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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 1999
[ ] 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 1-12521
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SWISHER INTERNATIONAL GROUP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3857632
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
20 Thorndal Circle, Darien, CT 06820
----------------------------------------
(Address of principal executive offices)
203-656-8000
------------
(Telephone Number)
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
------ ------
The number of shares of Class A Common Stock (par value $.01) outstanding
at April 30, 1999 was 5,778,300.
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TABLE OF CONTENTS
Page
Numbers
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Part I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
March 31, 1999 and December 31, 1998.................. 3
Condensed Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998............ 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1999 and 1998............ 5
Notes to Condensed Consolidated Financial Statements.... 6-10
Item 2. Management's Discussion and Analysis of the Results
of Operations and Financial Condition................. 11-18
Part II. Other Information
Item 1. Legal Proceedings....................................... 19
Item 6. Exhibits and Reports on Form 8-K........................ 20
Signatures ....................................................... 21
2
PART I. FINANCIAL INFORMATION
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Balance Sheets
(Dollars in thousands)
March 31, December 31,
1999 1998
-------- ------------
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 247 $ 1,633
Accounts receivable, less allowance for doubtful accounts of
$1,734 and $1,490, respectively 30,751 30,770
Inventories 80,394 77,903
Deferred income taxes 1,701 1,459
Other current assets 5,376 4,699
-------- --------
Total current assets 118,469 116,464
-------- --------
Property, plant and equipment:
Land 1,601 1,494
Buildings and improvements 21,744 21,562
Machinery and equipment 57,864 57,743
Construction in progress 4,157 2,991
-------- --------
85,366 83,790
Less, accumulated depreciation 12,596 11,327
-------- --------
72,770 72,463
-------- --------
Goodwill, net of accumulated amortization of $5,442 and
$5,129, respectively 44,803 45,116
Investment in Affiliates 11,733 11,733
Prepaid pension cost 4,954 4,954
Other assets 7,016 6,359
-------- --------
Total assets $259,745 $257,089
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 23,000 $ 23,000
Accounts payable 7,277 6,933
Accrued expenses 7,004 9,870
Income taxes payable 6,182 2,827
-------- --------
Total current liabilities 43,463 42,630
Long-term debt 63,567 70,072
Deferred income taxes 10,702 9,877
Accrued postretirement and postemployment benefits 15,739 15,364
Other liabilities 4,619 4,583
-------- --------
Total liabilities 138,090 142,526
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock 341 341
Paid-in capital 45,428 45,428
Retained earnings 78,739 71,603
Treasury stock, at cost, 221,700 shares (2,895) (2,895)
Cumulative translation adjustments 42 86
-------- --------
Total stockholders' equity 121,655 114,563
-------- --------
Total liabilities and stockholders' equity $259,745 $257,089
======== ========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Income
(In thousands except per share amounts)
Three Months Ended
March 31,
--------------------------
1999 1998
--------- ---------
(unaudited)
Net sales $ 63,185 $ 60,283
Cost of sales 31,972 29,452
-------- --------
Gross profit 31,213 30,831
Selling, general and administrative expenses 18,065 16,396
-------- --------
Operating profit 13,148 14,435
Interest expense, net 1,435 1,796
Other expense (income), net 15 (158)
------- --------
Income before income taxes 11,698 12,797
Provision for income taxes 4,562 4,929
-------- --------
Net income $ 7,136 $ 7,868
======== ========
Earnings per share
Basic $ .21 $ .23
======== ========
Diluted $ .21 $ .23
======== ========
Weighted average shares outstanding:
Basic 33,878 34,006
======== ========
Diluted 33,878 34,006
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
SWISHER INTERNATIONAL GROUP INC.
Condensed Consolidated Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
March 31,
--------------------------
1999 1998
--------- ---------
(unaudited)
Cash flows from operating activities:
Net income $ 7,136 $ 7,868
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,895 1,712
Deferred income taxes 583 776
Changes in assets and liabilities:
Accounts receivable 8 (4,019)
Inventories (2,502) (13,210)
Other current assets (678) (1,270)
Other assets (968) (32)
Accounts payable and accrued expenses (2,529) (1,488)
Income taxes 3,352 3,365
Other liabilities 411 400
Other, net - (31)
---------- ----------
Net cash provided by (used in) operating activities 6,708 (5,929)
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (1,577) (3,670)
Investments in Affiliates - (7,223)
---------- ----------
Net cash used in investing activities (1,577) (10,893)
----------- ----------
Cash flows from financing activities:
Long-term borrowings 172,400 168,100
Payments of long-term debt (178,905) (147,900)
Repurchase of common stock - (2,895)
---------- ----------
Net cash (used in) provided by financing activities (6,505) 17,305
---------- ----------
Effect of foreign exchange rate on cash (12) (13)
---------- ----------
Net (decrease) increase in cash and cash equivalents (1,386) 470
Cash and cash equivalents, beginning of period 1,633 1,057
---------- ----------
Cash and cash equivalents, end of period $ 247 $ 1,527
========== ==========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
1. ACCOUNTING POLICIES
The accompanying Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and the Notes
thereto contained in Swisher International Group Inc.'s (the "Company's") 1998
Annual Report on Form 10-K. The interim statements are unaudited but include all
adjustments, which consist of only normal recurring accruals, that management
considers necessary to fairly present the results for the interim periods.
