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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 February 26, 2000
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 March 31, 2000, 13,602,541 shares of Class A common stock, par value $0.01
per share, and 13,436,859 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 February 26, 2000 and February 27, 1999....... Page 3
Condensed Consolidated Balance Sheet as
of February 26, 2000 and November 27, 1999................... Page 4
Condensed Consolidated Statement of Cash Flows for the
13 Weeks ended February 26, 2000 and February 27, 1999....... Page 5
Condensed Consolidated Statement of Stockholders' Equity
for the 13 Weeks ended February 26, 2000..................... 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 13
-----------------
PART II. OTHER INFORMATION:
Item 6. EXHIBITS AND REPORTS ON FORM 8-K....................... Page 14
------------------------------------------
SIGNATURE.......................................................... Page 15
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
--------------------
FEB. 26, FEB. 27,
2000 1999
-------- --------
NET SALES................................................. $32,791 $52,495
Cost of goods sold........................................ 18,259 27,801
------ ------
GROSS PROFIT.............................................. 14,532 24,694
Selling, general and administrative expenses.............. 12,898 17,693
------ ------
OPERATING PROFIT.......................................... 1,634 7,001
Gain on sale of marketable securities..................... 4,999 -
Nonoperating income....................................... 190 107
Interest income........................................... 3,073 53
Interest expense.......................................... 344 1,152
------ ------
Income before provision for income taxes.................. 9,552 6,009
Provision for income taxes................................ 3,058 2,043
------ ------
NET INCOME................................................ $ 6,494 $ 3,966
====== ======
Basic net income per share................................ $ 0.24 $ 0.15
====== ======
Weighted average common shares outstanding................ 26,827 26,456
====== ======
Diluted net income per share.............................. $ 0.24 $ 0.15
====== ======
Weighted average common shares
and equivalents outstanding............................. 27,261 27,164
====== ======
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)
________ ________
FEB. 26, NOV. 27,
ASSETS 2000 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents............................. $125,511 $111,932
Marketable securities................................. 17,055 12,751
Receivables, less allowance of $819 (1999-$808)....... 25,556 31,027
Inventories........................................... 138,836 137,090
Other current assets.................................. 13,016 13,067
-------- --------
TOTAL CURRENT ASSETS........................... 319,974 305,867
Property and equipment, net............................. 59,911 60,185
Intangible assets, net, principally
trademarks and goodwill............................... 65,112 65,738
Investments in marketable securities.................... 6,190 12,603
Other assets............................................ 2,073 777
-------- --------
TOTAL ASSETS................................... $453,260 $445,170
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.............. $ 23,033 $ 26,957
Long-term debt due within one year.................... 220 253
Income taxes.......................................... 2,256 902
-------- --------
TOTAL CURRENT LIABILITIES...................... 25,509 28,112
Long-term debt.......................................... 10,269 10,259
Accrued retirement benefits............................. 10,269 10,558
Deferred income taxes................................... 15,474 14,832
Other noncurrent liabilities............................ 55,401 57,707
-------- --------
TOTAL LIABILITIES.............................. 116,922 121,468
-------- --------
Minority interest in preferred stock of subsidiary...... 3,300 3,300
-------- --------
Commitments and Contingencies (Note 9)
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: 13,458,720 shares at February 26, 2000;
Issued: 13,566,044 shares at November 27, 1999..... 135 136
Class A common stock, par value $0.01--authorized:
50,000,000 shares;
Issued: 14,814,380 shares at February 26, 2000;
Issued: 14,222,801 shares at November 27, 1999..... 148 142
Additional paid-in capital............................ 168,847 166,407
Accumulated other comprehensive income................ 4,177 399
Retained earnings..................................... 170,440 164,027
-------- --------
343,747 331,111
Less: Cost of Class A common stock held
in treasury, 1,233,700 shares................ (10,709) (10,709)
-------- --------
TOTAL STOCKHOLDERS' EQUITY..................... 333,038 320,402
-------- --------
TOTAL LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY.................... $453,260 $445,170
======== ========
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)
13 WEEKS ENDED
-------------------
FEB. 26, FEB. 27,
2000 1999
-------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income.............................................. $ 6,494 $ 3,966
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.......................... 1,967 2,444
Gain on sale of marketable securities.................. (4,999) -
Changes in assets and liabilities:
Decrease in accounts receivable........................ 5,471 11,495
Increase in inventories................................ (1,746) (2,292)
Decrease in accounts payable and accrued liabilities... (4,601) (14,603)
Increase (decrease) in income taxes payable............ 3,059 (1,151)
Increase in deferred income taxes...................... 4 208
Other, net............................................. (420) 2,164
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 5,229 2,231
------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Net proceeds from sale of marketable securities......... 12,647 -
Payments of contingent purchase price for subsidiary.... (2,250) (656)
Additions to property and equipment..................... (1,086) (2,033)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES... 9,311 (2,689)
------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowing on credit facility........................ - 3,000
Transaction costs relating to proposed merger........... (1,429) -
Purchase of treasury stock.............................. - (2,406)
Payments of debt........................................ (23) (198)
Proceeds from exercise of stock options................. 491 -
------- -------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES... (961) 396
------- -------
Net increase (decrease) in cash and cash equivalents...... 13,579 (62)
Cash and cash equivalents at beginning of period.......... 111,932 3,985
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................ $125,511 $ 3,923
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest................................................ $ 340 $ 1,123
Income taxes............................................ $ 60 $ 2,986
See Notes to Consolidated Financial Statements.
