As filed with the Securities and Exchange Commission on March 14, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
800-JR CIGAR, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 5194 52-2022117
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
301 ROUTE 10 EAST
WHIPPANY, NEW JERSEY 07981
(201) 884-9555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
--------------------
LEW ROTHMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
301 ROUTE 10 EAST
WHIPPANY, NEW JERSEY 07981
(201) 884-9555
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
--------------------
Copies to:
Samuel B. Fortenbaugh III, Esq. James R. Tanenbaum, Esq.
Morgan, Lewis & Bockius LLP Stroock & Stroock & Lavan LLP
101 Park Avenue 180 Maiden Lane
New York, New York 10178 New York, New York 10038
(212) 309-6000 (212) 806-5400
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. |_|
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, other than securities offered only pursuant to dividend or
interest reinvestment plans, please check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering.|_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.|_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.|_|
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CALCULATION OF REGISTRATION FEE
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<CAPTION>
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Proposed Proposed
Title of Each Maximum Maximum Amount of
Class of Securities Amount to be Offering Price Aggregate Offering Registration
to be Registered Registered(1) Per Share(2) Price(1)(2) Fee
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 3,450,000 $16.00 $55,200,000 $16,728.00
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</TABLE>
(1) Includes 450,000 shares subject to an over-allotment option to be granted
to the Underwriters.
(2) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
800-JR CIGAR, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K.
Showing Location in the Prospectus of Information
Required by Items 1 through 12, Part I, of Form S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------- ----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus. Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.......................... Inside Front and Outside Back Cover
Pages of Prospectus; Additional
Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges..... Prospectus Summary; Risk Factors;
Selected Combined Financial Data;
Management's Discussion and Analysis
of Financial Condition and Results of
Operations
4. Use of Proceeds ......................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.......... Outside Front Cover of Prospectus;
Underwriting
6. Dilution................................. Dilution
7. Selling Security Holders................. Not Applicable
8. Plan of Distribution..................... Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to Be Registered Outside Front Cover Page of
Prospectus; Dividend Policy; Shares
Eligible for Future Sale; Description of
Capital Stock
10. Interests of Named Experts and Counsel .. Legal Matters; Experts
11. Information with Respect to the Registrant Outside Front Cover Page of
Prospectus; Prospectus Summary; Risk
Factors; Reorganization of the
Company; Dividend Policy;
Capitalization; Selected Combined
Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Principal
Stockholders; Certain Related
Transactions; Shares Eligible for
Future Sale; Combined Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Not Applicable
</TABLE>
i
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION - DATED MARCH 14, 1997
PROSPECTUS
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[LOGO]
3,000,000 SHARES
800-JR CIGAR, INC.
Common Stock
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All of the 3,000,000 shares of common stock, $.01 par value (the "Common
Stock"), offered hereby (the "Offering") are being sold by 800-JR Cigar, Inc.
(the "Company"). Prior to the Offering, there has been no public market for the
Common Stock. It is currently anticipated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has applied for inclusion of the Common Stock on The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the trading symbol
"JRJR."
SEE "RISK FACTORS" ON PAGES 9 TO 14 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share............ $ $ $
- --------------------------------------------------------------------------------
Total (3)............ $ $ $
================================================================================
(1) The Company and the Existing Stockholders (as defined) of the Company have
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $ .
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 450,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such additional shares are
purchased by the Underwriters, the total Price to Public will be $ , the
total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters subject
to delivery by the Company and acceptance by the Underwriters, to prior
sale and to withdrawal, cancellation or modification of the offer without
notice. Delivery of the shares to the Underwriters is expected to be made
at the office of Prudential Securities Incorporated, One New York Plaza,
New York, New York, on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
, 1997
<PAGE>
[reserved for artwork]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD
BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE PREDECESSOR
COMBINED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
PROSPECTUS. THIS PROSPECTUS GIVES EFFECT TO THE REORGANIZATION OF THE COMPANY
(THE "REORGANIZATION"), PURSUANT TO WHICH THE EXISTING STOCKHOLDERS (AS DEFINED
HEREIN) WILL CONTRIBUTE TO 800-JR CIGAR, INC. ("800-JR CIGAR") 100% OF THE
OUTSTANDING CAPITAL STOCK OF EACH OF J.R. TOBACCO OF AMERICA, INC., CIGARS BY
SANTA CLARA, N.A., INC., J.N.R. GROCERY CORP., J.R. TOBACCO NC, INC., J&R
TOBACCO (NEW JERSEY) CORP., J.R. TOBACCO COMPANY OF MICHIGAN, INC., J.R.-46TH
STREET, INC., J.R. TOBACCO OUTLET, INC. AND J.R. STATESVILLE, INC.
(COLLECTIVELY, THE "CONSTITUENT ENTITIES") IN EXCHANGE FOR SHARES OF COMMON
STOCK OF 800-JR CIGAR. SEE "REORGANIZATION OF THE COMPANY" AND THE PREDECESSOR
COMBINED FINANCIAL STATEMENTS. UNLESS THE CONTEXT OTHERWISE REQUIRES, (A) ALL
REFERENCES HEREIN TO THE "COMPANY" REFER TO THE CONSTITUENT ENTITIES ON A
COMBINED BASIS, (B) ALL REFERENCES HEREIN TO THE COMPANY'S OR 800-JR CIGAR'S
ACTIVITIES, RESULTS OF OPERATIONS OR FINANCIAL CONDITION REFER TO THAT OF THE
CONSTITUENT ENTITIES, TAKEN AS A WHOLE, AND (C) ALL INFORMATION IN THIS
PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE
EXERCISED.
The Company
800-JR Cigar is one of the largest distributors and retailers of
tobacco and tobacco related products in North America. The Company's primary
products consist of premium cigars, mass market cigars and cigarettes which are
distributed to retail and wholesale customers. Management believes that the
Company ranks as the largest retailer of brand name cigars in the United States.
In addition, the Company is the largest customer for many of the world's leading
cigar manufacturers, including Consolidated Cigar Holdings Inc., General Cigar
Holdings, Inc., Swisher International Group, Inc. and Villazon & Company, Inc.
The Company believes that its success is due, in part, to its ability to
purchase in large quantities from a broad range of suppliers, thereby serving
its retail and wholesale customers as the leading source for competitively
priced, high-quality, nationally branded and proprietary brand premium cigars
and other tobacco products. The Company's net sales have increased at a compound
annual growth rate of 34.4%, from $46.8 million in 1991 to $152.7 million in
1995. Net sales for the ten-month period ended October 31, 1996 were $155.3
million.
The Company's premium cigars (imported, hand-made and hand-rolled
cigars made with long filler and all natural tobacco leaf) consist of
approximately 150 premium brands, of which 43 are the Company's proprietary
brands. The Company's proprietary products include nationally recognized brand
names such as Belinda(R), Casa Blanca(R), El Rey del Mundo(R), 5 Star
Seconds(R), Jose Marti(TM), J-R Alternative(R), J-R Ultimate(R), La Finca(R),
Rosa Cuba(TM) and Santa Clara(R). The Company's highest gross margins are
generated from the sale of premium cigars and, as such, it has targeted premium
cigars as its primary growth vehicle. For the ten-month period ended October 31,
1996, sales of cigars and tobacco products, other than cigarettes, totaled $74.1
million, or 47.7% of net sales, and represented 65.4% of the Company's total
gross profit. The cigarette products sold by the Company include all major
brands produced by the leading U.S. cigarette manufacturers. Cigarette sales
represented $66.4 million, or 42.8% of net sales, during the ten-month period
ended October 31, 1996. The Company also offers a variety of discounted general
merchandise, including fragrances and apparel, through its stores. During the
ten-month period ended October 31, 1996, sales of such non-tobacco products
totaled $14.8 million, or 9.5% of net sales.
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3
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The Company markets tobacco products on a retail basis throughout
the United States by direct mail and through five specialty cigar stores and two
large discount outlet stores. Its mail order catalog provides one of the largest
selections of high quality premium cigars at substantial savings, and management
believes that its mail order sales are the largest among the world's catalog
retailers of cigars. The Company's five specialty cigar stores feature a broad
selection of premium cigars, and serve as destination stores for customers
seeking high quality products at competitive prices. During 1996, the Company
opened an award-winning upscale cigar store in Whippany, New Jersey, which
achieved over $5.0 million in sales in its initial nine months of operation. The
Company intends to incorporate certain characteristics of the Whippany location
in its expansion plans for existing store renovations and new store openings.
The Company's two large discount outlet stores are located on major interstate
highways in North Carolina, a "tobacco-friendly" state with lower tobacco excise
taxes relative to other eastern states. The discount outlet stores capitalize
upon the draw of tobacco products, particularly premium cigars and cigarettes,
to market a variety of discounted general merchandise. The Company achieved
$87.8 million in total retail sales for the ten-month period ended October 31,
1996, representing 56.5% of net sales.
The Company's wholesale activities consist predominantly of sales
of premium cigars through a catalog and sales of cigarettes through
cash-and-carry operations which are located at the Company's two discount outlet
stores. Added sales generated by the Company's wholesale operations enable the
Company to earn significant discounts on large volume purchases of cigars and
related products, and provide the Company with flexibility to determine the
amount, timing and channel of distribution by which it will most profitably sell
its tobacco products. The Company's wholesale customers include approximately
5,000 smoke shops, restaurants, taverns, liquor stores and other retail outlets
and wholesale distributors throughout the United States. The Company achieved
$67.5 million in wholesale sales for the ten-month period ended October 31,
1996, representing 43.5% of net sales.
The Company believes that there is an increasing market for
cigars generally and for premium cigars in particular. Unit sales of cigars
increased from 3.4 billion units in 1993 to an estimated 4.4 billion units in
1996. Unit sales of premium cigars increased from 110 million units in 1993 to
an estimated 273 million units in 1996, increasing at a compound annual growth
rate of 35.4%. Unit sales of mass market large cigars increased from 2.0 billion
units in 1993 to an estimated 2.7 billion units in 1996, increasing at a
compound annual growth rate of 9.6%. Based upon industry sources, including the
Cigar Association of America, the total market for cigars in the United States
is estimated to have been approximately $1.25 billion in 1996. The Company also
profits by its high-volume retail and wholesale cigarette businesses at its
discount outlet stores. Although manufacturers' shipments of cigarettes in the
United States have declined at an average rate of 1% to 2% per year over the
past several years, the Company believes that the availability of cigarettes at
its discount outlet stores will remain a popular draw for interstate travelers
seeking low-priced cigarettes.
The Company's principal objective is to enhance its position as
the leading distributor and retailer of a full line of premium and mass market
cigars. The principal elements of this business strategy include: (i) offering a
broad product selection, (ii) providing value prices, (iii) leveraging
long-standing relationships with manufacturers, (iv) building upon leading
proprietary cigar brands, (v) leveraging multiple channels of distribution and
(vi) emphasizing customer service.
The Company's growth strategy is designed to capitalize on its
competitive strengths and the recent growth in the cigar industry. Specifically,
over the course of the next 18 months, the Company intends to increase
penetration in its retail market by (i) expanding direct mail capabilities and
increasing catalog circulation, (ii) relocating, redesigning and expanding
existing specialty cigar stores and adding two additional stores and (iii)
opening a new discount outlet store and expanding retail selling space at
existing discount outlet stores. Over the same period, the Company intends to
increase penetration in its
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
wholesale market by (i) expanding and strengthening distribution of its
wholesale premium cigar catalog and (ii) adding an additional cigarette
cash-and-carry operation within a new discount outlet store. Furthermore, the
Company intends to increase dedicated sources of supply of imported premium
cigars and to take advantage of the growth in mass market large cigar sales by
increasing its presence in the domestic cigar market.
The Company was incorporated on March 11, 1997 under the laws of
the State of Delaware. The Company's principal executive offices are located at
301 Route 10 East, Whippany, New Jersey 07981, and its telephone number is (201)
884-9555.
The Offering
Common Stock Offered hereby........ 3,000,000 shares
Common Stock to be Outstanding
after the Offering .............. shares(1)
Use of Proceeds.................... To (i) pay $6.9 million in partial
satisfaction of the Distribution Notes
(as defined herein) previously issued to
the Existing Stockholders, which notes
represent estimated cumulative
undistributed Subchapter S corporation
("S Corporation") earnings through the
date of the Offering on which taxes are
payable by the Existing Stockholders,
(ii) finance development, construction,
and related inventory costs of a new
warehouse, new stores and store
renovations for approximately $19.5
million, (iii) finance expansion of
direct mail operations with a $2.0
million upgrade in information systems
and graphics capability, (iv) pay $1.5
million in signing bonuses to an officer
and MC Management, Inc. ("MC
Management") in connection with the
execution of long-term services
agreements, and (v) repay approximately
$8.6 million of long-term indebtedness.
The balance, if any, will be used for
working capital and general corporate
purposes. See "Use of Proceeds,"
"Reorganization of the Company" and
"Certain Related Transactions -
Management Services."
Proposed Nasdaq National
Market Symbol.................... "JRJR"
- ----------
(1) Excludes 450,000 shares of Common Stock subject to the 30-day
over-allotment option to be granted to the Underwriters. See "Management"
and "Shares Eligible for Future Sale."
--------------------
Casa Blanca(R), Clemenceau(R), Consuegra(R), Farach(R), 5
Star Seconds(R), Garcia y Garcia(R), Jeroboam(R), J-R Alternative(R), J-R
Ultimate(R), La Finca(R), Maria Mancini(R), Mocambo(R), Mocha(R), Perfecto
Garcia(R), Perfecto Garcia Crown Royals(R), Principales(R), Quorum(R),
Remedios(R), Rey del Rey(R), Reynitas(R), Robustos de Manuel Zavalla(R), Santa
Clara(R) and Whitehall(R) are registered trademarks of the Company. The Company
has filed trademark applications for the following cigar names: El Secreto del
Rio Jagua(TM), Jose Marti(TM), Laguito(TM), LaMeca(TM), Rectangulares(TM),
Valentinos(TM) and Villar y Villar(TM). The Belinda(R) and El Rey del Mundo(R)
brands referenced in this Prospectus are exclusively licensed to the Company by
Villazon & Company, Inc.
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5
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Summary Combined Financial Information
(in thousands, except per share amounts)
The following table sets forth, for the periods and at the dates
indicated, summary combined financial data for the Company. Such data have been
derived from the audited and unaudited Predecessor Combined Financial Statements
of the Company included elsewhere herein. See "Selected Combined Financial
Data." The following table also includes certain unaudited pro forma combined
statement of income data for the year ended December 31, 1995 and the ten-month
period ended October 31, 1996 which give effect to the Reorganization, the
Offering, and certain other adjustments as if they had occurred on January 1,
1995. In addition, the unaudited pro forma combined balance sheet data gives
effect to the Reorganization, the Offering, and certain other adjustments as if
they had occurred on October 31, 1996.
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
-------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
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Statement of Income Data(1):
Net sales........................... $46,772 $54,258 $74,581 $109,297 $152,695 $121,934 $155,278
Cost of goods sold.................. 39,279 44,958 62,660 91,588 130,645 104,351 128,291
------- ------- ------- -------- -------- -------- --------
Gross profit........................ 7,493 9,300 11,921 17,709 22,050 17,583 26,987
Selling, general and administrative
expenses............................ 6,422 7,147 9,714 14,450 18,768(2) 15,193(2) 17,013
Depreciation and amortization....... 282 263 361 447 493 379 558
------- ------- ------- -------- -------- -------- --------
Income from operations.............. 789 1,890 1,846 2,812 2,789 2,011 9,416
Other income (expense):
Interest expense................ (401) (353) (481) (710) (785) (659) (681)
Other(3)........................ 978 488 404 454 308 235 548
------- ------- ------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of change in
accounting method............... 1,366 2,025 1,769 2,556 2,312 1,587 9,283
Provision (credit) for
income taxes.................... 151 168 160 257 (74) (115) 25
------- ------- ------- -------- -------- -------- --------
Income before cumulative effect
of change in accounting
method.......................... 1,215 1,857 1,609 2,299 2,386 1,702 9,258
Cumulative effect of change in
accounting for income taxes..... -- -- 58 -- -- -- --
------- ------- ------- -------- -------- -------- --------
Net income.......................... $ 1,215 $ 1,857 $ 1,667 $ 2,299 $ 2,386 $ 1,702 $ 9,258
======= ======= ======= ======== ======== ======== =========
</TABLE>
Year Ended Ten Months Ended
December 31, 1995 October 31, 1996
----------------- ----------------
Pro Forma Information
(unaudited)(4):
Historical income before income taxes.... $ 2,312 $ 9,283
Pro forma adjustments other than income
taxes..............................
543 620
Pro forma income before provision for
income taxes....................... 2,855 9,903
Pro forma provision for income taxes.....
$ 1,148 3,971
---------
Pro forma net income..................... $ 1,707 $ 5,932
========= ========
Pro forma earnings per share(5)..........
========= ========
Pro forma common shares outstanding......
========= ========
6
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<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
------------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Operating Data:
Revenues:
Retail sales..................... 72.1% 72.7% 72.2% 66.1% 58.3% 54.4% 56.5%
Wholesale sales.................. 27.9 27.3 27.8 33.9 41.7 45.6 43.5
</TABLE>
At October 31, 1996
-----------------------------------------
Pro Forma
Balance Sheet Data: Actual Pro Forma(6) as Adjusted(7)
- ------------------- ------ ------------ --------------
(unaudited)
Working capital...................... $ 16,946 $ 2,561 $
Total assets......................... 42,636 40,946
Total long-term debt................. 8,726 22,626
Total stockholders' equity (deficit). 21,348 (6,937)
(1) Prior to the Reorganization, each of the Constituent Entities was
treated as an S Corporation and therefore was not subject to federal
and, in some cases, state income tax at the corporate level; as a
result, income or losses were passed through to respective
stockholders. Accordingly, the Predecessor Combined Financial
Statements do not include a provision for federal and, in some
cases, state income taxes. See Note 8 to the Predecessor Combined
Financial Statements and note 4 below.