Results for interim periods are not necessarily indicative of results for a full
year. The year end balance sheet data was derived from audited financial
statements, but , as presented here, does not include all disclosures required
by generally accepted accounting principles.
2. SUPPLEMENTAL STATEMENT OF CASH FLOWS INFORMATION
"Net cash provided by (used in) operating activities" includes the
following cash payments for interest and income taxes:
Three months ended
March 31,
----------------------
1999 1998
--------- ----------
Interest, net of amount capitalized $1,524 $1,976
Income taxes 632 772
3. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously required fully diluted earnings
per share. All earnings per share amounts for all periods have been presented,
and where appropriate, restated to conform to the SFAS No. 128 requirements.
Weighted average shares used in computing diluted earnings per share may differ
from the weighted average shares used in computing basic earnings per share as a
result of employee stock options.
4. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1999 1998
----------- -------------
Finished goods $ 24,635 $ 22,822
Work-in-process 2,909 2,604
Raw materials 42,556 42,005
Stores and supplies 10,294 10,472
-------- ---------
$ 80,394 $ 77,903
======== =========
6
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES
The tobacco industry continues to experience significant health-related
litigation. Plaintiffs in such cases typically seek compensation and, in some
cases, punitive damages, for various injuries allegedly sustained from the use
of tobacco products or exposure to tobacco smoke, including health care costs.
The Company is not aware of any adverse decision or judgment having been
rendered against smokeless tobacco or cigar manufacturers. The Company is a
defendant, along with other defendants in an action brought by an individual
plaintiff in Louisiana seeking damages and other relief in connection with
injuries allegedly resulting from use of the Company's and the other defendants'
products. The Company and other defendants have been named in a Texas action
brought by another individual seeking damages and other relief in connection
with injuries allegedly caused to plaintiff by products manufactured by the
Company and the other defendants. The Company is also a defendant, along with
other defendants, in a wrongful death action commenced in Louisiana. In that
case, plaintiffs allege that decedent suffered injury after consuming products
manufactured by one or more of the defendants including the Company and seek
damages for the wrongful death of the decedent in excess of fifty thousand
dollars together with fees and costs. The Company is vigorously defending all
three of these lawsuits.
In addition, the Company is named in two groups of cases filed in a West
Virginia court in 1998 in an apparent effort to take advantage of a mass
litigation panel established by the West Virginia courts. In the first group of
cases, 65 different plaintiffs filed simultaneous actions against 34 defendants
including the Company. In the second group, 18 different plaintiffs filed
simultaneous actions against 27 defendants including the Company. In each group
of cases, each plaintiff alleges that he or she became ill after using tobacco
products manufactured by one or more of the defendants in that group of cases.
None of these cases allege that any particular plaintiff used any specific
product or the products of any specific defendant and none alleges the damage
that any specific plaintiff incurred; nevertheless, each plaintiff seeks damages
in an unspecified amount against all the defendants in the group of cases in
which he or she is a participant.
The Company is also a defendant along with multiple other defendants in
three actions brought under California Proposition 65 and the California Unfair
Competition Act.
Further, the Company is also subject to other litigation, claims and
contractual agreements arising in the ordinary course of business. In the
opinion of management, the cost, if any, of resolving all litigation and
contingencies should not have a significant impact on the Company's consolidated
financial position. There can be no assurance, however, that the Company may not
be named as a defendant in future suits, nor can there be any assurance that
existing or future litigation will not result in an adverse judgment against the
Company which could have a material effect on the Company's business, future
results of operations or cash flows. The Company does not carry insurance to
protect against health-related product liability because the cost of obtaining
such coverage is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product or any related products could preclude the
further sale of such product, which could have a material adverse effect on the
Company's business.
