferred stock issued by GCMM in connection
with the acquisition of $21.3 million of marketable securities. The
remaining investment in marketable securities was funded in cash. The
preferred stock carries a coupon of 7% payable quarterly.
(6) 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 39 Weeks Ended
---------------------- ----------------------
Aug. 28, Aug. 29, Aug. 28, Aug. 29,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Weighted average common
shares outstanding
for basic calculation.......... 26,555,145 27,179,416 26,499,450 27,463,553
Add: Effect of stock options... 573,550 676,562 638,253 860,444
---------- ---------- ---------- ----------
Weighted average common shares
and equivalents outstanding.... 27,128,695 27,855,978 27,137,703 28,323,997
========== ========== ========== ==========
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 third quarter and 1,228,444 shares in the 1998
third quarter, because the options' exercise prices were greater than the
average market price of the common shares.
(7) 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 second and third quarters of 1999.
9
<PAGE>
(8) COMMITMENTS AND CONTINGENCIES
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 and results of operations.
(9) RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current periods' presentation.
(10) INVENTORIES
Inventories consist of:
Aug. 28, Nov. 28,
1999 1998
-------- --------
Raw materials and supplies........................ $126,174 $108,327
Work-in-process................................... 7,396 6,968
Finished goods.................................... 31,549 42,567
------- -------
$165,119 $157,862
======= =======
(11) 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.
(12) 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, if any, 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 sold its Mass-Market Cigar business to Swedish
Match North America Inc., for $200 million in cash (the "Mass-Market Sale"). In
addition, as part of the sale, the Company has entered into a five year Supply
Agreement with the buyer to supply tobacco for use in the Mass-Market Cigar
operations. Net proceeds from the sale were used to prepay $54.8 million of bank
debt and a $3.8 million equipment loan, and provide funds for operations. The
Mass-Market Sale significantly strengthened the Company's financial position.
As of August 28, 1999, cash and cash equivalents of $104.9 million included in
the accompanying condensed consolidated balance sheet included principally money
market funds and time deposits with maturities of 90 days or less, yielding
approximately 5% annually. In June 1999, the Company invested $24.3 million in
marketable securities, including $21.3 million in certain bonds issued by the
Russian Federation. The face value of the bonds at the current exchange rate is
approximately $94.0 million. Because of the deep discount on these bonds, any
appreciation in their value that is realized upon disposal may significantly
leverage the return on the investment. However, these are not investment grade
securities and the realization of interest and principal is subject to credit
and foreign exchange risks, including the convertibility of the currency.
Accretion of the bond discount will not be recorded currently, and interest on
the bonds, which carry a coupon of 14% payable semiannually, will be recognized
when interest proceeds are converted into, and repatriated in, U.S. dollars.
The Company intends to hold the bonds to their maturity, September 2001.
Accordingly, the bonds are included in the balance sheet in non-current assets
at cost, which at August 28, 1999 was approximately equal to their market value.
The tax basis in the bonds is $157.0 million greater than the book basis. The
related tax benefit of approximately $60.0 million will be realized upon
maturity or earlier disposition of the bonds. The Company has recognized the
$60.0 million future tax benefit as a deferred tax asset in its financial
statements, but has offset this asset with a $60.0 million valuation reserve
until the actual benefit is reviewed, approved and realized. Accordingly, the
transaction had no effect on the Company's results for the period ended August
28, 1999.
The Company is considering a number of business investment options including
acquisitions of select premium cigar brands, and expansion of its distribution
and marketing activities, in both international and domestic markets. The
Company also plans to complete purchases of approximately $34 million of tobacco
over the next nine to 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 appropriate
levels.
11
<PAGE>
Net cash used in operating activities was $15.0 million in the nine months ended
August 28, 1999 (the "1999 Period") compared to net cash of $11.8 million used
in the nine months ended August 29, 1998 (the "1998 Period"). The higher use of
cash from operating activities in the 1999 Period occurred largely as a result
of lower operating profit partially offset by changes in the balances of certain
current assets and liabilities, excluding the effect of the Mass-Market Sale and
higher net interest income.