5
<PAGE>
PART I (Cont.)
GENERAL CIGAR HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Class B Class A Other Total
Common Stock Common Stock Additional Compre- Stock-
----------------- ---------------- Paid-in hensive Retained Treasury holders'
Shares Amount Shares Amount Capital Income Earnings Stock Equity
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT
NOVEMBER 27, 1999....... 13,566,044 $136 14,222,801 $142 $166,407 $399 $164,027 $(10,709) $320,402
Comprehensive income:
Net income.................. - - - - - - 6,494 - 6,494
Unrealized gains on
marketable securities,
net of taxes.............. - - - - - 3,778 - - 3,778
---------- --- ---------- --- ------- ----- ------- ------ -------
Total comprehensive income... - - - - - 3,778 6,494 - 10,272
Exercise of stock options.... - - 484,255 5 486 - - - 491
Exchange of shares........... (107,324) (1) 107,324 1 - - - - -
Tax benefit arising from
exercise of employee
stock options.............. - - - - 1,954 - - - 1,954
Dividends on
preferred stock......... - - - - - - (81) - (81)
---------- --- ---------- --- ------- ----- ------- ------ -------
BALANCE AT
FEBRUARY 26, 2000....... 13,458,720 $135 14,814,380 $148 $168,847 $4,177 $170,440 $(10,709) $333,038
========== === ========== === ======= ===== ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
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 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 ended February 26, 2000 are not necessarily
indicative of the results that may be expected for the entire year ending
November 25, 2000.
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: (i) the Company's audited 1999 financial statements
included in Form 10-K and Form 10-K/A, as filed with the Commission on
February 25, 2000 and March 24, 2000, respectively, (ii) the Notes to
Consolidated Financial Statements appearing in those reports and (iii) the
Company's Proxy Statement filed in connection with an Agreement and Plan of
Merger, as filed with the Commission on April 10, 2000.
(2) AGREEMENT AND PLAN OF MERGER
On January 19, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Swedish Match AB ("Swedish Match") and
Swedish Match's wholly owned subsidiary, SM Merger Corporation ("Merger
Sub"). The Merger Agreement provides that upon satisfaction of certain
conditions, Merger Sub will merge into the Company with the Company
surviving the merger (the "Merger"). The Merger will result in Swedish
Match owning a 64% interest in the Company. Pursuant to the Merger
Agreement, each share of common stock of the Company owned by the public
will be purchased for $15.25 per share in cash. The Cullman family has
agreed to sell approximately one third of their holdings to Swedish Match
for $15.00 per share in cash immediately prior to the Merger pursuant to a
stock purchase agreement (the "Stock Purchase Agreement"). The Cullman
family, which has managed the Company since 1961, will hold the remaining
36% of the Company following the Merger and will continue to manage the
Company. The Merger requires the approval of the Company's stockholders,
including the vote of a majority of the Class A shares, other than those
held by the Cullman family, voting separately as a class. The Cullman
family has agreed pursuant to a voting agreement with Swedish Match (the
"Voting Agreement") to vote all of their Class B shares in their capacities
as stockholders in favor of the Merger and against any competing offer for
a period of eighteen months in the event of a termination of the Merger
Agreement. The Board of Directors of the Company unanimously approved the
Merger based upon the unanimous recommendation of a special committee of
independent directors. The Company has set May 8, 2000 as the date for its
special meeting to vote on the Merger. Stockholders of record on April 7,
2000 of both Class A and Class B shares will be entitled to vote on the
Merger.