7
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES (continued)
In 1996, the federal Food and Drug Administration ("FDA") for the first
time asserted jurisdiction over nicotine in tobacco as a "drug" and issued
regulations purporting to regulate smokeless tobacco products as "medical
devices." These regulations prohibit the sale of smokeless tobacco products to
minors and severely restrict advertising, marketing and promotion of smokeless
tobacco products. The regulations also require the Company and other
manufacturers to comply with a wide range of labeling, reporting and other
requirements. In 1995, the Company and other smokeless tobacco manufacturers
mounted a court challenge to the FDA's authority to regulate tobacco and, after
a United States District Court found that the FDA was not precluded from such
regulatory authority in general but was prohibited from restricting advertising
or promotion of tobacco products, appealed the matter to the U.S. Court of
Appeals for the Fourth Circuit. In 1998, the Court of Appeals reversed the
District Court decision and held that the FDA had no jurisdiction to regulate
tobacco. The Fourth Circuit's holding has been appealed to the United States
Supreme Court. The Company is unable to predict the outcome of the appeal or its
impact on those portions of the regulation that have not been given effect. Any
further provisions of these regulations that become effective could have a
materially adverse effect on the Company's business.
In 1997, the five largest tobacco companies announced a proposed
settlement of a number of cases brought by the Attorneys General of several
states to recoup Medicare and Medicaid expenses. Legislation introduced in
Congress to implement the settlement by increasing the price of cigarettes,
regulating all tobacco products including those manufactured by the Company
(which was not a party to the suits being settled), imposing full FDA regulation
and adopting new and highly restrictive marketing regulations. Although the
Congress failed to adopt the legislation, the five tobacco companies engaged in
the 1997 proposed settlement entered into separate settlement agreements in 1998
with the Attorneys General of all fifty states except for one pursuant to which
they agreed to pay significant penalties annually and to certain marketing
restrictions. The Company is not a party to any of those settlement agreements
and is unable to determine whether or to what extent it may be affected by
changes in the marketing of tobacco products resulting from such settlements.
In 1998, the Company was notified by the Federal Trade Commission ("FTC")
of the adoption by the FTC of an Order to File a Special Report on the Company's
advertising and marketing expenditures with regard to its cigar business for
1997 and 1996. This information, which is similar to information which the
Company has filed with the FTC for many years with respect to its smokeless
tobacco products, was filed on April 9, 1998.
8
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
5. CONTINGENCIES (continued)
In addition to regulations imposed by federal authorities, there is an
increasing burden of state regulation. Legislation adopted in Massachusetts in
1997 required cigarette and smokeless tobacco manufacturers to disclose the
identity and relative weight of ingredients added to tobacco during the process
of manufacturing each brand sold in the state and to report the nicotine yields
of each such brand. A United States District Court enjoined the effectiveness of
the ingredient reporting requirement but the Company is complying with the
nicotine reporting requirement. In early 1999, the Massachusetts Attorney
General issued regulations that will impose certain marketing restrictions on
all tobacco products sold in the state beginning in August 1999 and will require
certain prescribed health warnings to appear (beginning in early 2000) on
packages of, and in advertisements for, cigars. The Massachusetts Department of
Health has also proposed regulations that will require cigar manufacturers to
apply health warnings to cigar packages and advertisements beginning in late
2000. A Minnesota statute required reporting by all tobacco manufacturers
beginning in early 1999 whether certain constituents were contained in their
products which were sold in the state. A statute enacted in Texas requires that
all manufacturers of tobacco products sold in Texas report annually on the
ingredients contained in those products beginning later in 1999 and to report on
the nicotine yield ratings of smokeless tobacco products sold in the state. The
Company is unable to anticipate whether, or to what extent, other states will
initiate regulations of this kind or the effect of the increasing state
regulation on the Company's business.
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify with
certainty the potential impact of future actions regarding environmental
matters, in the opinion of management, compliance with the present environmental
protection laws will not have a material adverse impact upon the Company's
consolidated financial position, results of operations or cash flows.
Cigars and smokeless tobacco products have long been subject to
federal, state and local excise taxes. Such taxes are frequently subject to
proposed increases, in some cases significant increases, to fund various
legislative initiatives. The Balanced Budget Act adopted by Congress in 1997,
provides for increases in federal excise taxes on all tobacco products in two
stages, beginning in 2000. Management does not believe that these increases will
have a material adverse effect on the Company's operations, however, enactment
of new or significant further increases in existing federal, state or local
excise taxes could have a material adverse effect on the Company's business.
6. COMPREHENSIVE INCOME
In 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. The Company's comprehensive income
consists of net income and foreign currency translation adjustments.
Comprehensive income for the three months ended March 31, 1999 and 1998 was
$7,092 and $7,826 respectively.
9
SWISHER INTERNATIONAL GROUP INC.