(2) Includes payment of legal fees and settlement costs in connection
with certain litigation with a former licensee in the amount of $1.0
million for the year ended December 31, 1995, which includes $0.4
million for the ten-month period ended October 31, 1995.
(3) Relates principally to rental income and interest income and
includes receipt of $265,000 in partial payment of an insurance
settlement for the ten-month period ended October 31, 1996.
(4) The unaudited pro forma statement of income data for the year ended
December 31, 1995 and the ten-month period ended October 31, 1996,
reflects the Reorganization, the Offering and the following
adjustments as if they had occurred on January 1 of each period: (a)
a decrease in aggregate compensation from $1,511,000 to $400,000 for
the year ended December 31, 1995 and $1,500,000 to $333,000 for the
ten-month period ended October 31, 1996 for two of the Company's
executives pursuant to new employment agreements; (b) an increase in
interest expense of $1,275,000 for the year ended December 31, 1995
and $1,093,000 for the ten-month period ended October 31, 1996,
assuming the issuance of the Distribution Notes; (c) a reduction in
interest expense of $785,000 for the year ended December 31, 1995
and $681,000 for the ten-month period ended October 31, 1996
assuming the application of proceeds from the Offering to repay all
the Company's indebtedness other than capital lease obligations; (d)
a reduction in interest income of $78,000 for the year ended
December 31, 1995 and $135,000 for the ten-month period ended
October 31, 1996, assuming the repayment to the Company of loans
receivable from stockholders; and (e) an increase of $1,263,000 for
the year ended December 31, 1995 and $3,946,000 for the ten-month
period ended October 31, 1996 for income taxes based upon pro forma
pre-tax income as if the Company had been subject to federal and
additional state income taxes. See "Reorganization of the Company -
Reorganization of the Company," "- Termination of S Corporation
Status" and "Management - Employment Agreements."
(5) Pro forma per share information is based on shares of
Common Stock outstanding prior to the Offering, increased by the
sale of shares of Common Stock assuming an initial public
offering price of $ per share ($ , net of
underwriting discounts and commissions and estimated offering
expenses), the proceeds of which would be necessary to pay
approximately $6.9 million, the current portion of the Distribution
Notes. The net income used in the calculation of pro forma per share
information has been: (i) increased by the interest expense of
$302,000 ($181,000 on an after-tax basis) for the year ended
December 31, 1995, and $282,000 ($169,000 on an after-tax basis) for
the ten-month period ended October 31, 1996 related to the current
portion of the Distribution Notes to be repaid from the proceeds of
the Offering; and (ii) decreased by the interest on debt of $785,000
($469,000 on an after-tax basis) for the year ended December 31,
1995, and $681,000 ($401,000 on an after-tax basis) for the
ten-month period ended October 31, 1996.
Supplementary pro forma per share information for the year ended
December 31, 1995, and the ten-month period ended October 31, 1996
are $ and $ , respectively, based on
shares of Common Stock outstanding prior to the Offering, increased
by (a) the sale of shares of Common Stock assuming an initial
public offering price of $ per share ($ , net of
underwriting discounts and commissions and estimated offering
expenses), the proceeds of which would be necessary to pay
approximately $6.9 million, the current portion of the Distribution
Notes, and (b) the sale of shares of Common Stock assuming an
initial public offering price of $ per share ($ , net of
underwriting discounts and commissions and estimated offering
expenses), the proceeds of which would be necessary to repay
approximately $8.6 million in outstanding debt. The net income used
in the calculation of supplementary pro forma per share information
is $1,888,000 and $6,101,000 for the year ended December 31, 1995
and the ten-month period ended October 31, 1996. Such net income has
been increased by the interest expense of $302,000 ($181,000 on an
after-tax basis) for the year ended December 31, 1995, and $282,000
($169,000 on an after-tax basis) for the ten-month period ended
October 31, 1996 related to the current portion of the Distribution
Notes to be repaid from the proceeds of the Offering.
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7
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(6) Pro forma to reflect (i) the Reorganization; (ii) the issuance of
the Distribution Notes in the aggregate amount of $20,800,000 (such
amount estimated through the date of the Offering) which amount is
net of loans receivable from stockholders of $2,390,000; (iii) a
distribution of $795,000 made in December 1996 and anticipated
additional distributions of $5,000,000 to be made prior to the
Offering and (iv) a deferred tax asset of approximately $700,000
which the Company will record concurrently with becoming a C
corporation. See "Reorganization of the Company" and "Certain
Related Transactions."
(7) Pro forma as adjusted to reflect (i) the sale of 3,000,000 shares of
Common Stock offered hereby at the price of $ per share after
deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company; (ii) a non-recurring
pre-tax charge of $1.0 million ($600,000 on an after-tax basis) for
a payment to MC Management in connection with MC Management's
entering into a five-year contract with the Company; (iii) a
non-recurring pre-tax charge of $500,000 ($300,000 on an after-tax
basis) for a payment to an officer of MC Management as a bonus for
entering into an employment agreement with the Company; and (iv) the
application of the estimated net proceeds therefrom, including the
payment of an aggregate of $6,900,000 (such amount estimated through
the date of the Offering) in partial repayment of the Distribution
Notes and (iii) the payment of approximately $8.6 million in
long-term indebtedness. See "Reorganization of the Company," "Use of
Proceeds" and "Capitalization."
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES
A HIGH DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO OTHER INFORMATION SET FORTH IN THIS
PROSPECTUS, IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
THIS PROSPECTUS CONTAINS STATEMENTS THAT CONSTITUTE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE 1934 ACT. THOSE STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS
PROSPECTUS AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT
EXPECTATIONS OF THE COMPANY, ITS DIRECTORS OR ITS OFFICERS WITH RESPECT TO,
AMONG OTHER THINGS: (i) TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION OR
RESULTS OF OPERATIONS; (ii) THE COMPANY'S FINANCING PLANS; (iii) THE COMPANY'S
BUSINESS AND GROWTH STRATEGIES; (iv) THE USE OF THE PROCEEDS TO THE COMPANY OF
THE OFFERING; AND (v) THE DECLARATION AND PAYMENT OF DIVIDENDS. PROSPECTIVE
INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE ACCOMPANYING INFORMATION
CONTAINED IN THIS PROSPECTUS, INCLUDING WITHOUT LIMITATION THE INFORMATION SET
FORTH UNDER THE HEADINGS "RISK FACTORS," "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," IDENTIFIES
IMPORTANT FACTORS THAT WOULD CAUSE SUCH DIFFERENCES.
Declining Market for Cigars through 1993; Declining Market for
Cigarettes. According to industry sources, including the Cigar Association of
America, the cigar industry experienced declining consumption between 1964 and
1993 at a compound annual rate of 3.6%. While the cigar industry has experienced
significantly better trends in unit consumption since 1993 compared to this
historical trend, the Company believes that much of the recent growth in cigar
unit sales, particularly with respect to premium cigars, is attributable to new
cigar smokers attracted to the improved image and enhanced visibility of cigar
smoking by celebrities. There can be no assurance that recent positive trends
will continue on a long-term basis or that new customers will remain cigar
smokers in the future.
In addition, the unit volume of cigarettes sold in the United States
has declined in recent years. A 1995 report issued by the United States
government suggests that while consumption of cigarettes stabilized between 1993
and 1994, consumption could ultimately continue to decline in the future if
states or the federal government raise taxes and/or restrictions and
prohibitions on smoking increase. Additional factors that could cause this
decline to continue include government regulation of and restrictions on the
labeling, sale, and advertising of cigarettes and smokeless tobacco products,
scientific reports in the media concerning adverse health effects of smoking,
and diminishing social acceptance of smoking. Significant future declines in
cigarette consumption could have an adverse effect on the Company's results of
operations and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Market Overview."
Constraints on Ability to Satisfy Demand for Premium Cigars. As a
result of the unanticipated industry-wide increase in demand for premium cigars
in recent years, the Company experienced a shortage of certain cigars. Although
the industry's leading manufacturers have taken measures to increase production,
the Company generally is not a party to long-term contracts. The Company relies
upon the strength of its relationships with cigar manufacturers, which it has
cultivated over a 25-year period, to meet its supply requirements. To insure the
manufacture and supply of its own
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brand name cigars, however, the Company has entered into agreements with certain
affiliated entities whose production is expected to represent 30% of the
Company's supply of premium cigars. See "Business -- Sources of Supply;
Production" and "Certain Related Transactions -- Manufacturing Facility
Arrangements." Although the Company is pursuing such measures to increase its
supply of proprietary premium cigars, no assurance can be given that these
measures will be successful or that they will be sufficient to enable the
Company to meet any future demand for its proprietary premium cigars. Any
material inability of the Company to expand its current means of supply in a
timely manner could have a material adverse effect on the Company's business,
including the loss of sales by the Company.
Risks Associated with Management of Growth. The Company intends to
pursue an aggressive growth strategy for the foreseeable future, and its future
operating results will depend to a certain degree upon its ability to service a
larger direct mail customer base and to manage its overall expansion
effectively. The Company's growth strategy will increase the operating
complexity of the Company as well as the level of responsibility for both
existing and new management personnel. The Company will be required to
reconfigure and improve its operational and financial systems and to expand its
employee base. The Company has engaged two consulting firms to review the
Company's management information systems and to recommend improvements to such
systems. However, there can be no assurance that the Company's management
information systems, accounting systems, purchasing systems and internal
controls will be adequate or that the Company will be able to upgrade or
reconfigure its systems and controls to respond to the Company's growth, the
inability of which could have a material adverse effect on the successful
operation of the Company's business, implementation of its growth strategy and
future operating results. If the Company's management is unable to manage this
growth effectively, the Company's business, results of operations and financial
condition could be materially adversely affected.
Reliance on Key Personnel. Various administrative and other
services, including telemarketing services, are performed for the Company by MC
Management, a management services company owned by Ms. Maureen Colleton. See
"Certain Related Transactions -- Management Services." The Company's operations
will continue to depend upon the efforts of MC Management and senior personnel
of the Company, including Mr. Lew Rothman, the President and Chief Executive
Officer of the Company and a well-known figure in the cigar industry. While the
Company will enter into a five-year management contract with MC Management and
three-year employment agreements with Mr. Rothman and certain other senior
management personnel of the Company, the loss of the services of MC Management,
Mr. Rothman or any other senior personnel may have a material adverse effect on
the Company's business and prospects. The Company does not maintain key-man life
insurance on any of its executive officers. See "Management."
Concentration of Sales From Two Large Discount Outlet Stores. A
significant portion of the Company's sales (30.8% for the ten-month period ended
October 31, 1996 and 34.1% for the year ended December 31, 1995) is generated by
retail sales at the Company's two large discount outlet stores. Any significant
decrease in sales generated by either discount outlet store could therefore have
a material adverse effect on the Company's results of operations. In addition,
the Company's growth strategy contemplates the opening of an additional discount
outlet store in 1998 and, consequently, discount outlet stores are expected to
continue to account for a significant portion of the Company's sales. The
success of the Company's discount outlet stores will largely depend upon the
continued market for and availability of low cost cigarettes, the ability of the
Company to locate new discount outlet stores in high traffic areas of
tobacco-friendly states, and the ability of the Company to
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become a licensed cigarette distributor in tobacco-friendly states. As of the
date of this Prospectus, only four of the country's 50 states do not impose
substantial excise taxes on cigarettes at the state level; therefore, the
Company may be limited in its ability to increase the number of such stores and
to identify acceptable locations for its discount outlet stores. In addition, no
assurance can be given that the states which do not currently impose excise
taxes on cigarettes will not do so in the future.
Dependence on Cigarette Sales. The success of the Company's discount
outlet stores depends to a significant degree upon the sale of discounted
cigarettes. Cigarette sales for the ten-month period ended October 31, 1996 were
$66.4 million (or 42.8% of total net sales), of which $25.8 million were derived
from retail sales and $40.6 million were derived from wholesale cash-and-carry
sales. Any change to or cessation of promotional programs or the imposition of
any tax on cigarettes in North Carolina or in any other state in which the
Company may seek to open additional discount outlet stores or any other event
which adversely affects the consumption of cigarettes in the Company's markets
could restrict the Company's ability to offer significant discounts on
cigarettes and could therefore have an adverse effect on the Company's business
and results of operations.
Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate in the future as a result
of a variety of factors, including the timing of store openings and renovations
and related pre-opening expenses, weather conditions, and the price and
availability of tobacco products and general merchandise. Therefore, results for
any quarter are not necessarily indicative of the results that the Company may
achieve for any subsequent quarter or for a full year. Fluctuations caused by
variations in quarterly operating results may subsequently affect the market
price of the Common Stock. In addition, the Company expects its business to
continue to exhibit some measure of seasonality, with increased discount outlet
store sales during the spring and summer vacation seasons and increased overall
sales during the Christmas holiday season. See "Management Discussions and
Analysis of Financial Condition and Results of Operations-Quarterly Results of
Operations; Seasonality."
Extensive and Increasing Regulation of Tobacco Products. The tobacco
industry is subject to regulation in the United States at the federal, state and
local levels, and the recent trend is toward increasing regulation. A variety of
bills relating to tobacco issues have recently been introduced in the United
States Congress, including bills that, if passed, would (i) prohibit the
advertising and promotion of all tobacco products and/or restrict or eliminate
the deductibility of such advertising expenses; (ii) increase labeling
requirements on tobacco products to include, among other things, addiction
warnings and lists of additives and toxins; (iii) modify federal preemption of
state laws to allow state courts to hold tobacco manufacturers liable under
common law or state statutes; (iv) shift regulatory control of tobacco products
and advertisements from the United States Federal Trade Commission (the "FTC")
to the United States Food and Drug Administration (the "FDA"); (v) increase
tobacco excise taxes; and (vi) require tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Although hearings have been held on certain of these proposals, none
of such proposals, to date, has been passed by Congress.
In August 1996, the FDA determined nicotine is a drug and that it
had jurisdiction over cigarettes and smokeless tobacco products, as
nicotine-delivering medical devices, and, therefore, promulgated regulations
restricting and limiting the sale, distribution and advertising of cigarette and
smokeless tobacco products. The prohibition on retailers from selling
cigarettes, cigarette tobacco or smokeless tobacco to persons under the age of
18 and requiring retailers to check the photographic
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<PAGE>
identification of every person under the age of 27 became effective on February
28, 1997. Other measures are scheduled to go into effect August 28, 1997 and on
August 28, 1998. The FDA has also announced that, at some future point, it
intends to impose additional requirements, potentially including registration,
listing, premarket notification and approval, record-keeping and reporting
requirements, and good manufacturing practices. There can be no assurance that
the regulations, if upheld in court, will not result in material reduction of
the consumption of tobacco products in the United States.
In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies also have increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas.
Federal law has required health warnings on cigarettes since 1965
and on smokeless tobacco since 1986. Although no federal law currently requires
that cigars carry such warnings, California has enacted laws requiring that
"clear and reasonable" warnings be given to consumers who are exposed to
chemicals determined by the state to cause cancer or reproductive toxicity,
including tobacco smoke and several of its constituent chemicals. Although
similar legislation has been introduced in other states, no action has been
taken. There can be no assurance that such legislation introduced in other
states will not be passed in the future or that other states will not enact
similar legislation. Consideration at both the federal and state level also has
been given to consequences of tobacco smoke on others who are not currently
smoking (so called "second hand" smoke). There can be no assurance that
regulation relating to second hand smoke will not be adopted or that such
regulation or related litigation would not have a material adverse effect on the
Company's business and results of operations.
Increased cigar consumption and the publicity such increase has
received may increase the risk of additional regulation of cigars and/or cigar
products. The National Cancer Institute has announced that it will issue a
report in 1997 describing research into cigars and health. There can be no
assurance as to the ultimate content, timing or effect of this report or any
additional regulation of cigars by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business and results of
operations. See "Business -- The Tobacco Industry -- Regulation."
Tobacco Industry Litigation. The tobacco industry has experienced
and is experiencing significant health-related litigation involving tobacco and
health issues. Plaintiffs in such litigation have sought and are seeking
compensatory and, in some cases, punitive damages, for various injuries
resulting from the use of tobacco products or exposure to tobacco smoke,
including health care costs. Although the Company has not been the subject of
any such health-related litigation to date and does not manufacture any tobacco
products, other cigarette distributors have been named in such litigation. There
can be no assurance that there will not be an increase in health-related
litigation against cigarette and smokeless tobacco manufacturers or distributors
or similar litigation in the future against cigar manufacturers or distributors.
The costs to the Company of defending prolonged litigation and any settlement or
successful prosecution of any health-related litigation could have a material
adverse effect on the Company's business and results of operations. The recent
increase in the sales of cigars and the publicity such increase has received may
have the effect of increasing the probability of legal claims.
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See "-- Extensive and Increasing Regulation of Tobacco Products" and "Business
- -- The Tobacco Industry -- Litigation."
Social, Political and Economic Risks Associated with International
Trade. The Company contracts for the manufacture of its brand name products with
manufacturers whose operations are primarily conducted in foreign countries.
Such countries include Honduras, the Dominican Republic, Nicaragua, Jamaica,
Mexico, the Philippines, Ireland, and Spain and may in the future include other
countries. As a result, the Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade including the risk of supply interruption or significant
increases in the prices of tobacco products. There can be no assurance that any
such changes in social, political or economic conditions will not have a
material adverse effect on the Company's business and results of operations.
Competition. The Company believes that no single entity competes in
all of its lines of business, although several companies compete in one or more
of its markets. The Company's tobacco business faces competition from numerous
retail establishments and other direct mail retailers and wholesalers. The
Company's cash-and-carry wholesale cigarette operations faced vigorous
competition from Sam's Clubs, a division of Wal-mart Stores, Inc., in its local
markets. Sam's Clubs has substantially greater resources than the Company and is
better able to sustain prolonged price competition. No assurance can be given
that the Company will continue to be able to compete effectively against Sam's
Clubs or any of its other existing or future competitors in any of its market
segments. See "Business -- Competition."
Control by Management. Upon completion of the Offering, Mr. and Mrs.