Inventory levels, particularly filler and binder tobacco, increased
significantly in both the 1999 and 1998 Periods, but to a lesser extent in the
1999 Period. These increases were primarily attributable to the combination of
lower cigar sales, and higher tobacco purchases which were initiated in response
to the substantial increase in cigar sales in 1997 and early 1998. The Company
has begun to curtail its tobacco purchases and its commitments for future
supplies. As of August 28, 1999, the Company's raw materials and supplies
include approximately $15 million of raw tobacco for use in the previously owned
Mass-Market Cigar business, under the terms of the Supply Agreement. Accounts
payable and accrued liabilities decreased $24.5 million during the 1999 Period
principally as a result of lower purchases of raw tobacco. The decrease in
accounts receivable during the 1999 Period was mainly the result of seasonal
sales in the fourth quarter of 1998 and lower sales in the 1999 Period. Income
taxes payable increased by $55.8 million reflecting the provision for income
taxes on the Mass-Market Sale offset by payments made during the 1999 Period.
Net cash provided by investing activities was $173.1 million in the 1999 Period
compared to net cash of $15.0 million used in the 1998 Period. Investing
activities in the 1999 Period include proceeds of $200 million from the
Mass-Market Sale, $21.0 million of purchases of marketable securities, and $5.9
million of purchases of property and equipment including expenditures to
complete the computer system replacement project. In the 1998 Period, investing
activities consisted of purchases of property and equipment.
Net cash used in financing activities was $57.3 million in the 1999 Period
compared to net cash of $20.0 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
Mass-Market Sale. As of August 28, 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 second and third quarters of 1999.
The Company's working capital increased to $215.5 million at August 28, 1999,
from $163.3 million at November 28, 1998, principally due to net proceeds from
the Mass-Market Sale. As a result of the Mass-Market Sale, 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.
12
<PAGE>
RESULTS OF OPERATIONS
Three Month and Nine Month Periods Ended August 28, 1999 as Compared to Three
Month and Nine Month Periods Ended August 29, 1998.
Net sales decreased 39.0%, or $24.7 million, to $38.7 million in the third
quarter of 1999 ("1999 Third Quarter") from $63.4 million in the third quarter
of 1998 ("1998 Third Quarter"). Net sales in the 1999 Period were $140.3
million, a decrease of 29.6% compared to net sales of $199.4 million in the 1998
Period. These decreases were largely attributable to the effect of the
Mass-Market Sale. Excluding the effect of the Mass-Market Sale, decreases in net
sales reflected a lower unit sales compared to higher sales in the 1998 Period
when customers continued to purchase cigars in excess of demand in order to
avoid potential short supply. Management believes that the significantly lower
decline in net sales during the 1999 Third Quarter compared to the decline in
the 1999 Period reflects a decrease in this downward trend.
Gross profit decreased 35.6%, or $11.0 million, to $20.0 million in the 1999
Third Quarter from $31.0 million in the 1998 Third Quarter. Gross margin
increased to 51.6% in the 1999 Third Quarter from 48.8% in the 1998 Third
Quarter. In the 1999 Period, gross profit decreased 29.5%, or $28.2 million to
$67.6 million from $95.8 million in the 1998 Period. Gross margins were stable
at 48.2% in the 1999 Period as compared to 48.1% in the 1998 Period. The decline
in gross profit was largely the result of the Mass-Market Sale. Excluding the
effect of the Mass-Market Sale, gross margin decreased to 51.2% in the 1999
Period compared to 52.5% in the 1998 Period. The decrease in gross margin
reflected a change in sales mix and the effect of relatively higher costs of raw
materials.
Selling, general and administrative expenses ("SG&A") decreased to $13.4 million
in the 1999 Third Quarter from $22.1 million in the 1998 Third Quarter. For the
1999 Period, SG&A expenses decreased to $49.5 million from $63.1 million in the
1998 Period. As a percentage of net sales, SG&A expenses were 34.7% and 35.3%,
in the 1999 Third Quarter and 1999 Period, respectively, compared to 34.9% and
31.6%, in the 1998 Third Quarter and 1998 Period. The reductions in SG&A
expenses reflect primarily the effect of the Mass-Market Sale, certain
nonrecurring expenses included in the 1998 Period and expense reduction
initiatives undertaken during the 1999 Period. The increase in SG&A expenses as
a percentage of net sales in the 1999 Period reflect primarily the effect of
lower sales.