7
<PAGE>
The aggregate cost of the transaction is approximately $330 million of
which $170 million will be paid by Swedish Match to buy certain shares of
the Cullman family at $15.00 per share and to provide part of the financing
for the Company to buy public shares at $15.25 per share. The Company plans
to finance the remaining $160 million of the transaction with a combination
of existing cash and equivalents, marketable securities, and borrowings
under a new credit facility which is currently being negotiated. Under the
terms of the Merger Agreement, the Company is expected to borrow
approximately $55 million to finance the transaction which is expected to
close during the second quarter of 2000.
The consolidated financial statements of the Company do not reflect the
effect of the Merger Agreement.
(3) 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.
(4) GAIN ON SALE OF MARKETABLE SECURITIES
The Company has commenced the sale of its Russian bond portfolio to provide
a portion of the funds necessary for the proposed Merger. During the first
quarter of 2000, the Company sold certain of these bonds for net proceeds
of $12.6 million and a gain of $5.0 million before taxes. The remaining
$13.6 million of such bonds are included in current assets as securities
available-for-sale at an estimated fair value of $17.1 million.
(5) MARKETABLE SECURITIES
At February 26, 2000, the Company has classified all marketable securities
as available-for-sale. The cost, gross unrealized holding gains and fair
value of the available-for-sale securities at February 26, 2000 were as
follows:
Gross
Unrealized
Holding Fair
Cost Gains Value
------------------------------
Classified as current assets:
Russian bonds ...................... $13,602 $3,453 $17,055
------ ----- ------
Total ................................. $13,602 $3,453 $17,055
====== ===== ======
Classified as noncurrent assets:
Russian equity funds ............... $ 3,500 $2,690 $ 6,190
------ ----- ------
Total ................................. $ 3,500 $2,690 $ 6,190
====== ===== ======
Net unrealized gains and losses, net of the related income tax effect, on
available-for-sale securities are excluded from earnings and reported as a
separate component of stockholders' equity until realized.
(6) SALE OF MASS-MARKET CIGAR BUSINESS
On April 30, 1999, the Company sold its Mass-Market Cigar business to
Swedish Match North America Inc. ("SMNA"), for $204.5 million in cash (the
"Mass-Market Sale"). Net proceeds from the Mass-Market Sale were used to
prepay certain debt and provide funds for operations and investments.
Net sales and operating profit from the Mass-Market Cigar business, which
are included in the accompanying financial statements, are as follows:
13 Weeks Ended
------------------
Feb. 26, Feb. 27,
2000 1999
-------- --------
Net sales........................................ $ - $18,385
Operating profit................................. - 2,235
8
<PAGE>
In connection with the Mass-Market Sale, the Company entered into a five
year Supply Agreement with SMNA 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
subsequent to the date of the Supply Agreement is sold at the purchase
price. During the 2000 first quarter, the Company recorded $0.4 million of
interest income calculated on the average balance of tobacco in inventory
maintained for SMNA.
(7) 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
-----------------------
Feb. 26, Feb. 27,
2000 1999
---------- ----------
BASIC AND DILUTED EPS COMPUTATION:
Net income................................... $ 6,494 $ 3,966
Less: Preferred stock dividends............. (81) -
---------- ----------
Net income available to common stockholders.. $ 6,413 $ 3,966
========== ==========
Weighted average number of
common shares outstanding:
Basic................................... 26,826,541 26,455,579
Add: Effect of stock options............ 434,445 708,636
---------- ----------
Diluted................................. 27,260,986 27,164,215
========== ==========
BASIC NET INCOME PER SHARE.................... $ 0.24 $ 0.15
===== =====
DILUTED NET INCOME PER SHARE.................. $ 0.24 $ 0.15
===== =====
The calculation of weighted average common shares outstanding for the
diluted calculation excludes the consideration of stock options for 565,535
shares in the 2000 first quarter and 1,067,662 shares in the 1999 first
quarter, because the options' exercise prices were greater than the average
market price of the common shares.