Lew and LaVonda Rothman and trusts established for the benefit of certain
members of the Rothman family (collectively, the "Existing Stockholders") will
hold shares of Common Stock, constituting approximately % of the
Company's outstanding Common Stock (approximately % if the Underwriters'
over-allotment option is exercised in full). As a result, the Existing
Stockholders will have substantial control over the Company and may have the
power to approve any matter requiring the approval of stockholders, including
electing directors, adopting amendments to the Company's certificate of
incorporation, and approving mergers and other change in control transactions
involving the Company. See "Management," "Principal Stockholders," and
"Description of Capital Stock."
No Prior Public Market; Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock of the Company
and there can be no assurance that an active market will develop or be sustained
after the Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price will
be determined through negotiations between the Company and the Representative of
the Underwriters, and may not be indicative of future market prices. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The market price of the Common Stock could be
subject to wide fluctuations in response to quarter-to-quarter variations in
operating results of the Company or its competitors, changes in earnings
estimates by analysts, developments in the tobacco industry or changes in
general economic conditions.
Anti-Takeover Provisions. Certain provisions of the Company's
Certificate of Incorporation (the "Certificate of Incorporation") and By-laws
(the "By-laws") and Delaware General Corporation Law could delay or frustrate
the removal of incumbent directors and could make difficult a merger, tender
offer or proxy contest involving the Company, even if such events could be
viewed as beneficial by the Company's stockholders. The Board of Directors (the
"Board") of the Company is empowered to issue preferred stock in one or more
series without stockholder action. Any issuance of
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this "blank-check" preferred stock could materially limit the rights of holders
of the Common Stock and render more difficult or discourage an attempt to obtain
control of the Company by means of a tender offer, merger, proxy contest or
otherwise. In addition, the Certificate of Incorporation and By-laws contain a
number of provisions which could impede a takeover or change in control of the
Company, including, among other things, staggered terms for the members of the
Board, the requiring of a two-thirds supermajority vote of stockholders to amend
certain provisions of the Certificate of Incorporation or take any action by
written consent, and a fair price requirement. Certain provisions of the
Delaware General Corporation Law to which the Company will be subject may also
discourage takeover attempts that have not been approved by the Board. See
"Description of Capital Stock -- Anti-Takeover Provisions."
Dilution. Investors participating in the Offering will incur
immediate and substantial dilution of $ in net tangible book value per share
of Common Stock from the assumed initial public offering price of $ . See
"Dilution."
Shares Eligible for Future Sale. Upon completion of the Offering,
the Company will have a total of shares of Common Stock outstanding ( shares
if the Underwriters' over-allotment option is exercised in full), of which
shares will be restricted securities within the meaning of Rule 144 under the
Securities Act of 1933. The Company will grant to the Existing Stockholders
"piggyback" registration rights exercisable on or after one year following the
date of the Offering to require the Company to register their shares under the
Securities Act at such time as the Company registers any additional shares on
its own behalf. The Company also will grant under its 1997 Long-Term Incentive
Plan options to purchase an aggregate of 450,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. An
additional shares will be available for issuance upon the exercise of options
which may be granted in the future under the Long-Term Incentive Plan. Upon
consummation of the Offering, the shares issuable upon exercise of any such
options will not have been registered under the Securities Act and, therefore,
when issued will be subject to resale restrictions imposed by the Securities
Act. However, the Company intends to register such shares shortly after the
consummation of the Offering. All of the directors and officers of the Company
and each of the Existing Stockholders holding, in the aggregate, shares of
Common Stock and options to purchase an aggregate of shares of Common Stock will
agree with the Underwriters that they will not, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale, contract
of sale, pledge, grant of any option to purchase or other sale or disposition)
any shares of Common Stock or other capital stock or any securities convertible
into or exercisable or exchangeable for, or any rights to purchase or acquire
any shares of Common Stock or other capital stock of the Company for a period of
180 days after the date of this Prospectus without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters (the "180 Day
Lockup"). Prudential Securities Incorporated may, in its sole discretion, at any
time and without notice, release all or any portion of the shares of Common
Stock subject to such agreement. Upon the expiration of the 180 Day Lockup,
these shares will become eligible for sale subject to the restrictions and
volume limitations of Rule 144. Sales of substantial amounts of such shares in
the public market or the availability of such shares for future sale could
adversely affect the market price of the Common Stock and adversely affect the
Company's ability to raise additional capital through an offering of its equity
securities. See "Shares Eligible for Future Sale" and "Underwriting."
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REORGANIZATION OF THE COMPANY
Reorganization of the Company
800-JR Cigar was formed in March 1997 in the State of Delaware as
the holding company for the Constituent Entities. Simultaneously with the
consummation of the Offering, the Existing Stockholders will, pursuant to a
contribution agreement (the "Contribution Agreement"), contribute to the Company
100% of the capital stock of each of (i) J.R. Tobacco of America, Inc., a North
Carolina corporation, (ii) Cigars by Santa Clara, N.A., Inc., a North Carolina
corporation, (iii) J.N.R. Grocery Corp., a New York corporation, (iv) J.R.
Tobacco NC, Inc., a North Carolina corporation, (v) J&R Tobacco (New Jersey)
Corp., a New Jersey corporation, (vi) J.R. Tobacco Company of Michigan, Inc., a
Michigan corporation, (vii) J.R.-46th Street, Inc., a New York corporation,
(viii) J.R. Tobacco Outlet, Inc., a New Jersey corporation and (ix) J.R.
Statesville, Inc., a North Carolina corporation (collectively, the "Constituent
Entities") in exchange for shares (approximately % of the outstanding
Common Stock of the Company after the Offering or % if the Underwriters'
overallotment option is exercised in full). The foregoing transactions are
referred to herein as the "Reorganization." The Reorganization will close
simultaneously with, and is a condition precedent to, the Offering. For further
information regarding the Reorganization, see Notes 1 and 8 to the Predecessor
Combined Financial Statements. See "Principal Stockholders."
Termination of S Corporation Status
Prior to the Reorganization, each of the Constituent Entities has
been treated as an S Corporation for federal income tax purposes under
Subchapter S of the Internal Revenue Code of 1986 (the "Code"), and in some
cases, for state corporate income tax purposes under comparable state laws. As a
result, each of the Constituent Entities' historical earnings have been taxed
directly to their respective stockholders and each of the Constituent Entities
has not been subject to income tax on such earnings. Following the
Reorganization, the Constituent Entities will no longer qualify as S
Corporations and the Company will be fully subject to federal and state income
taxes as a C corporation under the Code. Pursuant to the Contribution Agreement,
the Company will agree to cause the Constituent Entities to file all income tax
returns for periods during which the Constituent Entities were S Corporations
for U.S. federal income tax purposes or under comparable state and local tax
provisions, and the Existing Stockholders will agree to pay any taxes with
respect to such returns. The Existing Stockholders will also severally
(according to the relative percentage of the outstanding shares of the
Constituent Entity stock owned by each Existing Stockholder on the last day of
any applicable period to which a liability described below relates) and not
jointly, agree to indemnify and hold harmless the Company for all and any
federal, state or local income tax liabilities of the Constituent Entities
(including interest and penalties imposed thereon) which are attributable to a
taxable year beginning on or after the effective date of an election to be
treated as an S Corporation for federal, state or local income tax purposes, as
the case may be, and ending on the date preceding the Reorganization. The
determination of income allocable to the portion of the year in which the
Constituent Entities were S Corporations and in which they are C corporations
will be made using the "closing of the books" method. On the effective date of
the Reorganization, the Company will record a deferred tax asset on its balance
sheet. The amount of the deferred tax asset to be recorded as of the date of
termination of S Corporation status will depend upon temporary differences
between tax and book accounting methods relating principally to the deduction of
certain expenses for tax purposes. If the S Corporation status of the
Constituent Entities had been terminated as of December 31, 1995, the amount of
the deferred tax
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asset as of October 31, 1996 would have been approximately $700,000. See
"Capitalization," "Selected Financial Data" and Note 8 to the Predecessor
Combined Financial Statements.
Prior to the Reorganization, the Constituent Entities will pay a
dividend in the form of notes payable (the "Notes") to the Existing Stockholders
in the aggregate principal amount of $20.8 million. The principal amounts of the
Notes represent the estimated cumulative undistributed S Corporation earnings of
the Constituent Entities through May 15, 1997 on which income taxes are payable
by the Existing Stockholders. The Notes will be promissory notes bearing
interest at the rate of 7.0% per annum. Principal on the Notes will be paid in
equal quarterly installments over a three year period, and interest will be
payable quarterly as it accrues. The estimate used to determine the principal of
the Notes was net of loans receivable from the Existing Stockholders of $2.4
million, a distribution made in December 1996 of $0.8 million and anticipated
additional distributions to be made prior to the Offering in the amount of $5.0
million to enable the Existing Stockholders to pay income taxes on their
allocable portions of the Constituent Entities' 1996 and a portion of 1997
estimated undistributed S Corporation earnings. Prior to the Reorganization, the
Constituent Entities will also pay a dividend in the form of additional notes
payable (the "Additional Notes," and together with the Notes the "Distribution
Notes") to the Existing Stockholders with an aggregate initial principal amount
of $225 which amount shall be increased by an amount equal to the Constituent
Entities' S Corporation earnings from May 15, 1997 to the day preceding the
Reorganization as determined separately for each Constituent Entity. However,
any increases in S Corporation earnings of any Constituent Entity for the
taxable period of 1997 that such Constituent Entity was an S Corporation
(including the period through May 15, 1997) based upon the final S Corporation
tax returns or resulting from a final determination by the Internal Revenue
Service or a court increasing such Constituent Entity's S Corporation earnings
shall be added to the principal amount of the Additional Notes. The Additional
Notes will mature three years from the date of the Offering and will bear
interest at the rate of 7.0% per annum.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately , based on an assumed initial public offering price of
$ per share after deduction of underwriting discounts and commissions and
estimated offering expenses (approximately $ million if the Underwriters'
over-allotment option is exercised in full). Of such net proceeds, the Company
intends to use (i) $6.9 million to pay the current portion of the Distribution
Notes previously issued, which Distribution Notes represent estimated cumulative
undistributed S Corporation earnings on which taxes are payable by the Existing
Stockholders, net of loans receivable from such stockholders of $2.4 million, a
distribution of $0.8 million made in December 1996 and anticipated additional
distributions to be made prior to the Offering in the amount of $5.0 million to
enable such stockholders to pay income taxes on their allocable portions of the
Constituent Entities' 1996 and 1997 estimated undistributed S Corporation
earnings through the date of the Offering, (ii) approximately $10.0 million to
finance a new discount outlet store and warehouse facility, including inventory
costs, (iii) approximately $5.0 million to finance the expansion of retail
selling space at existing discount outlet stores, including inventory costs,
(iv) approximately $4.5 million to finance the relocation, redesign and
expansion of four existing specialty cigar stores, the acquisition of another
cigar store from a licensee of the Company and the opening of an entirely new
cigar store, (v) approximately $2.0 million to upgrade information systems and
graphics capabilities in connection with the expansion of direct mail
operations, (vi) $1.5 million to pay signing bonuses to an officer and MC
Management in connection with long-term services agreements and (vii)
approximately $8.6 million to repay outstanding indebtedness, of which
approximately $6.0 million had been incurred under notes issued pursuant to the
Credit Agreement (as defined herein), $2.5 million had been incurred under
mortgages and $0.1 million had been incurred under a note issued to a former
stockholder. The notes to be repaid under the Credit Agreement have outstanding
principal amounts of $1.9 million, $1.3 million and $2.8 million, respectively,
currently accrue interest at a rate of 6.6%, 8.25% and 7.5% per annum,
respectively, and mature in August 1998, September 1999 and May 2003,
respectively. The mortgages to be repaid have outstanding principal amounts of
$2.0 million, with annual interest at 8.25%, and $0.5 million, with annual
interest at the prime rate, respectively. These mortgages mature in October 2001
and December 1998, respectively. The note issued to a former stockholder accrues
interest at the rate of 12.0% per annum and matures in April 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The remainder of the net proceeds, if any, will be used by the
Company for general corporate purposes. Pending such uses, the net proceeds of
the Offering will be invested in short-term, investment grade securities and
interest bearing securities.
DIVIDEND POLICY
Following the Offering, the Company expects that earnings, if any,
will be retained by the Company for working capital and other general corporate
purposes and that, initially, the Company will not pay or declare any dividends
to its stockholders. In addition, the Credit Agreement prohibits, and any credit
arrangements into which the Company may enter in the future may restrict or
prohibit, the payment of dividends. Declaration or payment of dividends, if any,
in the future, will be at the discretion of the Company's Board and will depend
on the Company's then current financial condition, results of operations,
capital requirements and other factors deemed relevant by the Board.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
October 31, 1996 (i) on a historical combined basis, (ii) on a pro forma
combined basis assuming the consummation of the Reorganization, the issuance of
the Distribution Notes, the recording of a deferred tax asset concurrent with
the Constituent Entities becoming C corporations, and the recording of a
distribution made in December 1996 of $0.8 million and anticipated additional
distributions of $5.0 million to be made prior to the Offering to enable the
Existing Stockholders to pay income taxes on their allocable portions of the
Constituent Entities' 1996 and 1997 estimated undistributed S Corporation
earnings through the date of the Offering, and (iii) on a pro forma combined
basis as adjusted to reflect the non-recurring pre-tax charge of $1.5 million
($0.9 million on an after-tax basis) which the Company will accrue upon the
consummation of the Offering in connection with the execution of long-term
services agreements with an officer and MC Management, the sale of the 3,000,000
shares of Common Stock offered hereby at the offering price of $ per share and
the application of the estimated net proceeds therefrom.
The capitalization table should be read in conjunction with the
Predecessor Combined Financial Statements of the Company and the related notes
thereto included elsewhere herein. See "Reorganization of the Company," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
October 31, 1996
----------------------------------------------
(in thousands)
Pro Forma
Actual Pro Forma as Adjusted
------ --------- -----------
<S> <C> <C> <C>
Debt: (unaudited)
Current debt:
Current portion of long-term debt
and capital lease obligations......................... $ 2,198 $ 2,198 $
Current portion of Distribution Notes.................... 6,900
Distributions payable ................................... 5,795
--------- -------- ----------
Total current debt............................. $ 2,198 $ 14,893 $
========= ======== ==========
Long-term debt:
Long-term debt and capital lease obligations less current
portion............................................... $ 6,528 $ 6,528
Long-term portion of Distribution Notes.................. 13,900
--------- -------- ----------
Total long-term debt........................... $ 6,528 $ 20,428
Stockholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized; none issued and outstanding...............
Common Stock, $.01 par value, 40,000,000 shares
authorized; shares outstanding pro forma as
adjusted(1)...........................................
Common stock of Constituent Entities..................... 21 21
Additional paid-in capital............................... 28 (6,540)
Retained earnings........................................ 21,717 --
--------- -------- ----------
21,766 (6,519)
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Treasury stock, at cost.................................. (418) (418)
--------- -------- ----------
Total stockholders' equity (deficit).................. 21,348 (6,937)
--------- -------- ----------
Total capitalization.................................. $ 27,876 $ 13,491 $
========= ======== ==========
</TABLE>
(1) Excludes 450,000 shares of Common Stock subject to options to be
granted upon consummation of the Offering under the Company's 1997
Long-Term Incentive Plan. See "Management -- Long-Term Incentive
Plan."
19
<PAGE>
DILUTION
Purchasers of Common Stock offered hereby will experience an
immediate and substantial dilution in the net tangible book value of the Common
Stock from the initial public offering price. The pro forma combined net
tangible book value of the Company as of October 31, 1996 was approximately
$21.3 million, or $ per share. "Pro forma combined net tangible book value"
per share represents the pro forma tangible net worth (total tangible assets
less total liabilities) of the Company divided by the number of shares of Common
Stock outstanding after giving effect to the Reorganization, but before giving
effect to the sale of the Common Stock offered hereby. After giving effect to
the sale by the Company of the shares of Common Stock offered hereby (at an
assumed initial public offering price of $ per share less the underwriting
discounts and commissions and estimated offering expenses) the pro forma
combined net tangible book value of the Company at October 31, 1996 would have
been $ or $ per share. This represents an immediate increase in net
tangible book value of $ per share to the Existing Stockholders and an
immediate reduction in net tangible book value of $ per share to new
investors. Dilution is determined by subtracting the pro forma combined net
tangible book value per share after the Offering from the amount of cash paid by
a new purchaser for a share of Common Stock. The following table illustrates the
dilution described above on a per share basis:
Assumed initial public offering price.......................... $
--------
Net tangible book value at October 31, 1996.................... $
========
Pro forma net tangible book value at October 31, 1996
after giving effect to the issuance of the Distribution
Notes, the recording of a deferred tax asset, and the
recording of additional distributions......................
--------
Increase in pro forma net tangible book value attributable to
new investors.............................................. $
--------
Pro forma combined net tangible book value after the Offering..
--------
Dilution in net tangible book value to new investors........... $
========
The following table summarizes on a pro forma basis as of October
31, 1996, the difference between the number of shares of Common Stock purchased
from the Company, the total consideration and the average price per share deemed
to have been paid by the Existing Stockholders, and by new investors purchasing
the shares offered by the Company hereby at the assumed initial public offering
price of $ per share:
Shares Purchased Total Consideration
----------------- ------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
Existing stockholders % $ % $
New investors
------ ------- ------ -------
Total % $ %
====== ======= ====== =======
20
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(in thousands, except per share amounts)
The following table sets forth predecessor selected combined
financial data for the Company as of the dates and for the periods indicated.