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except share data)
7. GOING-PRIVATE TRANSACTION
On December 9, 1998, the Company announced that its Board of Directors
had approved a transaction to take the Company private (the "Going-Private
transaction") pursuant to which the Company will merge (the "Merger") with and
into its wholly-owned subsidiary, SIGI Acquisition Corporation ("Newco"),
subject to the approval of (i) the holders of a majority of the Company's Class
A Common Stock present at a shareholder's meeting, and (ii) the holders of a
majority of the voting power of its outstanding Common Stock. If the Merger is
approved, each outstanding share of the Company's Class A Common Stock (other
than Class A Shares held in the treasury which will be canceled and Class A
Shares owned by holders who perfect their appraisal rights) will be converted
into the right to receive $9.50 in cash. At the same time, all 28,100,000 of the
Company's outstanding Class B shares will be converted into an aggregate of
2,810 newly-issued shares of Newco common stock, representing all of the
outstanding shares of Newco common stock and all of the voting power and equity
interest in Newco.
After the Company announced the Merger, several purported class action
lawsuits challenging the Merger were filed on various dates in the Court of
Chancery of the State of Delaware, each naming the Company and some or all of
the Company's directors as defendants. The parties to these lawsuits entered
into a Memorandum of Understanding, dated as of April 26, 1999, setting forth a
proposed settlement of all of the lawsuits, subject to approval of the Delaware
Court of Chancery.
In connection with the Merger, the Company intends to enter into a new
credit facility ("New Credit Facility"), which will consist of a $75 million
five-year term loan and a $125 million five-year revolving credit facility,
whereby the Company will finance the purchase price of the Class A shares in the
Merger, pay other fees and expenses incurred in connection with the Merger, and
refinance its existing credit facility ("Existing Credit Facility").
10
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net Sales. Net sales increased $2.9 million or 4.8% to $63.2 million for
the three months ended March 31, 1999 from $60.3 million for the three months
ended March 31, 1998. The increase in net sales was due to higher sales of
cigars, offset partially by lower sales of smokeless tobacco products and higher
product returns. Cigar sales increased principally due to unit volume growth and
price increases, in all categories except premium cigars. Smokeless tobacco
sales decreased as a result of volume decline, offset partially by price
increases in all smokeless tobacco categories.
Gross Profit. Gross profit increased $.4 million or 1.2% to $31.2 million
(49.4% of net sales) for the three months ended March 31, 1999 from $30.8
million (51.1% of net sales) for the three months ended March 31, 1998. As a
percentage of net sales, gross profit decreased due to a shift in sales mix.
Selling, General and Administrative ("SG&A") Expenses. SG&A expenses
increased $1.7 million or 10.2% to $18.1 million (28.6% of net sales ) for the
three months ended March 31, 1999 from $16.4 million (27.2% of net sales) for
the three months ended March 31, 1998. The increase of $1.7 million is
principally due to an increase in selling, marketing and administrative
expenses.
Operating Profit. Operating profit decreased $1.3 million or 8.9% to $13.1
million (20.8% of net sales) for the three months ended March 31, 1999 from
$14.4 million (23.9% of net sales) for the three months ended March 31, 1998.
The decrease, as a percentage of net sales, was primarily due to lower gross
profit margins, and an increase in SG&A expenses, both absolutely and as a
percentage of net sales.
Interest Expense, Net. Interest expense, net decreased $.4 million or 20.1%
to $1.4 million for the three months ended March 31, 1999 from $1.8 million for
the three months ended March 31, 1998. For the three months ended March 31,
1999, the average debt balance was $89.8 million, with an average effective
interest rate of 6.4%. For the three months ended March 31, 1998, the average
debt balance was $111.2 million, with an average effective interest rate of
6.5%.
Income Taxes. The effective income tax rate was 39.0% and 38.5% for the
three month periods ended March 31, 1999 and 1998, respectively.
Net Income. Net income decreased $.7 million or 9.3% to $7.1 million (11.3%
of net sales), for the three months ended March 31, 1999 from $7.9 million
(13.1% of net sales), for the three months ended March 31, 1998.
11
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Liquidity and Capital Resources
Net cash flows provided by (used in) operating activities were $6.7 million
and $(5.9) million for the three month periods ended March 31, 1999 and 1998,
respectively. The increase of $12.6 million was primarily due to lower working
capital requirements.