(8) STOCK REPURCHASE PROGRAM
During 1999, the Company repurchased 1,233,700 shares of Class A common
stock for an aggregate of $10.7 million under its stock repurchase program.
No shares were repurchased during the first quarter of 2000.
(9) 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, result of operations, and cash flows.
As of February 26, 2000, the Company had firm commitments for capital
expenditures of approximately $3.0 million principally for the
establishment of a new consolidated distribution and service center. The
Company also plans to complete purchases of approximately $34 million of
tobacco over the next nine to twelve months, under earlier existing
commitments.
9
<PAGE>
(10) RECLASSIFICATIONS
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current periods' presentation.
(11) INVENTORIES
Inventories consist of:
Feb. 26, Nov. 27,
2000 1999
-------- --------
Raw materials and supplies........................ $110,687 $106,086
Work-in-process................................... 6,241 6,617
Finished goods.................................... 21,908 24,387
------- -------
$138,836 $137,090
======= =======
(12) 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.
(13) 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.
(14) SUBSEQUENT EVENT - NEW CREDIT FACILITY
In March 2000, the Company signed a commitment letter with two banks for a
five-year revolving credit facility in an amount not to exceed $85,000,000,
including a $25,000,000 364-day revolving facility, which converts to a
four-year term loan facility (the "Credit Facilities"). The proceeds of the
Credit Facilities are intended to be used to provide a portion of the funds
necessary for the proposed Merger, pay transaction costs, and for general
corporate and working capital purposes of the Company. Upon the completion
of the proposed Merger and under the terms of the Credit Facilities, the
Company will terminate its existing credit agreement.
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 January 19, 2000, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Swedish Match AB ("Swedish Match") and Swedish
Match's wholly owned subsidiary, SM Merger Corporation ("Merger Sub"). The
Merger Agreement provides that upon satisfaction of certain conditions, Merger
Sub will merge into the Company with the Company surviving the merger (the
"Merger"). The Merger will result in Swedish Match owning a 64% interest in the
Company. Pursuant to the Merger Agreement, each share of common stock of the
Company owned by the public will be purchased for $15.25 per share in cash. The
Cullman family has agreed to sell approximately one third of their holdings to
Swedish Match for $15.00 per share in cash immediately prior to the Merger
pursuant to a stock purchase agreement (the "Stock Purchase Agreement"). The
Cullman family, which has managed the Company since 1961, will hold the
remaining 36% of the Company following the Merger and will continue to manage
the Company. The Merger requires the approval of the Company's stockholders,
including the vote of a majority of the Class A shares, other than those held by
the Cullman family, voting separately as a class. The Cullman family has agreed
pursuant to a voting agreement with Swedish Match (the "Voting Agreement") to
vote all of their Class B shares in their capacities as stockholders in favor of
the Merger and against any competing offer for a period of eighteen months in
the event of a termination of the Merger Agreement. The Board of Directors of
the Company unanimously approved the Merger based upon the unanimous
recommendation of a special committee of independent directors. The Company has
set May 8, 2000 as the date for its special meeting to vote on the Merger.
Stockholders of record on April 7, 2000 of both Class A and Class B shares will
be entitled to vote on the Merger.
The aggregate cost of the transaction is approximately $330 million of which
$170 million will be paid by Swedish Match to buy certain shares of the Cullman
family at $15.00 per share and to provide part of the financing for the Company
to buy public shares at $15.25 per share. The Company plans to finance the
remaining $160 million of the transaction with a combination of existing cash
and equivalents, marketable securities, and borrowings under a new credit
facility which is currently being negotiated. (See "Note 13: Subsequent Event -
New Credit Facility" of the Notes to Consolidated Financial Statements). Under
the terms of the Merger Agreement, the Company is expected to borrow
approximately $55 million to finance the transaction which is expected to close
during the second quarter of 2000. The consolidated financial statements of the
Company do not reflect the effect of the Merger Agreement.
The Company has commenced the sale of its Russian bond portfolio to provide a
portion of the funds necessary for the proposed Merger. During the first quarter
of 2000, the Company sold certain of these bonds for net proceeds of $12.6
million and a gain of $5.0 million before taxes. The remaining $13.6 million of
such bonds are included in current assets as securities available-for-sale at an
estimated fair value of $17.1 million.