The selected combined financial data as of and for the years ended December 31,
1993, 1994 and 1995 and as of and for the ten months ended October 31, 1996 have
been derived from audited predecessor combined financial statements of the
Company. The selected combined financial data as of and for the years ended
December 31, 1991 and 1992 and as of and for the years ended December 31, 1991
and 1992 and as of and for the ten months ended October 31, 1995 have been
derived from unaudited financial statements of the Company which, in the opinion
of management, have been prepared on a basis substantially consistent with the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary to present fairly the information for the
interim period. The results of such interim periods are not necessarily
indicative of the results for the full fiscal year. The following table also
includes certain unaudited pro forma combined statement of income data for the
year ended December 31, 1995 and the ten-month period ended October 31, 1996
which give effect to the Reorganization, the Offering, and certain other
adjustments as if they had occurred on January 1, 1995. The data presented below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Predecessor Combined
Financial Statements and the related notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
--------------------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data(1):
Net sales........................... $46,772 $54,258 $74,581 $109,297 $152,695 $121,934 $ 155,278
Cost of goods sold.................. 39,279 44,958 62,660 91,588 130,645 104,351 128,291
------- ------- -------- -------- -------- -------- ---------
Gross profit........................ 7,493 9,300 11,921 17,709 22,050 17,583 26,987
Selling, general and administrative
expenses........................ 6,422 7,147 9,714 14,450 18,768(2) 15,193(2) 17,013
Depreciation and amortization....... 282 263 361 447 493 379 558
------- ------- -------- -------- -------- -------- ---------
Income from operations.............. 789 1,890 1,846 2,812 2,789 2,011 9,416
Other income (expense):
Interest expense................ (401) (353) (481) (710) (785) (659) (681)
Other(3)........................ 978 488 404 454 308 235 548
------- ------- -------- -------- -------- -------- ---------
Income before income taxes and
cumulative effect of change in
accounting method............... 1,366 2,025 1,769 2,556 2,312 1,587 9,283
Provision (credit) for
income taxes.................... 151 168 160 257 (74) (115) 25
------- ------- -------- -------- -------- -------- ---------
Income before cumulative effect
of change in accounting
method.......................... 1,215 1,857 1,609 2,299 2,386 1,702 9,258
Cumulative effect of change in
accounting for income taxes..... -- -- 58 -- -- -- --
------- ------- -------- -------- -------- -------- ---------
Net income.......................... $ 1,215 $ 1,857 $ 1,667 $ 2,299 $ 2,386 $ 1,702 $ 9,258
======= ======= ======== ======== ======== ======== =========
</TABLE>
21
<PAGE>
Pro Forma Information Year Ended Ten Months Ended
(unaudited)(4): December 31, 1995 October 31, 1996
- --------------- ----------------- ----------------
Historical income before income taxes..... $ 2,312 $ 9,283
Pro forma adjustments other than income
taxes............................... 543 620
-------- --------
Pro forma income before provision for
income taxes........................ 2,855 9,903
Pro forma provision for income taxes...... 1,148 3,971
-------- --------
Pro forma net income...................... $ 1,707 $ 5,932
======== ========
Pro forma earnings per share(5)...........
======== ========
Pro forma common shares outstanding.......
======== ========
<TABLE>
<CAPTION>
At December 31, At October 31, 1996
--------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 Actual Pro Forma(6)
---- ---- ---- ---- ---- ------ ---------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ...................... $ 5,290 $ 5,921 $ 9,014 $10,845 $ 8,914 $16,946 $ 2,561
Total assets ......................... 12,719 16,108 22,692 29,951 32,670 42,636 40,946
Total long-term debt ................. 2,670 2,345 6,153 8,955 7,302 8,726 22,626
Total stockholders' equity (deficit) . 3,880 5,738 7,405 9,704 12,090 21,348 (6,937)
</TABLE>
- ------------------------
(1) Prior to the Reorganization, each of the Constituent Entities was treated
as an S Corporation and therefore was not subject to federal and, in some
cases, state income tax at the corporate level; as a result, income or
losses were passed through to respective stockholders. Accordingly,
predecessor combined historical financial statements do not include a
provision for federal and, in some cases, state income taxes. See Note 8
to the Predecessor Combined Financial Statements and note 4 below.
(2) Includes payment of legal fees and settlement costs in connection with
certain litigation with a former licensee in the amount of $1.0 million
for the year ended December 31, 1995, which includes $0.4 million for the
ten-month period ended October 31, 1995.
(3) Relates principally to rental income and interest income, and includes
receipt of $265,000 in partial payment of an insurance settlement for the
ten-month period ended October 31, 1996.
(4) The unaudited pro forma statement of income data for the year ended
December 31, 1995 and the ten-month period ended October 31, 1996 reflects
the Reorganization, the Offering and the following adjustments as if they
had occurred on January 1 of each period: (a) a decrease in aggregate
compensation from $1,511,000 to $400,000 for the year ended December 31,
1995 and $1,500,000 to $333,000 for the ten-month period ended October 31,
1996 for two of the Company's executives pursuant to new employment
agreements; (b) an increase in interest expense of $1,275,000 for the year
ended December 31, 1995 and $1,093,000 for the ten-month period ended
October 31, 1996, assuming the issuance of the Distribution Notes; (c) a
reduction in interest expense of $785,000 for the year ended December 31,
1995 and $681,000 for the ten-month period ended October 31, 1996 assuming
the application of proceeds from the Offering to repay all the Company's
indebtedness other than capital lease obligations; (d) a reduction in
interest income of $78,000 for the year ended December 31, 1995 and
$135,000 for the ten-month period ended October 31, 1996, assuming the
repayment to the Company of loans receivable from stockholders; and (e) an
increase of $1,263,000 for the year ended December 31, 1995 and $3,946,000
for the ten-month period ended October 31, 1996 for income taxes based
upon pro forma pre-tax income as if the Company had been subject to
federal and additional state income taxes. See "Reorganization of the
Company--Reorganization of the Company," "--Termination of S Corporation
Status" and "Management--Employment Agreements."
(5) Pro forma per share information is based on shares of Common Stock
outstanding prior to the Offering, increased by the sale of
shares of Common Stock assuming an initial public offering price of
$ per share ($ , net of underwriting discounts and
commissions and estimated offering expenses), the proceeds of which would
be necessary to pay approximately $6.9 million, the current portion of the
Distribution Notes. The net income used in the
22
<PAGE>
calculation of pro forma per share information has been: (i) increased by
the interest expense of $302,000 ($181,000 on an after-tax basis) for the
year ended December 31, 1995, and $282,000 ($169,000 on an after-tax
basis) for the ten-month period ended October 31, 1996 related to the
current portion of the Distribution Notes to be repaid from the proceeds
of the Offering; and (ii) decreased by the interest on debt of $785,000
($469,000 on an after-tax basis) for the year ended December 31, 1995, and
$681,000 ($401,000 on an after-tax basis) for the ten-month period ended
October 31, 1996.
Supplementary pro forma per share information for the year ended December
31, 1995, and the ten-month period ended October 31, 1996 are $ and
$ , respectively, based on shares of Common Stock outstanding
prior to the Offering, increased by (a) the sale of shares of Common
Stock assuming an initial public offering price of $ per share
($ , net of underwriting discounts and commissions and estimated
offering expenses), the proceeds of which would be necessary to pay
approximately $6.9 million, the current portion of the Distribution Notes,
and (b) the sale of shares of Common Stock assuming an initial public
offering price of $ per share ($ , net of underwriting
discounts and commissions and estimated offering expenses), the proceeds
of which would be necessary to repay approximately $8.6 million in
outstanding debt. The net income used in the calculation of supplementary
pro forma per share information is $1,888,000 and $6,101,000 for the year
ended December 31, 1995 and the ten-month period ended October 31, 1996.
Such net income has been increased by the interest expense of $302,000
($181,000 on an after-tax basis) for the year ended December 31, 1995, and
$282,000 ($169,000 on an after-tax basis) for the ten-month period ended
October 31, 1996 related to the current portion of the Distribution Notes
to be repaid from the proceeds of the Offering.
(6) Pro forma to reflect (i) the Reorganization; (ii) the issuance of the
Distribution Notes in the aggregate amount of $20,800,000 (such amount
estimated through the date of the Offering) which amount is net of loans
receivable from Existing Stockholders of $2,390,000; (iii) a distribution
of $795,000 made in December 1996 and anticipated additional distributions
of $5,000,000 to be made prior to the Offering, and (iv) a deferred tax
asset of approximately $700,000 which the Company will record concurrently
with the Constituent Entities becoming C corporations. See "Reorganization
of the Company" and "Certain Related Transactions."
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company is one of the largest distributors and retailers of
tobacco and tobacco related products in North America. The Company operates in a
large and highly fragmented industry characterized by multiple and relatively
undeveloped channels of distribution. Over its 27-year history in the cigar
industry, the Company has established itself as an important participant in the
movement of products from manufacturers to customers. Manufacturers benefit from
the Company's ability to perform a number of functions, such as distribution,
credit, customer support and marketing, which would otherwise be the
responsibility of the manufacturer. Customers benefit from the Company's
extensive variety of tobacco products, rapid order fulfillment and advantageous
pricing made possible through the Company's volume buying as an importer and
distributor. The Company's net sales have grown from $46.8 million in the year
ended December 31, 1991 to $152.7 million and $155.3 million in the year ended
December 31, 1995 and the ten-month period ended October 31, 1996, respectively.
The Company markets its products through two principal channels of
distribution: retail, consisting of the Company's premium cigar direct mail
business, five specialty cigar stores, and two large discount outlet stores; and
wholesale, consisting of the wholesale cigar mail order business and wholesale
cash-and-carry cigarette operations located within the Company's discount outlet
stores. The following table sets forth the Company's sales at the retail and
wholesale level by dollar amount and as a percentage of net sales.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------ Ten Months Ended
1994 1995 October 31, 1996
-------------------- ---------------------- ------------------------
$ % $ % $ %
------ ----- ------ ----- ------ -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Retail operations:
Direct mail cigars................ $ 18.1 16.6% $ 26.4 17.3% $ 27.9 18.0%
Cigar stores...................... 9.1 8.3 10.5 6.9 12.0 7.7
Discount outlet stores............ 45.0 41.2 52.1 34.1 47.9 30.8
------ ----- ------ ----- ------ -----
Total retail sales .......... 72.2 66.1 89.0 58.3 87.8 56.5
------ ----- ------ ----- ------ -----
Wholesale operations:
Direct mail cigars................ 18.4 16.8 25.2 16.5 26.9 17.3
Cash-and-carry cigarettes......... 18.7 17.1 38.5 25.2 40.6 26.2
------ ----- ------ ----- ------ -----
Total wholesale sales........ 37.1 33.9 63.7 41.7 67.5 43.5
------ ----- ------ ----- ------ -----
Total net sales......................... $109.3 100.0% $152.7 100.0% $155.3 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
The Company has built its reputation with customers as a retailer
and wholesaler of a wide selection of premium cigars at substantial savings. To
leverage its premium cigar business, the Company offers a variety of other
tobacco products, including mass market cigars, smokeless and pipe tobacco and
tobacco-related accessories. The Company is also a regional distributor and
retailer of
24
<PAGE>
cigarettes. In addition, the Company sells fragrances and general merchandise
primarily through its North Carolina discount outlet stores. The following table
sets forth the Company's sales per product category by dollar amount and as a
percentage of net sales:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------ Ten Months Ended
1994 1995 October 31, 1996
-------------------- ---------------------- ------------------------
$ % $ % $ %
------ ----- ------ ----- ------ -----
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Cigars/Tobacco*.............. $ 46.9 42.9% $ 65.5 42.9% $74.1 47.7%
Cigarettes................... 46.0 42.1 67.1 43.9 66.4 42.8
Fragrances................... 7.8 7.1 8.1 5.3 5.2 3.3
Other merchandise............ 8.6 7.9 12.0 7.9 9.6 6.2
------ ----- ------ ----- ------ -----
Total net sales......... $109.3 100.0% $152.7 100.0% $155.3 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
* Excludes cigarettes.
Results of Operations
The following discussion should be read in conjunction with the
Predecessor Combined Financial Statements and related notes thereto and
"Selected Combined Financial Data" appearing elsewhere herein. The following
table sets forth, as a percentage of net sales, certain items in the Combined
Statements of Income for the periods presented.
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31, 1996
-------------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Retail sales ................. 72.2% 66.1% 58.3% 54.4% 56.5%
Wholesale sales .............. 27.8 33.9 41.7 45.6 43.5
----- ----- ----- ----- -----
Net sales ........... 100.0 100.0 100.0 100.0 100.0
Cost of goods sold ................ 84.0 83.8 85.6 85.6 82.6
----- ----- ----- ----- -----
Gross profit ...................... 16.0 16.2 14.4 14.4 17.4
Selling, general and administrative
expenses ..................... 13.0 13.2 12.3 12.5 10.9
Depreciation and amortization ..... 0.5 0.4 0.3 0.3 0.4
----- ----- ----- ----- -----
Income from operations ............ 2.5 2.6 1.8 1.6 6.1
Other income (expense):
Interest expense ............. (0.6) (0.6) (0.5) (0.5) (0.4)
Other ........................ 0.5 0.3 0.2 0.2 0.3
Income before income taxes ........ 2.4 2.3 1.5 1.3 6.0
Provision (credit) for income taxes 0.2 0.2 (0.1) (0.1) --
----- ----- ----- ----- -----
Net income ........................ 2.2% 2.1% 1.6% 1.4% 6.0%
===== ===== ===== ===== =====
</TABLE>
25
<PAGE>
Ten-Month Period Ended October 31, 1996 Compared to Ten-Month Ended October 31,
1995.
Net sales were $155.3 million and $121.9 million for the first ten
months of 1996 and 1995, respectively, an increase of $33.4 million or 27.3%.
Retail sales increased 32.4% to $87.8 million for the first ten months of 1996
from $66.3 million for the first ten months of 1995. The increase in retail
sales was due primarily to a $6.9 million, or 32.9%, increase in direct mail
cigar sales; a $4.0 million, or 50.0% increase in cigar store sales; and a $10.6
million or 28.4% increase in discount outlet store sales. Wholesale sales
increased 21.4% to $67.5 million for the first ten months of 1996 from $55.6
million over the same period in the prior year. The increase in wholesale sales
was due primarily to a $1.7 million, or 6.7%, increase in direct mail cigar
sales and a $10.1 million, or 33.1%, increase in cash-and-carry cigarette sales.
The overall increase in net sales was primarily attributable to increases in the
Company's retail and wholesale products sales, and in particular the sale of
premium cigars and cigar related products.
Gross profit was $27.0 million and $17.6 million for the first ten
months of 1996 and 1995, respectively, an increase of $9.4 million or 53.5%. The
increase in gross profit was due primarily to the increase in cigar sales, which
have higher profit margins. As a percentage of net sales, gross profit increased
to 17.4% for the first ten months of 1996 from 14.4% for the first ten months of
1995, primarily due to an increase in unit volume and prices of higher margin,
premium cigars.
Selling, general and administrative ("SG&A") expenses were $17.0
million and $15.2 million for the first ten months of 1996 and 1995,
respectively, an increase of $1.8 million or 12.0%, primarily due to increased
staffing and other costs, including costs related to the relocation and opening
of the Company's cigar store and administrative offices in Whippany, New Jersey.
SG&A expenses in 1995 included a charge of $0.4 million in connection with legal
and settlement costs related to certain litigation with a former licensee. As a
percentage of net sales, SG&A expenses decreased to 10.9% for the first ten
months of 1996 from 12.5% for the first ten months of 1995, due primarily to net
sales increasing at a greater rate than SG&A expenses.
Income from operations was $9.4 million and $2.0 million for the
first ten months of 1996 and 1995, respectively, an increase of $7.4 million. As
a percentage of net sales, income from operations increased to 6.1% for the
first ten months of 1996 from 1.6% for the first ten months of 1995, primarily
due to the increase in sales of higher margin, premium cigars.
Interest expense was unchanged at $0.7 million for the first ten
months of 1996 and 1995, as the Company maintained the same level of funded
indebtedness commensurate with the prior year. Other income was $0.6 million and
$0.2 million for the first ten months of 1996 and 1995, respectively. Other
income from 1996 included $0.3 million from an insurance settlement.
As a result of the foregoing, the Company had net income of $9.3
million in the first ten months of 1996, compared to $1.7 million in the first
ten months of 1995, an increase of $7.6 million.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994.
Net sales were $152.7 million and $109.3 million in 1995 and 1994,
respectively, an increase of $43.4 million or 39.7%. Retail sales increased
23.3% to $89.0 million in 1995 from $72.2 million in 1994. The increase in
retail sales was due primarily to a $8.3 million, or 45.9%, increase in direct
mail cigar sales; a $1.4 million, or 15.4%, increase in cigar store sales; and a
$7.1 million, or 15.8%, increase in discount outlet store sales. Wholesale sales
increased 71.7% to $63.7 million from $37.1 million in 1994. The increase in
wholesale sales was due primarily to a $6.8 million, or 37.0%, increase in
direct mail cigar sales and a $19.8 million, or 105.9%, increase in
cash-and-carry cigarette
26
<PAGE>
sales. The overall increase in net sales was a result of increased sales of
premium cigars and related products, higher levels of cigarette sales and, to a
lesser extent, general merchandise.
Gross profit was $22.0 million and $17.7 million in 1995 and 1994,
respectively, an increase of $4.3 million or 24.5%. The increase in gross profit
for 1995 was due in large part to sales increases in premium cigars and
cigarettes and, to a lesser extent, sales of general merchandise. As a
percentage of net sales, gross profit decreased to 14.4% in 1995 from 16.2% in
1994, primarily due to the impact of greater sales of lower-margin wholesale
cigarettes.
SG&A expenses were $18.8 million and $14.5 million in 1995 and 1994,
respectively, an increase of $4.3 million or 29.9%, primarily due to costs
related to the improvement of and move to the Company's Whippany, New Jersey
location and a charge of $1.0 million in connection with legal and settlement
costs in 1995 relating to certain litigation with a former licensee. SG&A
expenses decreased as a percentage of net sales to 12.3% in 1995 from 13.2% in
1994, however, primarily due to net sales increasing at a greater rate than SG&A
expenses.
Income from operations remained unchanged at $2.8 million in 1995
and 1994. As a percentage of net sales, income from operations decreased to 1.8%
in 1995 from 2.6% in 1994, primarily due to an increase in SG&A expenses and
higher sales of lower-margin cigarettes.