The Company's raw material inventory requirements for mass market cigar
production are relatively modest due to its long standing relationships with
major tobacco suppliers who commit to supply tobacco inventory as needed by the
Company. As a result of developments in the premium cigar market, the Company
has experienced increases in its premium cigar inventory levels, which the
Company currently believes is not long-term in nature. The Company's largest
working capital requirements are driven by its smokeless tobacco operations. The
tobacco for dry and moist snuff and loose-leaf chewing tobacco requires aging of
two to three years before being processed into finished products. The Company
maintains sufficient smokeless tobacco raw material inventories to ensure proper
aging and an adequate supply. Although the Company's business is not seasonal,
purchases of smokeless tobacco raw material inventory typically occur from the
middle of the fourth quarter through the end of the first quarter of each year.
Therefore, smokeless tobacco inventories at year end and at the end of the first
quarter are typically higher than during the rest of the year. The Company will
fund its seasonal working capital requirements through operating cash flows,
and, if needed, bank borrowings.
Cash flows used in investing activities were $1.6 million and $10.9 million
for the three month periods ended March 31, 1999 and 1998, respectively. Cash
flows used in 1999 were for purchases of property, plant and equipment. Cash
flows used in 1998 were primarily related to investments in joint ventures for
the production of premium cigars, and purchases of property, plant and
equipment. Capital expenditures are estimated to be between $5 million and $8
million for each of 1999 and 2000 and are expected to be used to maintain
existing equipment and facilities as well as increase production capacity. The
capital expenditures referred to above are expected to be funded by cash flows
from operations and, if needed, bank borrowings.
Cash flows (used in) provided by financing activities were $(6.5) million
and $17.3 million for the three month periods ended March 31, 1999 and 1998,
respectively. The 1999 amount is due principally to changes in long-term
borrowings. The 1998 amount is due principally to changes in long-term
borrowings, and the repurchase of common stock.
As of March 31, 1999, borrowings under the Existing Credit Facility were
$86.5 million, and the Company had $27.0 million of unused availability
thereunder, after taking into account approximately $1.5 million utilized to
support letters of credit.
12
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Liquidity and Capital Resources (continued)
To convert floating rate debt into fixed rate debt, the Company previously
entered into two interest rate swap agreements. As of March 31, 1999, the total
notional amount covered by the one remaining swap agreement was $15.0 million.
The agreement terminates on July 2, 1999. Under the terms of these agreements,
the Company receives a variable interest rate equal to three-month LIBOR and
pays a fixed rate of approximately 5.9%, as of March 31, 1999. If the Company
had terminated these agreements on March 31, 1999 or 1998, the effect, as of the
end of each period, would be insignificant.
The Company believes that net cash flow generated from future operations
and the availability of borrowings under the Existing Credit Facility, or the
New Credit Facility if the Merger is consummated, will be sufficient to fund its
working capital requirements, capital expenditures and debt service requirements
for the foreseeable future.
Inflation
The Company has historically been able to pass inflationary increases for
raw materials and other costs onto its customers through price increases,
however, there is no assurance it will be able to do so in the future.
Seasonality
Although the Company's business is generally non-seasonal, consumption of
smokeless tobacco products increases slightly during the summer months.
Additionally, purchases of smokeless tobacco raw materials typically occur from
the middle of the fourth quarter to the end of the first quarter.
Regulation
In 1996, the federal Food and Drug Administration ("FDA") for the first
time asserted jurisdiction over nicotine in tobacco as a "drug" and issued
regulations purporting to regulate smokeless tobacco products as "medical
devices." These regulations prohibit the sale of smokeless tobacco products to
minors and severely restrict advertising, marketing and promotion of smokeless
tobacco products. The regulations also require the Company and other
manufacturers to comply with a wide range of labeling, reporting and other
requirements. In 1995, the Company and other smokeless tobacco manufacturers
mounted a court challenge to the FDA's authority to regulate tobacco and, after
a United States District Court found that the FDA was not precluded from such
regulatory authority in general but was prohibited from restricting advertising
or promotion of tobacco products, appealed the matter to the U.S. Court of
Appeals for the Fourth Circuit. In 1998, the Court of Appeals reversed the
District Court decision and held that the FDA had no jurisdiction to regulate
tobacco. The Fourth Circuit's holding has been appealed to the United States
Supreme Court. The Company is unable to predict the outcome of the appeal or its
impact on those portions of the regulation that have not been given effect. Any
further provisions of these regulations that become effective could have a
materially adverse effect on the Company's business.
13
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Regulation (continued)
In 1997, the five largest tobacco companies announced a proposed settlement
of a number of cases brought by the Attorneys General of several states to
recoup Medicare and Medicaid expenses. Legislation introduced in Congress to
implement the settlement by increasing the price of cigarettes, regulating all
tobacco products including those manufactured by the Company (which was not a
party to the suits being settled), imposing full FDA regulation and adopting new
and highly restrictive marketing regulations. Although the Congress failed to
adopt the legislation, the five tobacco companies engaged in the 1997 proposed
settlement entered into separate settlement agreements in 1998 with the
Attorneys General of all fifty states except for one pursuant to which they
agreed to pay significant penalties annually and to certain marketing
restrictions. The Company is not a party to any of those settlement agreements
and is unable to determine whether or to what extent it may be affected by
changes in the marketing of tobacco products resulting from such settlements.