As of February 26, 2000, cash and cash equivalents of $125.5 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.
Net cash provided by operating activities was $5.2 million in the first quarter
of 2000 ("2000 First Quarter") compared to net cash of $2.2 million in the first
quarter of 1999 ("1999 First Quarter"). The increase in net cash provided by
operating activities occurred largely as a result of changes in the balances of
certain current assets and liabilities which more than offset the decrease in
operating profit. Accounts payable and accrued liabilities decreased $4.6
million during the 2000 First Quarter principally as a result of lower purchases
of raw tobacco. Inventory levels increased by $1.7 million principally due to
tobacco purchases. The Company has curtailed its tobacco purchases and its
commitments for future supplies. The Company has commitments for approximately
$34 million of tobacco to be delivered to the Company, principally in 2000. The
decrease in accounts receivable during the 2000 First Quarter was mainly the
result of seasonal sales in the fourth quarter of 1999 and lower sales in the
2000 First Quarter. Income taxes payable increased by $3.1 million reflecting
the provision for income taxes on the 2000 First Quarter.
11
<PAGE>
Net cash provided by investing activities was $9.3 million in the 2000 First
Quarter compared to net cash of $2.7 million used in the 1999 First Quarter.
Investing activities in the 2000 First Quarter include net proceeds of $12.6
million from the sale of marketable securities, $2.3 million of contingent
purchase price payment for the acquisition of General Cigar International, and
$1.0 million of purchases of property and equipment. In the 1999 First Quarter,
investing activities consisted of $0.7 million of contingent purchase price
payment for the acquisition of General Cigar International and $2.0 million of
purchases of property and equipment.
Net cash used in financing activities was $0.9 million in the 2000 First Quarter
compared to net cash of $0.4 million provided in the 1999 First Quarter. The
financing activities in the 2000 First Quarter included a $1.4 million payment
of transaction costs relating to the proposed Merger and $0.5 million of
proceeds from the exercise of employee stock options.
During the 1999 second quarter, the Company sold its Mass-Market Cigar business
to Swedish Match North America Inc., for $204.5 million in cash (the
"Mass-Market Sale"). Net proceeds from the Mass-Market Sale were used to prepay
certain debt and provide funds for operations and investments.
Excluding the effects of unrealized gains and reclassification of the Russian
bonds to securities available-for-sale, the Company's working capital increased
to $287.7 million at February 26, 2000, from $277.8 million at November 27,
1999, principally due to proceeds from the sale of marketable securities.
In March 2000, the Company signed a commitment letter with two banks for a
five-year revolving credit facility in an amount not to exceed $85,000,000,
including a $25,000,000 364-day revolving facility, which converts to a
four-year term loan facility (the "Credit Facilities"). The proceeds of the
Credit Facilities are intended to be used to provide a portion of the funds
necessary for the proposed Merger, pay transaction costs, and for general
corporate and working capital purposes of the Company. Upon the completion of
the proposed Merger and under the terms of the Credit Facilities, the Company
will terminate its existing credit agreement.
Based on its current projections of cash flows and the anticipated credit
facility, management believes the Company has adequate financial resources to
meet its expected business requirements, including the funds necessary for the
proposed Merger and transaction costs.
RESULTS OF OPERATIONS
13 Weeks Ended February 26, 2000 as Compared to 13 Weeks Ended February 27, 1999
Net sales decreased 37.5%, or $19.7 million, to $32.8 million in the 2000 First
Quarter from $52.5 million in the 1999 First Quarter. The decrease in net sales
was largely attributable to the effect of the Mass-Market Sale in 1999.
Excluding the effect of the Mass-Market Sale in 1999, net sales decreased $1.3
million.
Gross profit decreased 41.2%, or $10.2 million, to $14.5 million in the 2000
First Quarter from $24.7 million in the 1999 First Quarter. Gross margin
decreased to 44.3% in the 2000 First Quarter from 47.0% in the 1999 First
Quarter. The decline in gross profit was largely the result of the Mass-Market
Sale in 1999. Excluding the effect of the Mass-Market Sale in 1999, gross profit
declined 17.0% from $17.5 million, or 51.3% of net sales, in the 1999 First
Quarter. These decreases reflected principally the negative effects of certain
manufacturing issues, and tobacco quality for which the supplier is expected to
make partial restitution. Management believes that since these issues are non
recurring, the lower gross margin for this quarter is not indicative of the
gross margin that may be expected for the full year.