Interest expense increased to $0.8 million in 1995 from $0.7 million
in 1994 as moderately higher borrowing was partially offset by lower interest
rates. Other income was $0.3 million and $0.5 million in 1995 and 1994,
respectively, due to lower rental income offset by an increase in interest
income.
As a result of the foregoing, the Company had net income of $2.4
million in 1995, compared to $2.3 million in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993.
Net sales were $109.3 million and $74.6 million in 1994 and 1993,
respectively, an increase of $34.7 million or 46.5%. Retail sales increased
36.2% to $72.2 million in 1994 from $53.0 million in 1993. The increase in
retail sales was due primarily to a $5.9 million, or 48.4%, increase in direct
mail cigar sales; a $0.6 million, or 7.1%, increase in cigar store sales; and a
$12.7 million or 39.3%, increase in discount outlet store sales. Wholesale sales
increased 71.8% to $37.1 million, from $21.6 million over the same period. The
increase in wholesale sales was due primarily to a $5.2 million, or 39.4%,
increase in direct mail cigar sales and a $10.3 million, or 122.6%, increase in
cash-and-carry cigarette sales. The overall increase in net sales was primarily
due to the completion of the first full year of operations of a second discount
outlet store which opened in late 1993 and the increase in retail and wholesale
sales of premium cigars. Also contributing to the increase in net sales were
increased sales of cigarettes.
Gross profit was $17.7 million and $11.9 million in 1994 and 1993,
respectively, an increase of $5.8 million or 48.6%. The increase in gross profit
for 1994 was due to the higher sales level of tobacco product lines. As a
percentage of net sales, gross profit increased to 16.2% in 1994 from 16.0% in
1993.
SG&A expenses were $14.5 million and $9.7 million in 1994 and 1993,
respectively, an increase of $4.8 million or 48.8%, primarily due to the
increased costs associated with the operation of a second discount outlet store.
As a percentage of net sales, SG&A expenses increased to 13.2% in 1994 from
13.0% in 1993.
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<PAGE>
Income from operations was $2.8 million and $1.8 million in 1994 and
1993, respectively, an increase of $1.0 million or 52.3%. As a percentage of net
sales, income from operations increased to 2.6% in 1994 from 2.5% in 1993,
primarily due to improved sales and gross profits.
Interest expense increased to $0.7 million from $0.5 million in
1994 and 1993, respectively. The increase of $0.2 million was primarily due to
the higher level of debt incurred to support operations and the purchase of real
estate for a new cigar store location. Other income was $0.5 million and $0.4
million in 1994 and 1993.
As a result of the foregoing, the Company had net income of $2.3
million in 1994, compared to $1.7 million in 1993.
Quarterly Results of Operations; Seasonality
The following table sets forth unaudited combined financial data for
each of the preceding seven quarters.
<TABLE>
<CAPTION>
Year ended December 31, 1995 Year ended December 31, 1996
----------------------------------- ----------------------------
First Second Third Fourth First Second Third
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.......... $28,902 $36,518 $41,531 $45,744 $39,896 $46,530 $50,856
Gross profit....... 4,145 5,207 6,003 6,695 7,010 8,150 8,890
Income (loss) from
operations...... (696) 824 1,223 1,438 2,499 3,124 3,648
Net income (loss).. (651) 684 1,077 1,276 2,739 2,960 3,589
</TABLE>
The Company historically has experienced and expects to continue to
experience certain seasonal fluctuations in its sales and net income. The
Company generally has experienced increases in sales and net income from the
summer vacation season through the Christmas holiday season. The Company expects
this seasonality to continue for the foreseeable future. The Company's quarterly
results of operations may also fluctuate as a result of a variety of factors,
including the timing of store expansions, relocations and new store openings and
the net sales contributed by such stores.
Liquidity and Capital Resources
The Company historically has financed its business through
internally generated funds, bank debt and loans from certain of the Existing
Stockholders. The Company's net cash provided by operating activities was $6.1
million for the ten-month period ended October 31, 1996. Net cash used in
investing activities during such period was $3.5 million, of which $2.8 million
was related to construction of the Company's Whippany headquarters, warehouse
facility and retail store. Net cash used in financing activities was $1.1
million for the ten-month period ended October 31, 1996, primarily for repayment
of debt.
The Company's net cash provided by operating activities was $4.6
million for fiscal 1995. Net cash used in investing activities was $3.1 million
during such period, relating primarily to capital expenditures at the Company's
Whippany location. Net cash used in financing activities was $1.8 million in
fiscal 1995, primarily for repayment of debt.
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<PAGE>
At October 31, 1996, the Company had working capital of $16.9
million compared to $8.9 million at December 31, 1995. Working capital at
October 31, 1996 includes cash of $4.8 million, accounts receivable of $2.3
million, $21.0 million of inventory and $12.6 million of accounts payable and
accrued expenses.
At October 31, 1996, the Company had three long-term notes payable
to a bank totaling $6.0 million issued pursuant to an Amended and Restated
Credit Agreement (the "Credit Agreement"). The three notes, which bear interest
at rates of 6.6%, 8.25% and 7.5% per annum, respectively, had outstanding
balances at October 31, 1996 of $1.9 million, $1.3 million and $2.8 million,
respectively, and mature in August 1998, September 1999 and May 2003,
respectively. The Company also has available under the Credit Agreement a $4.0
million line of credit, with borrowings thereunder accruing interest at the
bank's base rate less 0.5% or the London Interbank Offered Rate ("LIBOR") plus
2.0%. At October 31, 1996, the Company had no borrowings under this line of
credit. The Credit Agreement contains certain affirmative covenants, including
that the Company maintain specific minimum financial ratios and minimum levels
of inventory, and various negative covenants, including prohibitions, subject to
certain limitations, against (i) capital expenditures in excess of $300,000 per
year, (ii) incurrence of any additional indebtedness other than accounts payable
and those created in the ordinary course of business, (iii) the declaration or
payment of dividends, (iv) the acquisition of assets of any entity and (v) the
consolidation or merger with any entity. Borrowings under the line of credit and
the notes payable are secured by all of the Company's accounts receivable and
certain inventory, furniture and fixtures and are personally guaranteed by
certain of the Existing Stockholders in an amount up to $1.0 million in the
aggregate. The notes will be repaid with the proceeds of the Offering and the
Credit Agreement will terminate. The Company intends to enter into a new credit
agreement to provide working capital and to fund other general corporate
purposes.
At October 31, 1996, the Company also had a mortgage in the amount
of $2.0 million, with a fixed interest rate of 8.25%, which is secured by
certain property, equipment and improvements at the Whippany location. The
Company also had a mortgage in the amount of $0.5 million at October 31, 1996,
with interest floating at the bank's prime rate (8.25% at October 31, 1996),
which is secured by certain property, equipment and improvements at one of the
Company's discount outlet stores. These mortgages mature in October 2001 and
December 1998, respectively. In addition, at October 31, 1996, the Company had
outstanding notes issued to a former stockholder of the Company in the aggregate
amount of $135,000, of which $105,000 is payable in monthly installments through
December 1997 and $30,000 is payable in monthly installments through April 1998.
Such notes accrue interest at 12% per annum. Each of the aforementioned
mortgages and notes will be repaid with the proceeds of the Offering. See
"Certain Related Transactions."
As part of its growth strategy over the course of the next 18
months, the Company intends to relocate, redesign and expand four existing
specialty cigar stores, acquire another cigar store from a licensee of the
Company and open an entirely new cigar store. Over the same period, the Company
also intends to expand retail space at its existing discount outlet stores, open
a new discount outlet store and add an additional cigarette cash-and-carry
operation within that discount outlet store. The Company currently estimates
that its capital expenditures relating to its expansion plans (exclusive of
inventory costs) will total approximately $7.5 million in 1997 and $7.0 million
in 1998, depending upon a number of factors, including the number and size of
any such facilities, and the availability of project related financing.
The Company believes that the proceeds of the Offering, together
with internally generated funds and amounts available under lines of credit,
will provide sufficient cash to meet the Company's capital and other cash
requirements for the foreseeable future.
29
<PAGE>
BUSINESS
General
800-JR Cigar is one of the largest distributors and retailers of
tobacco and tobacco related products in North America. The Company's primary
products consist of premium cigars, mass market cigars and cigarettes which are
distributed to retail and wholesale customers. Management believes that the
Company ranks as the largest retailer of brand name cigars in the United States.
In addition, the Company is the largest customer for many of the world's leading
cigar manufacturers, including Consolidated Cigar Holdings Inc. ("Consolidated
Cigar"), General Cigar Holdings ("General Cigar"), Swisher International Group,
Inc. ("Swisher") and Villazon & Company Inc. ("Villazon"). The Company believes
that its success is due, in part, to its ability to purchase in large quantities
from a broad range of suppliers, thereby serving its retail and wholesale
customers as the leading source for competitively priced, high-quality,
nationally branded and proprietary branded premium cigars and other tobacco
products. The Company's net sales have increased at a compound annual growth
rate of 34.4%, from $46.8 million in 1991 to $152.7 million in 1995. Net sales
for the ten-month period ended October 31, 1996 were $155.3 million.
The Company's premium cigars (imported, hand-made and hand-rolled
cigars made with long filler and all natural tobacco leaf) consist of
approximately 150 premium brands, of which 43 are the Company's proprietary
brands. The Company's proprietary products include nationally recognized brand
names such as Belinda(R), Casa Blanca(R), El Rey del Mundo(R), 5 Star
Seconds(R), Jose Marti(TM), J-R Alternative(R), J-R Ultimate(R), La Finca(R),
Rosa Cuba(TM) and Santa Clara(R). The Company's highest gross margins are
generated from the sale of premium cigars and, as such, it has targeted premium
cigars as its primary growth vehicle. For the ten-month period ended October 31,
1996, sales of cigars and tobacco products, other than cigarettes, totaled $74.1
million, or 47.7% of net sales, and represented 65.4% of the Company's total
gross profit. The cigarette products sold by the Company consist of all major
brands produced by the leading U.S. cigarette manufacturers. Cigarette sales
represented $66.4 million, or 42.8% of net sales, during the ten-month period
ended October 31, 1996. The Company also offers a variety of discounted general
merchandise, including fragrances and apparel, through its stores. During the
ten-month period ended October 31, 1996, sales of such non-tobacco products
totaled $14.8 million, or 9.5% of net sales.
The Company markets tobacco products on a retail basis throughout
the United States by direct mail and through five specialty cigar stores and two
large discount outlet stores. Its mail order catalog provides one of the largest
selections of high quality premium cigars at substantial savings, and management
believes that its mail order sales are the largest among the world's catalog
retailers of cigars. The Company's five specialty cigar stores feature a broad
selection of premium cigars, and serve as destination stores for customers
seeking high quality products at competitive prices. During 1996, the Company
opened an award-winning upscale cigar store in Whippany, New Jersey, which
achieved over $5.0 million in sales in its initial nine months of operation. The
Company intends to incorporate certain characteristics of the Whippany location
in its expansion plans for existing store renovations and new store openings.
The Company's two large discount outlet stores are located on major interstate
highways in North Carolina, a "tobacco-friendly" state with lower tobacco excise
taxes relative to other eastern states. The discount outlet stores capitalize
upon the draw of tobacco products, particularly premium cigars and cigarettes,
to market a variety of discounted general merchandise. The Company achieved
$87.8 million in total retail sales for the ten-month period ended October 31,
1996, representing 56.5% of net sales.
30
<PAGE>
The Company's wholesale activities consist predominantly of sales of
premium cigars through a catalog and sales of cigarettes through cash-and-carry
operations which are located at the Company's two discount outlet stores. Added
sales generated by the Company's wholesale operations enable the Company to earn
significant discounts on large volume purchases of cigars and related products,
and provide the Company with flexibility to determine the amount, timing and
channel of distribution by which it will most profitably sell its tobacco
products. The Company's wholesale customers include approximately 5,000 smoke
shops, restaurants, taverns, liquor stores and other retail outlets and
wholesale distributors throughout the United States. The Company achieved $67.5
million in wholesale sales for the ten-month period ended October 31, 1996,
representing 43.5% of net sales.
Market Overview
The Company is well known for its cigar business, principally for
the sale of premium cigars at discounted prices. Associated sales of other
discounted products, including cigarettes, general merchandise, fragrances,
apparel and other tobacco related products benefit from this recognition. The
Company has built its growth strategy upon its reputation as the leading
distributor of premium cigars in the United States.
The Company believes that there is an increasing market for cigars
generally and for premium cigars in particular. After declining from its peak in
1964 to its low in 1993, unit sales of cigars increased from 3.4 billion units
in 1993 to an estimated 4.4 billion units in 1996. Unit sales of premium cigars,
which had remained essentially flat from 1981 to 1993, increased from 110
million units in 1993 to an estimated 273 million units in 1996, increasing at a
compound annual growth rate of 35.4%. Unit sales of mass market large cigars
increased from 2.0 billion units in 1993 to an estimated 2.7 billion units in
1996, increasing at a compound annual growth rate of 9.6%. Based upon industry
sources, including the Cigar Association of America, the total market for cigars
in the United States is estimated to have been approximately $1.25 billion in
1996.
The Company believes that this increase in cigar sales is the result
of a number of factors, including (i) an improved image of cigar smoking
resulting from increased publicity, including the success of Cigar Aficionado
and Smoke magazines and the increased visibility of smoking by celebrities, (ii)
the emergence of an expanding base of younger, highly educated, professional
adults with a growing interest in luxury goods, (iii) an increase in the number
of adults over the age of 40 (a demographic group believed to smoke more premium
cigars than any other segment of the population) and (iv) the proliferation of
bars, clubs and other establishments in which premium cigar smoking is
encouraged.
The Company also profits by its high-volume retail and wholesale
cigarette business at its discount outlet stores. Although cigarette shipments
in the United States have declined at an average rate of 1% to 2% per year for
the past several years, the Company believes that the availability of cigarettes
at its discount outlet stores remain a popular draw for interstate travelers
seeking low-priced cigarettes. By offering cigarettes, fragrances and other
general merchandise at these locations, the Company operates under the
philosophy that diversification in its product mix encourages customers to
purchase multiple items and contributes to increased sales.
31
<PAGE>
Business Strategy
The Company's principal objective is to enhance its position as the
leading retailer and distributor of a full line of premium and mass market
cigars. The Company believes that its success is due, in part, to its ability to
purchase in large quantities from a broad range of suppliers, thereby serving
its retail and wholesale customers as the leading source for competitively
priced, high quality, nationally branded and proprietary brand tobacco products.
The principal elements of this business strategy include:
Offering a Broad Product Selection. The Company distinguishes itself
from its competition by offering its customers an unmatched selection of
products, including over 200 brands of premium and mass market cigars.
Manufacturers represented by the Company include Consolidated Cigar, General
Cigar, Swisher and Villazon, among others. The Company believes this strategy is
critical to its success, as retail customers are able to choose products ranging
in price, quality and name-recognition while wholesale customers are able to
satisfy substantially all of their supply needs from a single source.
Providing Value Prices. The Company's significant buying and selling
power enable it to earn volume discounts on purchases from vendors, and to pass
a portion of those savings on to customers in the form of discounted prices. In
addition, the Company markets an extensive selection of value-priced, private
label premium cigars under the J-R Alternative(R) brands, which the Company
believes compare favorably to nationally branded cigars which generally sell at
substantially higher prices.
Leveraging Long-Standing Relationships with Manufacturers. With over
25 years of experience in the cigar industry, the Company has developed strong,
long-standing relationships with cigar manufacturers and has secured a
reputation as the leading distributor of branded cigars in North America. The
Company believes that its present and future ability to obtain an advantageous
supply of desirable brand name cigars in an industry recently characterized by
shortages has been due in part to the strength of these relationships.
Building Upon Leading Proprietary Cigar Brands. The Company's J-R
line of cigars includes 43 premium brands and four mass market brands. Many of
the Company's proprietary premium cigars, such as Belinda(R), Casa Blanca(R), El
Rey del Mundo(R), 5 Star Seconds(R), Jose Marti(TM), J-R Alternative(R), J-R
Ultimate(R), La Finca(R), Rosa Cuba(TM) and Santa Clara(R), have gained national
prominence and have achieved high ratings from Cigar Aficionado magazine.
Generally, sales of its proprietary cigars generate the Company's highest gross
margins. Consequently, sales of such products enable the Company
opportunistically to sell non-proprietary brands at lower prices while
maintaining targeted gross profit margins for its total premium cigar business.
The Company intends to leverage its advantageous supply and pricing position to
attract new wholesale and retail customers and increase sales to existing
customers for its proprietary brands.
Leveraging Multiple Channels of Distribution. The Company maintains
distinct competitive operating advantages by operating retail and wholesale
distribution channels. In the highly fragmented cigar industry, the breadth of
the Company's distribution network has rendered it an important contributor in
the efficient movement of products from the manufacturer to the end-user.
Manufacturers benefit from the Company's ability to perform a number of
functions, such as distribution, credit, customer support and marketing, which
would otherwise be the responsibility of the manufacturer. Customers benefit
from the Company's extensive variety of tobacco products, rapid order
fulfillment and advantageous pricing made possible through volume buying as a
direct importer and distributor. By operating in multiple distribution channels,
the Company is able to determine the amount, timing and manner by which it will
most profitably sell its tobacco products.
32
<PAGE>
Emphasizing Customer Service. Direct mail and store sales personnel
are trained to educate customers on the relative merits of cigar products, and
to assist customers in making informed purchasing decisions. The Company
believes that this practice has earned it a widely-held reputation for honesty
and integrity which has resulted in a significant level of customer retention.
The Company believes that the strength of its customer relationships provides it
with a distinct competitive advantage.
Growth Strategy
The Company's growth strategy is designed to capitalize on its
competitive strengths and the recent growth in the cigar industry. The principal
elements of the Company's growth strategy include:
Increasing Penetration of Retail Market. The Company plans to
increase retail sales of its products by: (i) expanding its direct mail
capabilities and increasing catalog circulation; (ii) relocating and
refurbishing existing stores while opening new specialty cigar stores; and (iii)
opening new discount outlet stores opportunistically and expanding retail square
selling space at its existing discount outlet stores.