In 1998, the Company was notified by the Federal Trade Commission ("FTC")
of the adoption by the FTC of an Order to File a Special Report on the Company's
advertising and marketing expenditures with regard to its cigar business for
1997 and 1996. This information, which is similar to information which the
Company has filed with the FTC for many years with respect to its smokeless
tobacco products, was filed on April 9, 1998.
In addition to regulations imposed by federal authorities, there is an
increasing burden of state regulation. Legislation adopted in Massachusetts in
1997 required cigarette and smokeless tobacco manufacturers to disclose the
identity and relative weight of ingredients added to tobacco during the process
of manufacturing each brand sold in the state and to report the nicotine yields
of each such brand. A United States District Court enjoined the effectiveness of
the ingredient reporting requirement but the Company is complying with the
nicotine reporting requirement. In early 1999, the Massachusetts Attorney
General issued regulations that will impose certain marketing restrictions on
all tobacco products sold in the state beginning in August 1999 and will require
certain prescribed health warnings to appear (beginning in early 2000) on
packages of, and in advertisements for, cigars. The Massachusetts Department of
Health has also proposed regulations that will require cigar manufacturers to
apply health warnings to cigar packages and advertisements beginning in late
2000. A Minnesota statute required reporting by all tobacco manufacturers
beginning in early 1999 whether certain constituents were contained in their
products which were sold in the state. A statute enacted in Texas requires that
all manufacturers of tobacco products sold in Texas report annually on the
ingredients contained in those products beginning later in 1999 and to report on
the nicotine yield ratings of smokeless tobacco products sold in the state. The
Company is unable to anticipate whether, or to what extent, other states will
initiate regulations of this kind or the effect of the increasing state
regulation on the Company's business.
The Company is subject to laws and regulations relating to the protection
of the environment. While it is not possible to quantify with certainty the
potential impact of future actions regarding environmental matters, in the
opinion of management, compliance with the present environmental protection laws
will not have a material adverse impact upon the Company's consolidated
financial position, results of operations or cash flows.
14
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Excise Taxes
Cigars and smokeless tobacco products have long been subject to federal,
state and local excise taxes. Such taxes are frequently subject to proposed
increases, in some cases significant increases, to fund various legislative
initiatives. The Balanced Budget Act adopted by Congress in 1997, provides for
increases in federal excise taxes on all tobacco products in two stages,
beginning in 2000. Management does not believe that these increases will have a
material adverse effect on the Company's operations, however, enactment of new
or significant further increases in existing federal, state or local excise
taxes could have a material adverse effect on the Company's business.
Litigation
The tobacco industry continues to experience significant health-related
litigation. Plaintiffs in such cases typically seek compensation and, in some
cases, punitive damages, for various injuries allegedly sustained from the use
of tobacco products or exposure to tobacco smoke, including health care costs.
The Company is not aware of any adverse decision or judgment having been
rendered against smokeless tobacco or cigar manufacturers. The Company is a
defendant, along with other defendants in an action brought by an individual
plaintiff in Louisiana seeking damages and other relief in connection with
injuries allegedly resulting from use of the Company's and the other defendants'
products. The Company and other defendants have been named in a Texas action
brought by another individual seeking damages and other relief in connection
with injuries allegedly caused to plaintiff by products manufactured by the
Company and the other defendants. The Company is also a defendant, along with
other defendants, in a wrongful death action commenced in Louisiana. In that
case, plaintiffs allege that decedent suffered injury after consuming products
manufactured by one or more of the defendants including the Company and seek
damages for the wrongful death of the decedent in excess of $50,000 together
with fees and costs. The Company is vigorously defending all three of these
lawsuits.
In addition, the Company is named in two groups of cases filed in a West
Virginia court in 1998 in an apparent effort to take advantage of a mass
litigation panel established by the West Virginia courts. In the first group of
cases, 65 different plaintiffs filed simultaneous actions against 34 defendants
including the Company. In the second group, 18 different plaintiffs filed
simultaneous actions against 27 defendants including the Company. In each group
of cases, each plaintiff alleges that he or she became ill after using tobacco
products manufactured by one or more of the defendants in that group of cases.
None of these cases allege that any particular plaintiff used any specific
product or the products of any specific defendant and none alleges the damage
that any specific plaintiff incurred; nevertheless, each plaintiff seeks damages
in an unspecified amount against all the defendants in the group of cases in
which he or she is a participant.