Selling, general and administrative expenses ("SG&A") decreased to $12.9 million
in the 2000 First Quarter from $17.7 million in the 1999 First Quarter. As a
percentage of net sales, SG&A expenses were 39.3% in the 2000 First Quarter as
compared to 33.7% in the 1999 First Quarter. The reduction in SG&A expenses
reflect primarily the effect of the Mass-Market Sale in 1999 and expense
reduction initiatives undertaken during 1999. SG&A expenses in the 2000 First
Quarter include $0.5 million charge from adoption of a supplemental executive
benefit plan.
Operating profit decreased primarily as a result of the sale of the Mass-Market
cigar business in 1999, and higher cost resulting from manufacturing issues and
tobacco quality in the 2000 First Quarter.
In the 2000 First Quarter, the Company's results included a gain of $5.0 million
from the sale of marketable securities.
Interest income in the 2000 First Quarter relates to earnings from investments
in securities, with the proceeds from the Mass-Market Sale in 1999.
12
<PAGE>
Interest expense decreased to $0.3 million in the 2000 First Quarter from $1.2
million in the 1999 First Quarter. The decrease reflects lower average
borrowings during 2000 as a result of prepaying outstanding debt in 1999.
The provision for income taxes was $3.1 million in the 2000 First Quarter
compared to $2.0 million in the 1999 First Quarter. The lower effective tax rate
of 32.0% in the 2000 First Quarter compared to 34.0% in the 1999 First Quarter
reflects an increase in earnings in lower tax jurisdictions.
YEAR 2000 COMPLIANCE
The Company has addressed 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 provided
significantly enhanced systems capabilities and addressed the Year 2000 issue.
The new system and modifications to the Company's existing critical system was
completed in November 1999. The Company also completed the work necessary to
make its non-critical systems, including hardware, software and control systems
Year 2000 compliant. No problems have been noted with internal Year 2000
compliance as of the filing date of this Form 10-Q.
In addition, the Company has been in contact 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.
The Company conducted an assessment of the Year 2000 readiness of its major
customers and suppliers and no matters have come to the Company's attention,
which could give rise to the need for remedial measures. The Company cannot
currently predict the future effect of third parties' Year 2000 issues on its
business. As of the filing date of this Form 10-Q there have been no indications
of material matters which have or could impact the Company's business from third
parties.
The cost of the Oracle ERP system was approximately $6.6 million. No further
expenses of a material nature are anticipated.
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 and
(vii) 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 on Form 10-K and Form 10-K/A for the
fiscal year ended November 27, 1999.
13
<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 February 26, 2000
(for Commission use only)
(b) REPORTS ON FORM 8-K
On January 21, 2000, 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 AB had entered into an Agreement and Plan of Merger that
will result in Swedish Match AB owning a 64% interest in the Company.
14
<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: April 11, 2000 By: /s/ Joseph C. Aird
------------------
Joseph C. Aird
Senior Vice President,
Chief Financial Officer,
Treasurer and Acting Controller
15
<PAGE>
GENERAL CIGAR HOLDINGS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- --------------------------------------------------------------------------------
27 Financial Data Schedule for the 13 Weeks ended February 26, 2000
(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 FEBRUARY
26, 2000 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-25-2000
<PERIOD-START> NOV-28-1999
<PERIOD-END> FEB-26-2000
<CASH> 125,511
<SECURITIES> 17,055
<RECEIVABLES> 26,375
<ALLOWANCES> 819
<INVENTORY> 138,836
<CURRENT-ASSETS> 319,974
<PP&E> 109,499
<DEPRECIATION> 49,588
<TOTAL-ASSETS> 453,260
<CURRENT-LIABILITIES> 25,509
<BONDS> 10,269
0
0
<COMMON> 283
<OTHER-SE> 332,755
<TOTAL-LIABILITY-AND-EQUITY> 453,260
<SALES> 32,791
<TOTAL-REVENUES> 32,791
<CGS> 18,259
<TOTAL-COSTS> 18,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 344
<INCOME-PRETAX> 9,552
<INCOME-TAX> 3,058
<INCOME-CONTINUING> 6,494
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,494
<EPS-BASIC> 0.24
<EPS-DILUTED> 0.24
</TABLE>