Expanding and Strengthening Direct Mail Operations. The Company
intends to take advantage of the anticipated increase in demand for
and supply of premium cigars by increasing its customer base through
expanded circulation of its retail catalogs during 1997 and 1998. In
addition, the Company is funding projects to enhance the Company's
graphics and information systems and plans to expand shipping
facilities and telemarketing capabilities to accommodate growth in
sales volume.
Relocating, Redesigning and Expanding Existing Stores. During 1996,
the Company opened an award-winning upscale cigar store in Whippany,
New Jersey, which achieved over $5.0 million in sales in its initial
nine months of operation. Building upon the success of the Whippany
store, the Company plans to relocate, redesign and expand two of its
existing specialty cigar stores during the second half of 1997. The
Company also intends to acquire a cigar store from a licensee of the
Company in a major metropolitan area during the first half of 1997.
In 1998, the Company plans to open at least one new specialty cigar
store in a major metropolitan area and to relocate, redesign and
expand its two remaining specialty cigar stores.
Expanding and Opening Large Discount Outlet Stores. The Company
plans to increase sales at its existing discount outlet stores by
expanding its Selma store by 22,000 square feet by the end of 1997
and by converting the 25,000 square feet currently devoted to
warehouse and shipping at its Statesville store into additional
retail selling space during 1998. In addition, during 1998 the
Company plans to either construct a new shipping and warehouse
facility at Statesville or to relocate such facility to a new
discount outlet store scheduled to open in 1998.
Increasing Penetration of Wholesale Market. The Company plans to
increase penetration of the wholesale market by (i) increasing distribution of
its wholesale cigar catalog and expanding the range of tobacco-related products
it offers and (ii) adding an additional cigarette cash-and-carry operation.
Expanding and Strengthening Wholesale Cigar Business. The Company
plans to grow its wholesale cigar business by increasing circulation
of its wholesale catalog, increasing its average wholesale order
size by offering a greater variety of tobacco-related products and
establishing dedicated sources of supply, thereby limiting supply
shortages.
33
<PAGE>
Adding an Additional Cigarette Cash-and-Carry Operation. The Company
intends to open an additional cigarette cash-and-carry operation
within a new discount outlet store scheduled to open during the
second half of 1998 in a "tobacco-friendly" state in the
southeastern United States.
Increasing Dedicated Sources of Supply. Successfully implementing
the Company's retail and wholesale strategies depends upon an increasing supply
of premium cigars. The Company believes that the recent shortages of premium
cigars have enabled it to establish an industry-wide reputation as the leading
source of cigar products. The Company has directly or indirectly entered into
long-term agreements with Nicaraguan-American Tobacco Sociedad Anonima, S.A.
("NATSA") and Tabacalera Nacional Dominicana, S.A. ("TANDSA"), affiliated
entities which own and operate cigar manufacturing facilities in Nicaragua and
the Dominican Republic, respectively, for the production of the Company's own
brand name premium cigars. The Company expects that NATSA and TANDSA together
will produce 60,000 of the Company's cigars per day, representing approximately
30% of the Company's premium cigar requirements.
Increasing Presence in the Domestic Cigar Market. The Company also
intends to increase its presence in the growing mass market large cigar segment,
which includes machine-made cigars, such as White Owl(R) and Dutch Masters(R).
The Company believes the cigar market is characterized by shortages of name
brand premium cigars. As such, increased purchases of mass market large cigars
from the major manufacturers such as General Cigar, Consolidated Cigar and
Swisher will give the Company a relative buying advantage over its competitors
who seek to purchase only premium cigars from these suppliers. The Company plans
to continue to utilize its advantageous supply position to evaluate retail and
wholesale markets in an opportunistic manner and to distribute its products on a
cost-effective basis.
Marketing and Distribution
Retail Operations
The Company's retail operations are comprised of a premium cigar
direct mail operation through which the Company markets a variety of cigars and
tobacco related products, four specialty cigar stores in the New York
metropolitan area and one outside of Detroit, Michigan, and two discount outlet
stores in North Carolina. Sales generated by the Company's retail business
increased 32.4% to $87.8 million for the ten-month period ended October 31,
1996, representing 56.5% of net sales, compared to $66.3 million for the
ten-month period ended October 31, 1995, representing 54.4% of net sales.
Direct Mail. The Company markets a wide variety of premium cigars
(including its own brand names) and tobacco related products on a retail basis
throughout the United States by direct mail. For over 25 years, the Company has
maintained an extensive proprietary mail order list of regular customers. The
Company's average order size is presently over $100. Management utilizes its
mail order catalog as its primary advertising vehicle. Each glossy, color
catalog is replete with humorous asides and anecdotes written by Lew Rothman,
the Company's President and Chief Executive Officer, who views the retail
catalog as a means of personally communicating with the Company's established
customer base. The catalog frequently highlights the Company's proprietary
cigars and changes its product offerings and featured specials with each issue.
On average, each catalog offers 20 different brands of cigars from six different
countries; however, by dialing 1-800-JR-CIGAR, a customer can order any cigar or
tobacco accessory carried by the Company. In the event that the Company does not
have a product in stock, a customer may place an order to ship on arrival, or
knowledgeable telemarketers may direct the customer to similar products using
the Company's sophisticated database. The Company intends to increase the
frequency and circulation of its mail order catalog and introduce its own
website during 1997 as an additional means of advertising. Retail mail order
sales increased 32.9% to $27.9 million for the ten-month period ended October
31, 1996, representing 18.0% of net sales,
34
<PAGE>
compared to $21.0 million for the ten-month period ended October 31, 1995,
representing 17.2% of net sales.
Cigar Stores. The Company currently operates five specialty cigar
stores. The Company's strategy is to: (i) locate its stores in densely
populated, highly trafficked areas where demand for premium cigars is high; (ii)
maintain exceptional inventories of premium cigars and a limited inventory of
complementary items; and (iii) maintain fully humidified and climate-controlled
stores to ensure freshness. Comparable store sales increases were 45.2%, 16.4%
and 5.9%, respectively, for the ten-month period ended October 31, 1996, and the
fiscal years ended December 31, 1995 and 1994. The Company's Whippany store was
relocated and enlarged in 1996, and is not included in the comparable store
sales increase for the ten-month period ended October 31, 1996. Building upon
the success of the Whippany store, the Company plans to relocate, enlarge and
remodel its other cigar stores. Sales generated by the Company's specialty cigar
stores increased 50.0% to $12.0 million for the ten-month period ended October
31, 1996, representing 7.7% of the Company's net sales, compared to $8.0 million
for the ten-month period ended October 31, 1995, representing 6.6% of net sales.
Discount Outlet Stores. The Company operates two large discount
outlet stores. The Company's strategy for discount outlet store success is to:
(i) strategically locate its stores on interstate highways; (ii) leverage the
Company's reputation for quality cigars and cigarettes at discount prices; and
(iii) offer a broad and changing product mix to encourage multiple purchases. An
important factor contributing to its success is its status as a licensed
cigarette distributor in North Carolina for the major U.S. cigarette
manufacturers. Comparable store sales increases were 13.2%, 15.8% and 6.1%,
respectively, for the ten-month period ended October 31, 1996, and the fiscal
years ended December 31, 1995 and 1994. The Company's Statesville store was
opened in September 1993, and is not included in the 1994 comparable store
sales increase. Each discount outlet store maintains on the premises a wholesale
cigarette cash-and-carry operation and a specialty cigar store. Sales generated
by the Company's discount outlet stores increased 28.4% to $47.9 million for the
ten-month period ended October 31, 1996, representing 30.8% of net sales,
compared to $37.3 million for the ten-month period ended October 31, 1995,
representing 30.6% of net sales.
Wholesale Operations
Wholesale operations are a major component of the Company' success,
enabling it to purchase large quantities of tobacco products, particularly
cigars and cigarettes, at favorable prices. Furthermore, these operations
contribute to the Company's flexibility to determine the most profitable means
of satisfying demand for its products. The Company attributes its competitive
advantage over other distributors to: (i) a large quantity and variety of
products; (ii) a policy of no minimum order; (iii) convenience through "one-stop
shopping;" and (iv) competitive prices. Sales generated by the Company's
wholesale operations increased 21.4% to $67.5 million for the ten-month period
ended October 31, 1996, representing 43.5% of net sales, compared to $55.6
million for the ten-month period ended October 31, 1995, representing 45.6% of
net sales.
Catalog. The Company's wholesale mail order business focuses on the
sale of premium cigars through a comprehensive price list. The catalog offers a
wide selection of premium and mass market cigars and is distributed to
approximately 5,000 smoke shops, restaurants, taverns, liquor stores and other
retail outlets throughout the United States. Wholesale catalog sales increased
6.7% to $26.9 million in the ten-month period ended October 31, 1996,
representing 17.3% of net sales, compared to $25.2 million for the ten-month
period ended October 31, 1995, representing 20.6% of net sales.
Cash-and-Carry. The Company's cash-and-carry wholesale operations
are conducted on a walk-in basis at its discount outlet stores. Through these
operations, the Company sells a wide variety of premium, generic and deep
discount label cigarettes and, to a lesser extent, mass market cigars and
smokeless and pipe tobaccos. The Company's cash-and-carry sales increased 33.1%
to $40.6
35
<PAGE>
million in the ten-month period ended October 31, 1996, representing 26.1% of
net sales, compared to $30.5 million for the ten-month period ended October 31,
1995, representing 25.0% of net sales.
Products
Cigars and Other Tobacco Products
Sales of premium and mass market cigars and other tobacco products
increased 40.6% to $74.1 million in the ten-month period ended October 31, 1996,
accounting for 47.7% of net sales, compared to $52.7 million for the ten-month
period ended October 31, 1995, representing 43.2% of net sales.
Premium Cigars. Premium cigars are generally imported, hand-made or
hand-rolled cigars made with long filler and all natural tobacco leaf. Unit
sales of premium cigars in the United States increased by 10.7%, 14.5%, 30.5%
and an estimated 66.2% in 1993, 1994, 1995 and 1996, respectively. The Dominican
Republic, Honduras and Jamaica collectively accounted for approximately 84% of
premium cigars imported into the United States in 1995. Approximately 90% of the
cigars sold by the Company by dollar volume are premium cigars.
The Company sells approximately 150 brands of premium cigars, of
which 43 are the Company's proprietary brands. The Company ranks as the largest
single customer of many of the world's leading cigar manufacturers for premium
cigars. Sales of the Company's proprietary cigars historically represented
approximately 45% of the Company's total gross dollar cigar sales. The Company
offers most of its premium cigars at discounts ranging from approximately 20% to
60% off of manufacturers' suggested retail prices.
The Company believes that its proprietary premium cigars offer
excellent quality at affordable prices. These products are manufactured in
Honduras, the Dominican Republic, Nicaragua, Mexico and Jamaica. While premium
cigars generally sell at price points ranging up to $12.00 per unit, the
Company's proprietary premium cigars are typically sold at prices ranging
between $1.75 to $4.00 per unit, with J-R Alternatives selling at price points
ranging from $.75 to $1.50 per unit. In addition, the Company holds licenses to
distribute exclusively several brands of premium cigars, such as the Belinda and
El Rey del Mundo brands. Several of the Company's proprietary cigars, including,
among others, El Rey del Mundo, La Finca, Belinda, Casa Blanca, and Santa Clara,
have received among the highest ratings from Cigar Aficionado magazine. The
Company expects to launch two new premium cigar brands during the third quarter
of 1997: Remedios, which will be produced in the Canary Islands, Spain and La
Trinidad, which will be produced in the Dominican Republic.
The following list identifies brands of premium cigars manufactured
for the Company by country of origin:
Honduras: Belinda, Chivis, Consuegra, El Rey del Mundo, Honduran
Specials, J-R Alternative, J-R Ultimate, Jose Marti, La Finca,
Lew's Smokers, Maria Mancini, Mocha, Mocha Supreme, de Tena y Vega,
Vintage Hondurans.
Dominican Republic: Casa Blanca, Casa Blanca Reserve, Dominican
Estates, Five Star, 5 Star Seconds, J-R Alternative, J-R Special
Caribbean, J-R Special Corona, J-R Special Jamaicans, Jose Marti,
Matasa Seconds, Quorum, Royal Dominicana.
Nicaragua: Jose Marti, La Finca, Rosa Cuba, Villar y Villar.
Mexico: Mocambo, Santa Clara, Shane.
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Jamaica: J-R Alternative, Whitehall.
Philippines: Harrows.
Spain: La Fama.
Ireland: Mocambo Cigarillos.
Mass Market Large Cigars. Mass market large cigars generally are
domestic, machine-made cigars that use less expensive short filler tobacco and
are made with homogenized tobacco binders and either homogenized sheet wrappers
or natural leaf wrappers. Unit sales of mass market large cigars in the United
States decreased by 4.3% in 1993 and increased by 9.0% in 1994, 8.6% in 1995 and
an estimated 11.4% in 1996. Unit sales of more expensive mass market large
cigars using natural leaf wrappers, such as those sold by the Company, increased
by 12.9% in 1995.
The Company sells approximately 75 mass market large cigars,
including Garcia y Vega(R), White Owl(R), Tiparillo(R) and Dutch Masters(R), as
well as four brands of its own mass market large cigars. The Company's own mass
market large cigars sell at prices as low as $.50 per unit. These products are
manufactured for the Company in the United States and are sold under the brand
names Garcia Grande, Henry IV, J-R Famous and Mr. B.
Smokeless and Pipe Tobacco. The Company sells moist snuff, loose
leaf chewing tobacco, dry snuff, pipe tobacco and a variety of other related
tobacco products.
Tobacco Accessories. The Company sells a wide variety of tobacco
accessories, including, among other things, humidors, cigar cutters, pipes,
disposable lighters, cigar cases and ashtrays. While a small component of the
Company's overall business, sales of these products enable the Company to serve
as a one-stop shop for its customers.
Cigarettes
The Company purchases its cigarettes from major manufacturers for
resale in its discount outlet stores and from distributors for resale in certain
of its cigar stores, including brands such as Marlboro and Winston and discount
labels such as Basic and GPC. The availability of discount cigarettes generates
substantial customer traffic at the Company's two discount outlet stores. For
the ten-month period ended October 31, 1996, cigarette sales at the discount
outlet stores totaled $33.8 million. Overall cigarette sales increased 22.5% to
$66.4 million in the ten-month period ended October 31, 1996, representing 42.8%
of net sales, compared to $54.2 million for the ten-month period ended October
31, 1995, representing 44.5% of net sales.
Fragrances and Other Merchandise
The Company purchases a wide variety of designer fragrances and
specialty goods from distributors for resale in its discount outlet stores and,
to a lesser extent, its specialty cigar stores. Specialty goods include, among
other things, apparel, housewares, gift items and jewelry. The Company offers
all such products at discounted prices, with fragrances sold at prices ranging
from 20% to 75% off the manufacturers' suggested retail prices. The Company
ships fragrances and general merchandise to its specialty cigar stores at
targeted times during the year, such as the Christmas holiday season, to
increase sales. Sales of fragrances and other merchandise were $14.8 million for
the ten-month period ended October 31, 1996, representing 9.5% of net sales,
compared to $15.0 million for the ten-month period ended October 31, 1995,
representing 12.3% of net sales.
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Sources of Supply; Production
Cigar manufacturers have experienced shortages in raw materials
(principally properly aged tobacco) due to increased demand for premium cigars.
The Company, therefore, has also experienced shortages in supply and increasing
prices. Major manufacturers have recently increased production in an effort to
meet this increased demand. The Company purchases cigars from all leading
manufacturers including General Cigar, Consolidated Cigar, Swisher, Villazon,
Tabacalera A. Fuente, Plasencia and others. The Company believes that the
quality and strength of its business relationships with such manufacturers,
developed over a 25-year period, have positioned it to obtain a significant
portion of such increased production.
The Company has directly or indirectly entered into supply
agreements with NATSA and TANDSA, affiliated entities which own and operate
manufacturing facilities in Nicaragua and the Dominican Republic, respectively,
to enhance the supply of the Company's own brand name premium cigars. Pursuant
to such agreements, NATSA has begun to produce and has agreed to continue to
produce products exclusively for the Company and one-third of TANDSA's
production, which is scheduled to commence in May 1997, will be allocated to the
Company. The Company expects that, once fully operational, each of NATSA and
TANDSA will produce 50,000 and 10,000 units of premium cigars per day,
respectively, and will together represent approximately 30% of the Company's
premium cigar requirements. The Company believes that these efforts, as well as
those undertaken by the industry's major manufacturers, will enable the Company
to continue to implement its growth strategy. However, the Company has not
entered into formal contracts with any manufacturer, other than NATSA and
TANDSA. See "Certain Related Transactions -- Manufacturing Facility
Arrangements."
An important factor in the success of the Company's discount outlet
stores has been its status as a licensed cigarette distributor in North Carolina
for the major U.S. cigarette manufacturers. As a direct buying account, the
Company is eligible to participate in various goal-oriented promotions and to
receive display allowances, which enable it to pass substantial savings onto its
customers. Another important factor in discount store growth has been the
Company's experience in purchasing general merchandise directly from
manufacturers and other vendors at prices substantially below those generally
paid by conventional retailers. The Company regularly purchases overstocked or
overproduced items, including end-of-season and out-of-season merchandise. As a
result of the Company's relationships, experience and reputation for prompt
payment, many suppliers offer special purchasing opportunities to the Company
prior to attempting to dispose of merchandise through other channels.
Sales and Advertising
The Company has relied successfully upon the strength of its reputation
and word of mouth to achieve steadily increasing sales during years of industry
decline as well as industry prosperity. The Company's Chief Executive Officer,
Lew Rothman, is a well-known figure in the world of cigars and the Company's
products are widely reputed to be of high quality at affordable prices. As such,
the Company is frequently featured in articles printed by such publications as
Cigar Aficionado, Smoke, the Tobacconist and numerous newspapers. Consequently,
the Company has not been required to maintain a sales force or to expend
substantial amounts of money to promote its image or its products. Without
significant marketing expenditures, the Company is able to pass on savings in
the form of lower prices to its customers.
