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February 1999
Volume 26
Number 1

RETAILER & TOBACCO INDUSTRY NEWS (cont.)

Holt's Cigar Holdings Credits Mail-Order Sales for 13% Growth in Net Revenues
Says Retail Store Sales Hurt by Increased Competition
Holt's Cigar Holdings, Inc. posted a "very successful" third quarter, with mail order sales leading the company's continued growth in revenue, while offsetting sharp declines in sales at the company's three retail stores.

Holt's announced record revenues for the quarter ended December 31, 1998. Net sales increased 8.4% to $9.3 million, compared to $8.6 million in the third quarter of fiscal 1998. Net earnings for the third quarter were $1.3 million, compared with $1.04 million for the comparable period in fiscal 1998.

For the nine months ended December 31, 1998, net sales were up 13.0% to $24.9 million, compared to $22.02 million for the same period in fiscal 1998. Net earnings for the nine months ended December 31, 1998 were $3.4 million, compared with $2.9 million on a comparable period in fiscal 1998.

"The company's retail division, comprised of our three retail stores and mail order business, increased 16.1% overall for the quarter," said President Robert Levin. "Within the retail division mail order sales showed very strong growth, but the retail stores were down sharply. We believe our strong performance in mail order was due to increases in our proprietary mailing list, our growing national reputation for first class service and excellent product value, and the impact of several regional and national advertising efforts."

Levin attributed the decrease in individual retail store sales to increased competition from newer stores in the immediate Philadelphia region and across the country. "I believe that many of these new stores will not survive the changing marketplace, and that our company remains in a strong position to regain market share," said Levin. "The wholesale division was flat during this quarter. Our belief is that this is a result of the proliferation of closeout brands still clogging cigar retailers' shelves."


UST Inc., the world's largest maker of smokeless tobacco and parent company of U.S. Cigar Sales, Inc. (Don Tomas, Astral), was ranked No. 1 in profitability by Forbes Magazine in its Platinum 400 issue. UST produced a whopping 92.1 percent return on capital, a measure of the profit it produced for company bond- and stockholders. Forbes surveyed more than 1,200 U.S. companies in compiling the list.

Rocky Mountain Cigar Company Now a Division of Quintin USA, Inc.
Quintin USA, Inc. of Steamboat Springs, Col., merged with Rocky Mountain Cigar Co. in December, bringing together two established and well-known companies in the tobacco industry. "The expansion greatly enhances [our] relationships with all manufacturers and suppliers, as well as allowing the opportunity to offer additional cigar brands at more competitive pricing," a statement released by Quintin said.

Quintin USA, Inc., and Rocky Mountain Cigar Co. will continue to offer over 250 brands of premium and imported cigarettes and many other related accessories. The company is licensed to stamp and distribute in all states. Retailers are invited to contact either, or both companies for current catalog, price lists, and monthly specials. Quintin USA, Tel: (800) 359-4170; Rocky Mountain Cigar Co., Tel: (800) 793-0219.


Swedish Match, SJI Settle Terminated Contract Dispute
In the face of information that has been circulated in the industry, Swedish Match North America, Inc. has released a statement concerning its former association with SJI Group, Inc. and its terminated contract:

"As one of the world's leading manufacturers of tobacco products, Swedish Match has earned an excellent reputation among tobacconists and retailers, and highly values those relationships."

"Our focus remains on developing and distributing the highest quality products that contribute to the success of tobacconists and retailers," said Julian Roebuck, marketing manger at Swedish Match North America. "To achieve this, we have established and maintained outstanding relationships with some of the industry's leading distributors, including Phillips & King International, Arango Cigar Co., H.J. Bailey, F.G.T. Enterprises, Harold Levinson Associates, and others."

In early 1999, Swedish Match paid SJI Group, Inc. what it believed to be a reasonable termination fee to avoid protracted litigation between the parties and to end what it called an "unsatisfactory relationship."

Beginning in late 1996 and continuing throughout 1997, Swedish Match North America Inc. worked to establish a relationship with SJI as a distributor of its premium cigar products. In the face of a variety of disagreements between the parties in 1997, Swedish Match North America, Inc. elected to terminate this brief relationship with SJI Group, Inc.

"We are very pleased to bring this matter to a conclusion," said Roebuck.


Glut Takes Toll on General Cigar's 1998 Earnings
Favorable Results Expected after Second-Half of 1999

General Cigar Holdings, Inc. in January reported net income of $6.4 million on sales of $71.8 million for the quarter ended November 28, 1998, compared to net income of $14.0 million on sales of $83.5 million in the fourth quarter of 1997.

For the full year, General Cigar reported net income of $25.8 million on sales of $271.2 million, compared to net income of $36.1 million on sales of $262.8 million in 1997.

"The results for the quarter and the year fell well short of the expectations we had for our business at the beginning of the year, following the tremendous growth we experienced in 1997," said Edgar M. Cullman, Jr., president and c.e.o. "Most of the 1997 growth was driven by the frenzied market conditions, particularly in the latter half of that year, which distorted the reality of the marketplace and established trends that were not sustainable."

Cullman added that General Cigar looks forward to a more orderly marketplace in 1999, and reiterated that favorable comparisons against 1998's results are not expected until the second half of the year.

Excluding the accounting effect of two special items, net income was significantly affected in the quarter and the full year by higher selling, general, and administrative (SG&A) expenses.

"Our earnings were penalized all year by the high expense structures we had created to support the growth we had anticipated," said Cullman. "We are addressing this issue and have reduced headcount in various areas of our business and have written-down certain assets. We believe that reductions in SG&A expenses in 1999 will exceed the previously announced target of $5 million, and we will continue to pursue further opportunities to streamline our business."

Manufacturers Target Y2K Issues
But Will Cigars Still Ship as Usual Come Jan. 1, 2000?

You've been hearing about it everywhere: the Year 2000 or Y2K glitch. Computer programs driving government, business, and financial markets, originally written to manipulate only the last two digits of a given year, will incorrectly interpret the year 2000 as 1900, creating untold chaos throughout the economy, civilization, and the planet.

Attentive corporations will have the situation well under control, though, having identified potential problems ahead of time and having brought their computers and equipment into compliance. Manufacturers and distributors are particularly at risk, but tobacco retailers will be happy to know that the industry's largest companies are well on top of the situation.

Consolidated Cigar Corp. completed its evaluation and assessment phases of a multi-phase plan last October to ensure that cigars will continue to reach retailers' shelves uninterrupted. Software modification is essentially complete, with testing underway. It has been not been a simple task: an internal team was formed to inventory all affected technology, assess potential impact, develop solution plans, modify or replace equipment, test and certify all work, and develop contingency plans just in case.

General Cigar Corp. is replacing and modifying its existing critical computer systems. A $15 million company-wide system replacement project has been underway since 1997, with Y2K compliance for all critical applications expected to be complete by mid-1999. Remaining non-critical hardware, software, and control systems are also under review.

While individual companies can diligently track down and fix every last detail within their control, third parties remain a concern. If suppliers aren't Y2K compliant, operational problems could still arise. Both Consolidated Cigar and General Cigar are determining the extent of their own vulnerability, due to third parties' failure to remedy their own Y2K issues. Outside vendors, suppliers, shipping companies, or banking systems to name just a few could all be factors. Of course, given the millennium celebrations likely to ensue come Dec. 31, the cigar glut could again be a shortage.


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