Operating profit decreased 26.4%, or $2.3 million, to $6.5 million in the 1999
Third Quarter from $8.8 million in the 1998 Third Quarter primarily as a result
of lower SG&A expenses. Operating margin increased to 16.8% from 13.9% in the
1999 Third Quarter. In the 1999 Period, operating profit was $18.0 million, or
12.8% of net sales, as compared to $32.7 million, or 16.4% of net sales, in the
1998 Period.
Interest income in the 1999 Third Quarter and the 1999 Period relates to cash
invested in highly liquid investments, with the proceeds from the Mass-Market
Sale.
13
<PAGE>
Interest expense decreased to $0.3 million in the 1999 Third Quarter from $1.3
million in the 1998 Third Quarter. For the 1999 Period, interest expense
decreased to $2.0 million from $3.2 million in the 1998 Period. These decreases
reflect lower average borrowings during 1999 as a result of prepaying $58.6
million of outstanding debt.
The provision for income taxes was $2.8 million in the 1999 Third Quarter as
compared to $2.8 million in the 1998 Third Quarter. For the 1999 Period income
tax provision was $64.3 million as compared to $10.7 million in the 1998 Period.
This increase mainly reflect a $57.9 million income tax provision for the
Mass-Market Sale partially offset by a lower effective tax rate of 34.0% in 1999
compared to 35.5% in 1998. The lower effective tax rate reflects an increase in
earnings in lower tax jurisdictions.
In the 1999 Period, the Company's results included a gain of $152.3 million from
the Mass-Market Sale. The gain is comprised of proceeds less transaction and
disposition costs.
As a result of the changes described above, net income increased 6.8% to $5.4
million compared to $5.0 million in the 1998 Third Quarter. Net income for the
1999 Period was $106.9 million compared with $19.5 million in the 1998 Period.
Period.
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 implementation and testing of
the new Oracle ERP system has been substantially completed. Substantially all of
the Company's critical computer systems have been tested and are Year 2000
compliant. Final implementation and testing of the remaining systems are
scheduled to be completed during the fourth quarter of 1999. The Company has
satisfactorily completed a company wide review of the remaining non-critical
systems, including hardware, software and control systems.
The cost of the Oracle ERP system will be approximately $7 million. Through the
1999 Third Quarter, $6.5 million has been incurred on this project. The cost of
the modifications for its non-critical systems is not expected to be material.
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.
14
<PAGE>
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 that 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.
15
<PAGE>
PART II. OTHER INFORMATION
GENERAL CIGAR HOLDINGS, INC.
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
Report.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
--------------------------------------------------------------------------
27 Financial Data Schedule for the 13 Weeks ended August 28, 1999
(for Commission use only)
(b) REPORTS ON FORM 8-K
No Report on Form 8-K was filed during the quarter for which this Report
is filed.
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: February 25, 2000 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 13 Weeks ended August 28, 1999
(for Commission use only)
E-1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY CONSOLIDATED FINANCIAL INFORMATION EXTRACTED FROM
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF GENERAL CIGAR HOLDINGS, INC.
INCLUDED IN ITS QUARTERLY REPORT ON FORM 10-Q FOR THE 13 WEEKS ENDED AUGUST 28,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
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> MAY-30-1999
<PERIOD-END> AUG-28-1999
<CASH> 104,864
<SECURITIES> 0
<RECEIVABLES> 27,963
<ALLOWANCES> 1,109
<INVENTORY> 165,119
<CURRENT-ASSETS> 305,776
<PP&E> 109,395
<DEPRECIATION> 50,344
<TOTAL-ASSETS> 458,770
<CURRENT-LIABILITIES> 90,263
<BONDS> 10,447
0
0
<COMMON> 278
<OTHER-SE> 320,196
<TOTAL-LIABILITY-AND-EQUITY> 458,770
<SALES> 38,698
<TOTAL-REVENUES> 38,698
<CGS> 18,747
<TOTAL-COSTS> 18,747
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 516
<INTEREST-EXPENSE> 317
<INCOME-PRETAX> 8,113
<INCOME-TAX> 2,758
<INCOME-CONTINUING> 5,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,355
<EPS-BASIC> 0.20
<EPS-DILUTED> 0.20
</TABLE>