The Company conducts a limited amount of advertising in local
newspapers where its retail stores are located and on highway billboards located
within a 20 to 90 mile radius surrounding its discount outlet stores.
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Information Systems
Over the past several years, the Company has made a substantial
investment in its information systems, which has enabled it to more effectively
manage its inventory and sales levels. The Company intends to make additional
capital expenditures of approximately $2.0 million from the proceeds of the
Offering to upgrade and enhance the capabilities of its systems and to enhance
its graphics capabilities. The Company has engaged Computer Generated Solutions
Inc. and RMP Computer Science to review the Company's management information
systems. In addition, the Company plans to introduce its own website during 1997
as a cost-effective means of advertising.
Approximately 85% of purchased inventory is bar-coded by the
manufacturer, and the remaining inventory is coded alphanumerically by the
Company, thus enabling it to track all SKUs on its information systems. The
Company's headquarters and warehouse are electronically linked to each discount
outlet and cigar store location, enabling management to monitor sales and
inventory levels at each location by SKU. As a consequence, the Company is able
to identify the best-selling items and to forecast individual product demand.
The Company's proprietary software is able to identify low stock situations and
to communicate product re-orders directly to the Company's warehouse
instantaneously. The Company believes that this capability greatly reduces
out-of-stock situations in its retail outlets.
The Company's information systems have additional capabilities which
benefit its retail and wholesale premium cigar direct mail operations. For
example, telemarketers employed by MC Management, a management services company
providing administrative services to the Company, have access to the Company's
information systems. As a result, telemarketers are able to obtain in-stock
product information on a real time basis, as well as access a variety of
information regarding any cigar in which a customer may be interested, including
the cigar's strength, ring size, length, country of origin, wrapper color and
price as well as a list of comparable cigars to be recommended if the desired
cigar is out of stock. The Company's order entry systems are on-line with all
major credit cards, thereby enabling the Company to obtain instant credit checks
prior to the release of an order, reducing the Company's bad debt experience.
Intellectual Property
The Company believes its success and ability to compete are dependent
to a significant degree on its trademarks and licenses. The Company generally
owns its trademarks under which its proprietary cigar brands are sold. The
Company has registered its trademarks in the United States and will continue to
do so as new trademarks are developed or acquired. The Company owns the
following U.S. trademarks: Casa Blanca(R), Clemenceau(R), Consuegra(R),
Farach(R), 5 Star Seconds(R), Garcia y Garcia(R), Jeroboam(R), J-R Ultimate(R),
La Finca(R), Maria Mancini(R), Mocambo(R), Mocha(R), Perfecto Garcia(R),
Perfecto Garcia Crown Royals(R), Principales(R), Quorum(R), Remedios(R), Rey del
Rey(R), Reynitas(R), Robustos de Manuel Zavalla(R), Santa Clara(R) and
Whitehall(R). The Company has also registered the J-R(R) mark which precedes
Company brand names such as J-R Special Caribbean, J-R Special Corona and J-R
Special Jamaica. The J-R Alternative(R) brand name, which is used to market
cigars that are manufactured for the Company in Jamaica, the Dominican Republic
and Honduras, is also a registered trademark of the Company. In addition, the
Company has filed trademark applications for the following cigar names: El
Secreto del Rio Jagua(TM), Jose Marti(TM), Laguito(TM), LaMeca(TM),
Rectangulares(TM), Valentinos(TM) and Villar y Villar(TM). Each of the
aforementioned trademarks are valid for ten years from the date of registration
with the U.S. Patent and Trademark Office and are subject to renewals. The
Company also has licenses with Villazon to exclusively distribute the Belinda(R)
and El Rey del Mundo(R) premium cigars brands.
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With regard to its non-tobacco products, the Company also holds a
registered trademark for Cigarware(R), which it intends to use to market a line
of clothing. The Company has also filed a trademark application for its direct
mail telephone number 1-800-JR-CIGAR(TM).
Competition
The Company operates in a large and highly fragmented industry
characterized by multiple and relatively undeveloped channels of distribution.
Consequently, the Company believes that no single entity competes in all of its
lines of business, although several companies compete in one or more of its
market segments. The Company faces competition from numerous retail
establishments, direct mail retailers and wholesalers.
The Tobacco Industry
Regulation. The tobacco industry is subject to regulation at federal,
state and local levels. Federal law has recently required states, in order to
receive full funding for federal substance abuse block grants, to establish a
minimum age of 18 years for the sale of tobacco products, together with an
appropriate enforcement program. The recent trend is toward increasing
regulation of the tobacco industry, and the increase in popularity of cigars
could lead to an increase in regulation of cigars. A variety of bills relating
to tobacco issues have been introduced in the United States Congress, including
bills that would, if passed, (i) prohibit the advertising and promotion of all
tobacco products or restrict or eliminate the deductibility of such advertising
expenses; (ii) increase labeling requirements on tobacco products to include,
among other things, addiction warnings and lists of additives and toxins; (iii)
shift regulatory control of tobacco products and advertisements from the FTC to
the FDA; (iv) increase tobacco excise taxes; and (v) require tobacco companies
to pay for health care costs incurred by the federal government in connection
with tobacco related diseases. Hearings have been held on certain of these
proposals; however, to date, none of such proposals have been passed by
Congress.
In August 1996, the FDA published a final rule on tobacco in the
Federal Register in which it announced that nicotine is a drug and that it
therefore has jurisdiction over nicotine-delivery products, including cigarettes
and smokeless tobacco products, as medical devices. Specifically, the rule
prohibits a variety of activities relating to the sale of cigarettes and
smokeless tobacco. The provision prohibiting retailers from selling cigarettes,
cigarette tobacco or smokeless tobacco to persons under the age of 18, and
requiring retailers to check the photographic identification of every person
under the age of 27 became effective on February 28, 1997. Other measures are
scheduled to go into effect on August 28, 1997 and August 28, 1998. FDA has also
announced that, at some future point, it intends to apply additional
requirements, potentially including registration, listing, premarket
notification and approval, record-keeping and reporting requirements, and good
manufacturing practices. A number of tobacco companies and other entities have
filed legal proceedings challenging the FDA's assertion of jurisdiction to
regulate tobacco products. One tobacco company has proposed, as an alternative
to FDA regulation of tobacco products, a more limited set of restrictions on
cigarette sales and advertising aimed at curbing youth smoking. The Company is
unable to predict the effect on its business and profitability of the FDA rules
but, if upheld in court, such rules could have a material adverse effect on the
operations of the Company. Although these regulations are not currently
applicable to cigars, there can be no assurance that these regulations will not
be extended to include cigars in the future.
In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas, regulating point of sale placement and promotion and
requiring warning labels.
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Federal law has required health warnings on cigarettes since 1965 and
on smokeless tobacco since 1986. Although there is no federal law currently
requiring that cigars or pipe tobacco carry such warnings, California has
enacted legislation requiring that "clear and reasonable" warnings be given to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. In addition,
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. Although similar legislation has been introduced
in other states, no action has been taken. There can be no assurance that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation. Consideration at both the
federal and state level also has been given to consequences of tobacco smoke on
others who are not presently smoking (so called "second hand" smoke). There can
be no assurance that regulations relating to second hand smoke will not be
adopted or that such regulations or related litigation would not have a material
adverse effect on the Company's results of operations or financial condition.
The U.S. Environmental Protection Agency (the "EPA") published a report
in January 1993 with respect to the respiratory health effects of second hand
smoke, which concluded that widespread exposure to environmental tobacco smoke
presents a serious and substantial public health concern. Issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal Science reported that a chemical found in
cigarette smoke has been found to cause genetic damage in lung cells that is
identical to damage observed in many malignant tumors of the lung and, thereby,
directly links lung cancer to smoking. The National Cancer Institute also has
announced that it will issue a report in 1997 describing research into cigars
and health. The study and these reports could affect pending and future tobacco
regulation and litigation. See "--Litigation."
Increased cigar consumption and the publicity such increase has
received may increase the risk of additional regulation. There can be no
assurance as to the ultimate content, timing or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business.
Litigation. Historically, the cigar industry has experienced less
health-related litigation than the cigarette and smokeless tobacco industries
have experienced.
Litigation against the cigarette industry has historically been brought
by individual cigarette smokers. In 1992, the United States Supreme Court in
Cippollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts claims based on failure to warn
consumers about the health hazards of cigarette smoking, but does not preempt
claims based on express warranty, misrepresentation, fraud, or conspiracy. To
date, individual cigarette smokers' claims against the cigarette industry have
been generally unsuccessful. A jury in Florida, however, recently determined
that a cigarette manufacturer was negligent in the production and sale of its
cigarettes and sold a product that was unreasonably dangerous and defective,
awarding the plaintiffs a total of $750,000 in damages.
Current tobacco litigation generally falls within one of three
categories: class actions, individual actions (which have been filed mainly in
the State of Florida) or actions brought by individual states generally to
recover Medicaid costs allegedly attributable to tobacco-related illnesses. The
pending actions allege a broad range of injuries resulting from the use of
tobacco products or exposure to tobacco smoke and seek various remedies,
including compensatory and, in some cases, punitive damages together with
certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions.
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In May 1996, the Fifth Circuit Court of Appeals in Castano v. American
Tobacco, et al. reversed a Louisiana district court's certification of a
nationwide class consisting essentially of nicotine dependent cigarette smokers.
Notwithstanding the dismissal, new class actions asserting claims similar to
those in Castano have recently been filed in certain states. To date, two
pending class actions against major cigarette manufacturers have been certified.
The first case is limited to Florida citizens allegedly injured by their
addiction to cigarettes; the other is limited to flight attendants allegedly
injured through exposure to second hand smoke.
There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against the cigar
industry. The costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any material health-related litigation
against sellers of cigars, cigarettes or smokeless tobacco or suppliers to the
tobacco industry could have a material adverse effect on the Company's business.
Excise Taxes. Cigars and pipe tobacco long have been subject to
federal, state and local excise taxes, and such taxes have frequently been
increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. The federal excise tax rate on large cigars
(weighing more than three pounds per thousand cigars) is 12.75% of the
manufacturer's selling price, net of the federal excise tax and certain other
exclusions, capped at $30 per thousand cigars.
In the past, there have been various proposals by the federal
government to fund legislative initiatives through increases in federal excise
taxes on tobacco products. In 1993, the Clinton Administration proposed a
significant increase in excise taxes on cigars, pipe tobacco, cigarettes and
other tobacco products to fund the Clinton Administration's health care reform
program. The Company believes that the volume of cigars and pipe tobacco sold
would have been dramatically reduced if excise taxes were enacted as originally
proposed as part of the Clinton Administration's health care reform program.
Future enactment of significant increases in excise taxes, such as those
initially proposed by the Clinton Administration or other proposals not linked
specifically to health care reform, would have a material adverse effect on the
business of the Company. The Company is unable to predict the likelihood of the
passage or the enactment of future increases in tobacco excise taxes.
Tobacco products are also subject to certain state and local taxes.
Deficit concerns at the state level continue to exert pressure to increase
tobacco taxes. The number of states that impose excise taxes on cigars is 42.
State cigar excise taxes generally range from 2% to 75% of the wholesale
purchase price and are not subject to caps similar to the federal cigar excise
tax.
Employees
As of October 31, 1996, the Company had 591 employees, of whom 305 were
engaged in sales, seven in finance and administration, 87 in operations and 192
in various part-time and temporary capacities. As of October 31, 1996, MC
Management had 80 employees, including 66 telemarketers involved in retail and
wholesale direct mail operations. The Company will be required to hire
additional employees on a periodic basis in connection with the construction,
and subsequent operation, of future facilities and expanded direct mail
operations. The Company considers its relations with its employees to be good.
Legal Proceedings
The Company is not presently involved in any legal proceedings which,
if determined adversely to the Company, would have a material effect on the
Company.
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Properties
The Company's executive and administrative offices are located in
Whippany, New Jersey in a 33,000 sq. ft. building owned by the Company, which
includes an 8,200 sq. ft. upscale cigar store of which 1,200 square feet are
leased to an affiliate of the Company for operation of the El Rey del Mundo
Cigar Bar. See "Certain Related Transactions -- Other." The Company owns a
50,000 square foot discount outlet store and a 6,000 square foot specialty cigar
store located on nine acres in Selma, North Carolina. The Company plans to
expand its Selma facility during 1997 by connecting the specialty cigar store to
the main facility, thereby adding 22,000 square feet of retail selling space.
The Company also leases the following retail properties:
Lease Square
Location Expiration Date Footage
- -------- --------------- -------
17 E. 45th St., New York, NY December 31, 1999 3,000
217 Broadway, New York, NY September 30, 1997 900
Rt. 17S, Hasbrouck Heights, NJ December 31, 1997 1,600
Newtowne Plaza, Statesville, NC December 31, 2004 53,800
Northwestern Highway, Southfield, MI Month to Month 3,000
The Company expects to relocate and/or redesign each of its existing
specialty cigar stores as their respective leases expire.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth information concerning each of the
directors and executive officers and nominee directors and executive officers of
the Company:
Name Age Position
- ---- --- --------
Lew Rothman (1) 51 Chief Executive Officer, President and Director
LaVonda M. Rothman (1) 49 Executive Vice President, Secretary and Director
Maureen A. Colleton(1) 57 Director
Jane Vargas 38 Vice President and Director
Timothy P. Shannon 51 Chief Financial Officer
John Oliva* 54 Director
- ----------
* Appointment effective upon consummation of the Offering.
(1) Member of Nominating Committee.
Lew Rothman has been the President, Chief Executive Officer and a director of
the Company since March 1997 and the President, Chief Executive Officer and a
director of each of the Constituent Entities since 1970. He graduated from
Kansas State Teachers College in 1970 with a BA in Political Science and
Geography. He is the author of The Cigar Almanac and a contributing editor of
Smoke magazine.
LaVonda M. Rothman has been the Executive Vice President, Secretary and a
director of the Company since March 1997 and the Executive Vice President,
Secretary and a director of each of the Constituent Entities since 1970.
Maureen A. Colleton has been President of MC Management since 1990 and has been
a director of the Company since March 1997. She graduated from Brooklyn College
in 1960 with a BA in Marketing.
Timothy P. Shannon has been the Chief Financial Officer of the Company since
December 1996. From 1992 to 1996, he was a Vice President and Regional Manager
of Fleet Bank N.A., successor to National Westminster Bank (May 1996) and
Citizens First National Bank (October 1994). He graduated from St. John's
University in 1967 with a BA in Economics and from Fordham University Graduate
School in 1974 with an MBA in Finance.
Jane Vargas has been a Vice President and director of the Company since March
1997 and has been a Vice President of MC Management since 1990. Prior to joining
MC Management, Ms. Vargas was an Assistant Vice President for Horizon Bank. She
graduated from St. Peter's College in 1980 with a BS in Accounting.
John Oliva will be appointed a director of the Company effective upon the
consummation of the Offering. Since 1980, he has been the President and a
director of Oliva Tobacco Company, one of the largest tobacco leaf growers in
the world. Mr. Oliva graduated from the University of Florida in 1966 with a BS
in Industrial Engineering.
The Company intends to elect two additional independent directors effective upon
the consummation of the Offering. Lew Rothman and LaVonda M. Rothman are
married.
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Board of Directors
The number of directors on the Board is fixed at seven. The Board is
divided into three classes, with each class serving for a term of three years.
One class stands for re-election at each annual meeting of stockholders. The
Board is composed of two Class I directors (Jane Vargas and one independent
director to be elected), two Class II directors (John Oliva and Maureen A.
Colleton) and three Class III directors (Lew Rothman, LaVonda M. Rothman and one
independent director to be elected) whose terms will expire upon the election
and qualification of directors at the annual meetings of stockholders held in
1998, 1999 and 2000, respectively. At each annual meeting of stockholders,
directors will be elected by the stockholders of the Company for a full term of
three years to succeed those directors whose terms are expiring. Officers are
appointed by and serve at the discretion of the Board.
The Executive Committee of the Board currently consists of three
members. Except as otherwise provided by law or by the By-laws of the Company,
the Executive Committee may exercise all of the powers and authority of the
Board in the management of the Company's business. The current members of the
Executive Committee are Lew Rothman, LaVonda M. Rothman and Maureen A.
Colleton.
The Board will establish an Audit Committee which will consist of at
least two members. The Audit Committee recommends the appointment of auditors
and oversees the accounting functions of the Company.
The Board will establish a Stock Option and Compensation Committee
which will consist of at least two members. The Stock Option and Compensation
Committee determines officers' salaries and bonuses and administers the grant of
stock options and other awards pursuant to the Long-Term Incentive Plan. See "--
Executive Compensation -- Compensation Committee Insider Participation."
The Nominating Committee of the Board will consist of three members.
The Nominating Committee considers and recommends to the Board nominees for
election to the Board. The members of the Nominating Committee will be Lew
Rothman, LaVonda M. Rothman and Maureen A. Colleton.
Compensation of Directors
Directors who are employees of the Company will not receive
additional compensation for serving as directors. Each director who is not an
employee of or otherwise a consultant to the Company will receive an annual
retainer fee of $20,000 plus a fee of $900 for attendance at each meeting or
committee meeting (unless held on the same day as a Board meeting) of the Board,
as well as an automatic stock option grant pursuant to the Company's 1997
Non-Employee Directors' Stock Plan (see description below). All directors of the
Company will be reimbursed for out-of-pocket expenses incurred in attending
meetings of the Board or committees thereof, and for other expenses incurred in
their capacity as directors of the Company.
Executive Compensation
The Company was incorporated in March 1997. Accordingly, no
compensation has been paid to any of its executive officers.
During 1996, Lew Rothman and LaVonda M. Rothman, each of whom were
officers of the Constituent Entities, received $158,334 in salary. In addition,
both officers received $750,000 in other compensation in partial satisfaction of
income tax liabilities relating to his or her allocable portion of S Corporation
earnings. No other executive officer received compensation in excess of $100,000
during 1996.