The Company is also a defendant along with multiple other defendants in
three actions brought under California Proposition 65 and the California Unfair
Competition Act.
15
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Litigation (continued)
Further, the Company is also subject to other litigation, claims and
contractual agreements arising in the ordinary course of business. In the
opinion of management, the cost, if any, of resolving all litigation and
contingencies should not have a significant impact on the Company's consolidated
financial position. There can be no assurance, however, that the Company may not
be named as a defendant in future suits, nor can there be any assurance that
existing or future litigation will not result in an adverse judgment against the
Company which could have a material effect on the Company's business, future
results of operations or cash flows. The Company does not carry insurance to
protect against health-related product liability because the cost of obtaining
such coverage is commercially prohibitive. Additionally, a judgment against the
Company with respect to a product or any related products could preclude the
further sale of such product, which could have a material adverse effect on the
Company's business.
Going-Private Transaction
On December 9, 1998, the Company announced that its Board of Directors had
approved a transaction to take the Company private (the "Going-Private
transaction") pursuant to which the Company will merge (the "Merger") with and
into its wholly-owned subsidiary, SIGI Acquisition Corporation ("Newco"),
subject to the approval of (i) the holders of a majority of the Company's Class
A Common Stock present at a shareholder's meeting, and (ii) the holders of a
majority of the voting power of its outstanding Common Stock. If the Merger is
approved, each outstanding share of the Company's Class A Common Stock (other
than Class A Shares held in the treasury which will be canceled and Class A
Shares owned by holders who perfect their appraisal rights) will be converted
into the right to receive $9.50 in cash. At the same time, all 28,100,000 of the
Company's outstanding Class B shares will be converted into an aggregate of
2,810 newly-issued shares of Newco common stock, representing all of the
outstanding shares of Newco common stock and all of the voting power and equity
interest in Newco.
After the Company announced the Merger, several purported class action
lawsuits challenging the Merger were filed on various dates in the Court of
Chancery of the State of Delaware, each naming the Company and some or all of
the Company's directors as defendants. The parties to these lawsuits entered
into a Memorandum of Understanding, dated as of April 26, 1999, setting forth a
proposed settlement of all of the lawsuits, subject to approval of the Delaware
Court of Chancery.
In connection with the Merger, the Company intends to enter into a new
credit facility ("New Credit Facility"), which will consist of a $75 million
five-year term loan and a $125 million five-year revolving credit facility,
whereby the Company will finance the purchase price of the Class A shares in the
Merger, pay other fees and expenses incurred in connection with the Merger, and
refinance its existing credit facility ("Existing Credit Facility").
16
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Year 2000
The "Year 2000 issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
The Company has modified all of its significant computer applications and
believes they are Year 2000 compliant. All databases currently contain
four-digit years in their date fields, instead of the former two-digit years,
and all software has been tested to ensure that these dates are read and
interpreted correctly. All non-compliant hardware has been replaced with
machinery represented as compliant, and all significant non-IT systems have been
reviewed with their manufacturers and are now believed to be compliant.
The Company's use of third-party software applications is limited to UNIX-
and Microsoft Windows-based operating systems and standard personal computer
office software such as word processing and spreadsheet applications. The
manufacturers have reported all such software as Year 2000 compliant. As the
Company uses Electronic Data Interchange extensively to communicate with certain
customers, specifically for order taking and invoicing, this area is being
monitored carefully to ensure that these customers are able to send and receive
compliant data no later than June 30, 1999.
Most Year 2000 compliance efforts were completed by the Company's IT staff
with minimal time and without affecting progress of other IT projects. As a
result, the Company's Year 2000 expenditures have approximated only $50,000, and
future costs are expected to be insignificant.
The Company has identified those of its vendors, suppliers and customers
which it expects to be material to its operations after January 1, 2000 ("Key
Business Partners"). Through inquiry and other available means, the Company is
taking steps to determine the state of their Year 2000 readiness. The Company
will continue to monitor the readiness of such Key Business Partners and will
develop contingency plans, as appropriate, to the extent that there appears a
significant risk, in the Company's reasonable judgment, of Year 2000 compliance
failure with respect to any of them.
Although the Company cannot quantify the worst case consequences that may
result from any failure of Year 2000 readiness on the part of the Company or any
of its Key Business Partners, it anticipates that such consequences could
include, among other things, temporary delays in the delivery of products as
well as delays and errors in customer/vendor remittances. Consequently, even a
temporary inability of the Company to conduct its business in the ordinary
course due to the Year 2000 issue could have a material adverse effect on the
business and results of operations of the Company. While the Company has no
contingency plans regarding the failure of its systems or the systems of Key
Business Partners, the Company believes that actions taken to date, as described
above, should reduce the risk of any disruption and the resulting impact on the
Company and its business.
17
SWISHER INTERNATIONAL GROUP INC.
Management's Discussion and Analysis of the Results
of Operations and Financial Condition
Other
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other sections of this Form 10-Q contain
forward-looking statements that are based on current expectations, estimates and
projections about the industry in which the Company operates, management's
beliefs and assumptions made by management. Words such as "expects", "believes",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual outcomes and results may
differ materially from what is expressed or forecasted in such forward-looking
statements. The Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
18
SWISHER INTERNATIONAL GROUP INC.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On February 19, 1999, Engolio v. Brown & Williamson Tobacco Corporation, et
al., State Docket No. 51-783-D, was filed in the 18th Judicial Court, Parish of
Iberville, Louisiana. The action names the Company, along with other tobacco
manufacturers, distributors, retailers and industry associations, as defendants.
The plaintiffs are the widow and children of a decedent who was allegedly a
consumer of tobacco products manufactured by one or more of the defendants.
Plaintiffs seek damages in excess of $50,000 for the wrongful death of the
decedent together with costs and fees. The Company is vigorously defending this
lawsuit.
The Company is a plaintiff along with other manufacturers of tobacco
products, certain organizations representing the advertising industry and
representatives of the retailing community in United States Tobacco, et al. v.
United States Food and Drug Administration et al., an action filed in the United
States District Court for the Middle District of North Carolina in 1995.
Plaintiffs in the action moved for summary judgment, arguing that enforcement of
various marketing restrictions which the FDA had sought to impose upon certain
tobacco products was preempted by federal law and that, further, the FDA lacked
jurisdiction to regulate tobacco. In 1997, the Court granted plaintiffs' motion
with respect to the preemption of the FDA's ability to regulate advertising and
promotion of plaintiffs' products but denied the motion with regard to the FDA's
jurisdiction. In 1998, however, the Fourth Circuit Court of Appeals reversed the
lower Court's finding on jurisdiction and found for the plaintiffs. The Fourth
Circuit's finding is now on appeal to the United States Supreme Court.
On December 9, 1998, the Company announced that its Board of Directors had
approved a transaction to take the Company private (the "Going-Private
transaction") pursuant to which the Company will merge (the "Merger") with and
into its wholly-owned subsidiary, SIGI Acquisition Corporation ("Newco"),
subject to the approval of (i) the holders of a majority of the Company's Class
A Common Stock present at a shareholder's meeting, and (ii) the holders of a
majority of the voting power of its outstanding Common Stock. If the Merger is
approved, each outstanding share of the Company's Class A Common Stock (other
than Class A Shares held in the treasury which will be canceled and Class A
Shares owned by holders who perfect their appraisal rights) will be converted
into the right to receive $9.50 in cash (the Class A Merger Consideration"). At
the same time, all 28,100,000 of the Company's outstanding Class B shares will
be converted into an aggregate of 2,810 newly-issued shares of Newco common
stock, representing all of the outstanding shares of Newco common stock and all
of the voting power and equity interest in Newco.
After the Company announced the Merger, several purported class action
lawsuits challenging the Merger were filed on various dates in the Court of
Chancery of the State of Delaware, each naming the Company and some or all of
the Company's directors as defendants (the "Stockholder Suits"). Generally, the
Stockholder Suits purport to be brought on behalf of the holders of the
Company's common stock, allege substantially similar claims of breach of
fiduciary duty and allege that the Class A Merger Consideration is unjust and
inadequate in that the intrinsic value of the Company's Class A Common shares is
allegedly greater than the Class A Merger Consideration, in view of the
Company's prospects. The Stockholder Suits also generally seek an injunction
against the Merger (or, if it is consummated, recission thereof), compensatory
and other damages, and an award of attorneys' fees. The parties to these
lawsuits entered into a Memorandum of Understanding, dated as of April 26, 1999,
setting forth a proposed settlement of all of the lawsuits, subject to approval
of the Delaware Court of Chancery.
19
SWISHER INTERNATIONAL GROUP INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------ -----------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 31, 1999.
20
SWISHER INTERNATIONAL GROUP INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Swisher International Group Inc.
Date: May 14, 1999 By: /s/ William Ziegler, III
--------------------------- ------------------------
William Ziegler, III
Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date: May 14, 1999 By: /s/ Robert A. Britton
--------------------------- ----------------------
Robert A. Britton
Executive Vice President
and Chief Financial Officer
(principal financial and
accounting officer)
21