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Employment Agreements
Each of Lew Rothman, LaVonda M. Rothman, and Jane Vargas has entered
into a three-year employment agreement with the Company providing, effective
upon the consummation of the Offering, for an annual base salary of $200,000,
$200,000 and $105,000, respectively. The agreements also provide that each
employee shall be entitled, effective upon the consummation of the Offering, to
such medical and other benefits, including insurance and pension plans, as are
provided to other executive officers of the Company and to such bonuses as the
Board shall determine in its discretion. The agreements also provide that in the
event any such officer leaves the employ of the Company during the term of the
agreement, he or she agrees not to compete with the Company for a period of two
years. The employment agreement between the Company and Ms. Vargas provides for
a signing bonus of $500,000. See "Certain Related Transactions."
1997 Employee Bonus Pool Plan
Prior to the Offering, the Board will vote on the Company's 1997
Employee Bonus Pool Plan (the "Bonus Pool Plan"). Under the terms of the Bonus
Pool Plan, the Board may authorize and direct the payment by the Company to such
employees of the Company as the Board shall determine in its discretion, and
allocate among such employees in such manner as the Board shall determine in its
discretion, bonuses for calendar year 1997 that in the aggregate do not exceed
5% of the amount by which the Company's income before income taxes and the
effects of any changes in accounting method for calendar year 1997 exceeds the
Company's budgeted income before income taxes and the effects of any changes in
accounting method for calendar year 1997, as approved by the Board.
1997 Long-Term Incentive Plan
Prior to the Offering, the Board and Company's stockholders will
vote on the Company's 1997 Long-Term Incentive Plan (the "Incentive Plan"). The
maximum number of shares of Common Stock that may be subject to outstanding
awards may not be greater than shares. Awards may be settled in cash,
shares, other awards or other property, as determined by the Committee. The
number of shares reserved or deliverable under the Incentive Plan and the annual
per-participant limit is subject to adjustment in the event of stock splits,
stock dividends and other extraordinary corporate events.
The purpose of the Incentive Plan is to provide executive officers
(including directors who also serve as executive officers), key employees,
consultants and other service providers with additional incentives by enabling
such persons to increase their ownership interests in the Company. Individual
awards under the Incentive Plan may take the form of one or more of: (i) either
incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"); (ii)
stock appreciation rights ("SARs"); (iii) restricted or deferred stock; (iv)
dividend equivalents; (v) bonus shares and awards in lieu of Company obligations
to pay cash compensation; and (vi) other awards the value of which is based in
whole or in part upon the value of the Common Stock. Upon a change of control of
the Company (as defined in the Incentive Plan), certain conditions and
restrictions relating to an award with respect to the exercisability or
settlement of such award will be accelerated.
The Compensation Committee will administer the Incentive Plan and
generally select the individuals who will receive awards and the terms and
conditions of those awards (including exercise prices, vesting and forfeiture
conditions, performance conditions and periods during which awards will remain
outstanding). The number of shares deliverable upon exercise of ISOs is limited
to , provided that shares of Common Stock that are attributable to ISOs that
have expired, terminated or been canceled or forfeited or otherwise terminate
without delivery of shares are available for issuance or use in connection with
future ISOs. The Incentive Plan also provides that no participant may be granted
in
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any calendar year awards settleable by delivery of more than 500,000 shares, and
limits payments under cash-settled awards in any calendar year to an amount
equal to the fair market value of that number of shares.
The Company generally will be entitled to a tax deduction equal to
the amount of compensation realized by a participant through awards under the
Incentive Plan, except (i) no deduction is permitted in connection with ISOs if
the participant holds the shares acquired upon exercise for the required holding
periods; and (ii) deductions for some awards could be limited under the $1
million deductibility cap of Section 162(m) of the Internal Revenue Code. This
limitation, however, should not apply to awards granted under a plan during a
grace period of up to three years following the Offering, and should not apply
to certain options, SARs and performance-based awards granted thereafter if the
Company complies with certain requirements under Section 162(m).
The Incentive Plan will remain in effect until terminated by the
Board. The Incentive Plan may be amended by the Board without the consent of the
stockholders of the Company, except that any amendment, although effective when
made, will be subject to stockholder approval if required by any Federal or
state law or regulation or by the rules of any stock exchange or automated
quotation system on which the Common Stock may then be listed or quoted.
In connection with the Offering, NQSOs to purchase a total of
450,000 shares of Common Stock of the Company will be granted as follows: 50,000
to Lew Rothman, 50,000 to LaVonda M. Rothman, 35,000 to Jane Vargas, 35,000 to
Timothy P. Shannon, 144,500 to MC Management (of which 35,000 will be allocated
to Maureen A. Colleton and the remainder will be allocated among other employees
of MC Management), and 135,500 to other employees and consultants of the
Company. Each of the foregoing options will have an exercise price equal to the
initial public offering price per share in the Offering. These options will vest
generally in three equal installments on each of the first three anniversaries
of the Offering subject to acceleration under certain circumstances, and
generally will expire on the earlier of 10 years after the date of grant or
thirty days after termination of employment. If termination is for cause, all
options will terminate immediately.
1997 Non-Employee Directors' Stock Plan
Prior to consummation of the Offering, the Company will adopt and
the Stockholders will approve the 1997 Non-Employee Directors' Stock Plan (the
"Directors' Plan"), which provides for (i) the automatic grant to each
non-employee director serving at the commencement of the Offering of an option
to purchase 10,000 shares, and (ii) thereafter, the automatic grant to each
newly elected non-employee director of an option to purchase 10,000 shares upon
such person's initial election as a director; provided, however, that the number
of options which may be granted to newly elected non-employee directors upon
such person's initial election after the commencement of the Offering may be
altered by the Board. A total of 100,000 shares are reserved for issuance under
the Directors' Plan. The number of shares reserved, as well as the number to be
subject to automatically granted options, will be adjusted in the event of stock
splits, stock dividends and other extraordinary corporate events.
Options granted under the Directors' Plan will have an exercise
price per share equal to the fair market value of a share at the date of grant.
Options will expire at the earlier of 10 years from the date of grant or 90 days
after termination of service as a director. Options will vest and become
exercisable ratably, 20% per year, over the five-year period following the date
of grant of the options, subject to acceleration by the Board. In the event of a
change in control of the Company prior to normal vesting, all options not
already exercisable would become fully vested and exercisable under the
Directors' Plan (a non-employee director's death would also cause immediate
vesting of his or her non-vested options). In addition, the Directors' Plan
permits non-employee directors to elect to receive, in lieu of cash directors'
fees, nonforfeitable shares or nonforfeitable credits representing "deferred
shares" settleable at future dates, as elected by the director. The number of
shares or "deferred shares" received
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will be equal to the number of shares which, at the date the fees would
otherwise be payable, will have an aggregate fair market value equal to the
amount of such fees. Each "deferred share" will be settled by delivery of a
share of Common Stock at such time as may have been elected by the director
prior to the deferral.
Other Plans
Prior to consummation of the Offering, the Company will adopt and
the Stockholders will approve, the 1997 Employee Stock Purchase Plan, to be
effective on July 1, 1997. This plan will permit eligible employees of the
Company and its subsidiaries (generally all full-time employees who have
completed one year of service) to purchase shares of Common Stock at a discount.
Employees who elect to participate will have amounts withheld through payroll
deduction during six-month purchase periods. At the end of each purchase period,
accumulated payroll deductions will be used to purchase stock at a price equal
to 85% of the market price at the beginning of the period or the end of the
period, whichever is lower. Stock purchased under the plan will be subject to a
six-month holding period. The Company has reserved 300,000 shares of Common
Stock for issuance under this plan.
The Company also intends to adopt a "401(k)" plan shortly after
consummation of the Offering. This plan will allow eligible employees of the
Company and its subsidiaries to contribute to the plan on a pre-tax basis. The
Company will likely make matching contributions related to employee
contributions, and may also make year-end discretionary contributions based on
the performance of the Company. It is anticipated that discretionary
contributions will be invested in shares of Common Stock, and that employees may
direct the investment of their own contributions and matching contributions made
on their behalf among several investment options, including shares of Common
Stock. The Company is also considering adoption of a non-qualified supplemental
executive retirement plan ("SERP") for those individuals who may be affected by
various tax law limitations applicable to the 401(k) plan.
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CERTAIN RELATED TRANSACTIONS
Management Services
The Company has in the past contracted on an annual basis and, in
anticipation of the Offering, will enter into a five-year contract effective
upon consummation of the Offering, with MC Management for the performance on
behalf of the Company of various administrative and other services, including,
among other things, maintaining banking records, preparing tax returns,
providing general ledger accounting services, processing account receivables and
payables, making payroll distributions and providing telemarketing services.
Under the agreement, MC Management will continue to receive a management fee
from the Company equal to 1.0% of the Company's gross cigarette sales and
between 0.5% and 2.9% of the Company's gross sales of cigars and all other
products sold by the Company. MC Management fees paid by the Company in 1995 and
for the ten-month period ended October 31, 1996 were $2.8 million and $2.6
million, respectively.
As part of the consideration for its agreement with MC Management,
the Company has agreed to indemnify MC Management and its affiliates from and
against all claims, liabilities, losses or damages relating to or arising out of
action taken (or omitted to be taken) on behalf or for the benefit of the
Company during the term of and pursuant to the Management Agreement provided
that such actions do not constitute gross negligence or willful misconduct. This
indemnification does not apply to any claims, liabilities, losses or damages
relating to or arising out of any action taken (or omitted to be taken) by MC
Management or any affiliate of MC Management prior to the date of the Offering.
In addition, under the agreement, any affiliates of MC Management who serve as
directors, but are not employees, of the Company may receive customary fees paid
to non-employee directors of the Company and be reimbursed for all reasonable
out-of-pocket costs in connection therewith.
In consideration of MC Management's agreement to enter into this
long-term agreement, the Company will agree to pay a signing bonus to MC
Management in the amount of $1.0 million. In addition, Jane Vargas, Vice
President of MC Management, will enter into an employment agreement with the
Company and will receive a signing bonus of $500,000 in connection therewith
upon the consummation of the Offering. Ms. Vargas will resign as an employee of
MC Management, and MC Management's prior management agreements with the
Constituent Entities will terminate, effective upon consummation of the
Offering. See "Use of Proceeds" and "Management."
Manufacturing Facility Arrangements
In November 1995, Lew Rothman, the Company's Chief Executive
Officer, and John Oliva, a director of the Company, purchased a 49% and 36%
interest, respectively, in NATSA, a corporation which owns and operates a
Nicaraguan cigar manufacturing facility. In addition, Lew Rothman purchased a
35% interest in TANDSA, a corporation which owns and operates a Dominican cigar
manufacturing facility. Pursuant to agreements with each of NATSA and TANDSA,
NATSA has agreed to continue to produce the Company's products exclusively for a
one-year period, subject to renewals, and TANDSA will dedicate one third of its
production, which is scheduled to commence in May 1997, to the Company's
products for a one-year period, subject to renewals. NATSA is expected to
produce four of the Company's premium cigars, Jose Marti, Villar y Villar, Rosa
Cuba and La Finca. It is anticipated that, once fully operational, each of NATSA
and TANDSA will have the capacity to produce approximately 50,000 and 10,000
cigars per day, respectively, and will together represent approximately 30% of
the Company's supply of premium cigars. NATSA has agreed to sell 100% of its
production to Nicaraguan-American Tobacco Co. Inc. ("Natco"), an importing
company 50%-owned by Lew Rothman and 50%-owned by John Oliva, for resale
exclusively to the Company. TANDSA has agreed to sell its production for the
Company to Cigars by Santa Clara, N.A., Inc., a Constituent Entity. The Company
believes that the terms of such arrangements are no less favorable than would be
obtained from unaffiliated third parties and will establish a committee of
disinterested directors to review the Company's arrangements with such entities
in the future.
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Other
Casa Blanca, Inc. ("Casa Blanca"), an affiliate of the Company owned
by LaVonda M. Rothman, operates the El Rey del Mundo Cigar Bar at the Company's
Whippany, New Jersey cigar store location. Casa Blanca also operates a liquor
store on the Whippany store premises. Casa Blanca leases such premises from the
Company for an annual rent of $60,000.
In August 1989, Bernard Rothman, a brother of Lew Rothman, entered
into a Stock Sale and Purchase Agreement with certain of the Constituent
Entities pursuant to which Bernard Rothman agreed to sell to these entities
33 1/3% of the outstanding stock of each such Constituent Entity owned by him in
exchange for various payments. At October 31, 1996, the Company's total
outstanding liability to Bernard Rothman was $135,000. Notes evidencing such
indebtedness issued to Bernard Rothman accrue interest at 12% annually and
mature in April 1998.
Borrowings under the line of credit and notes issued pursuant to the
Credit Agreement have been personally guaranteed by the Existing Stockholders in
an amount up to $1.0 million in the aggregate.
From time to time, the Company has made advances to or received
advances from, the Existing Stockholders. Such advances bear interest at 9% per
annum and have no established maturity. For the ten-month period ended October
31, 1996, the Company received net interest income on these advances of
$135,000.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
the beneficial ownership of the Company's Common Stock after giving effect to
the Reorganization and as adjusted to reflect the sale of the Common Stock
offered hereby, by (i) all persons known to the Company to be the beneficial
owners of 5% or more thereof; (ii) each director; (iii) each of the five
executive officers currently contemplated by the Company to be the most highly
compensated executive officers of the Company for 1996; and (iv) all executive
officers and directors as a group.
Shares Beneficially Owned
------------------------------------------------------
After Giving Effect After Giving Effect
to the Reorganization to the Offering
------------------------- ----------------------
Number Percent Number Percent
Lew Rothman(1) % %
LaVonda M. Rothman(1)
Maureen A. Colleton
Jane Vargas
Timothy P. Shannon
All executive officers
and directors as a
group ( persons)
- ------------------
(1) Includes (i) shares of Common Stock held by LaVonda M. Rothman and Lew
Rothman, Trustees and Samuel Bornstein as Special Trustee of a trust f/b/o
Shane Rothman created under a trust agreement dated November 1, 1994, Lew
Rothman, Grantor (the "Shane Rothman Trust"), (ii) shares of Common
Stock held by LaVonda M. Rothman and Lew Rothman, Trustees, and Samuel
Bornstein as Special Trustee of a trust f/b/o Marni Rothman created under
a trust agreement dated November 1, 1994, Lew Rothman, Grantor (the "Marni
Rothman Trust"), (iii) shares of Common Stock held by LaVonda M.
Rothman and Lew Rothman, Trustees and Samuel Bornstein as Special Trustee
of trust f/b/o Samantha Rothman created under a trust agreement dated
November 1, 1994, Lew Rothman, Grantor (the "Samantha Rothman Trust") and
(iv) shares of Common Stock held by LaVonda M. Rothman and Lew
Rothman, Trustees and Samuel Bornstein as Special Trustee of a trust f/b/o
Luke Rothman created under a trust agreement dated November 1, 1994, Lew
Rothman, Grantor (the "Luke Rothman Trust") which may be deemed to be
beneficially owned by the named person but as to which the named person
disclaims beneficial ownership. Does not include shares of Common
Stock held by trusts established for the benefit of members of the Rothman
family as to which the named person is not a trustee.
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DESCRIPTION OF CAPITAL STOCK
General
The Company's authorized capital stock consists of 40,000,000 shares
of Common Stock, par value $.01 per share, and 5,000,000 shares of preferred
stock ("Preferred Stock"), par value $.01 per share. After giving effect to the
Reorganization, but prior to consummation of the Offering, the Company had
outstanding shares of Common Stock and no shares of Preferred Stock. Upon
completion of the Offering, the Company will have outstanding shares of
Common Stock and no shares of Preferred Stock.
Common Stock
The holders of Common Stock are entitled to one vote for each share
on all matters voted upon by stockholders, including the election of directors.
The Certificate of Incorporation does not provide for cumulative voting and,
accordingly, the holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election.
Subject to the rights of any then outstanding shares of Preferred
Stock, the holders of the Common Stock are entitled to such dividends as may be
declared in the discretion of the Board out of funds legally available
therefore. See "Dividend Policy." Holders of Common Stock are entitled to share
ratably in the net assets of the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. The holders of Common Stock have no preemptive
rights to purchase shares of stock of the Company. Shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are, and the
shares of Common Stock to be issued pursuant to the Offering will be upon
payment therefore, fully paid and non-assessable.
Preferred Stock
The Preferred Stock may be issued from time to time by the Board as
shares of one or more classes or series. Subject to the provisions of the
Company's Certificate of Incorporation and limitations prescribed by law, the
Board is expressly authorized to adopt resolutions to issue the shares, to fix
the number of shares and to change the number of shares constituting any series,
and to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the shares constituting any class or series of the
Preferred Stock, in each case without any further action or vote by the
stockholders. The Company has no current plans to issue any shares of Preferred
Stock of any class or series.
One of the effects of undesignated Preferred Stock may be to enable
the Board to render more difficult or to discourage an attempt to obtain control
of the Company by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of the Company's management. The issuance
of shares of the Preferred Stock pursuant to the Board's authority described
above may adversely affect the rights of the holders of Common Stock. For
example, Preferred Stock issued by the Company may rank prior to the Common
Stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of Common Stock.
Accordingly, the issuance of shares of Preferred Stock may discourage bids for
the Common Stock at a premium or may otherwise adversely affect the market price
of the Common Stock.
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Statutory Business Combination Provision
Upon consummation of the Offering, the Company will be subject to
the provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage
of Section 203 by amending its certificate of incorporation or by-laws by action
of its stockholders to exempt itself from coverage, provided that such by-law or
amendment to the Certificate of Incorporation shall not become effective until
12 months after the date it is adopted. The Company has not adopted such an
amendment to the Certificate of Incorporation or By-laws.
Limitation on Directors' Liabilities and Indemnification
Pursuant to the Company's Certificate of Incorporation and under
Delaware law, directors of the Company are not liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty, except for
liability in connection with a breach of duty of loyalty, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for dividend payments or stock repurchases illegal under Delaware law or
any transaction in which a director has derived an improper personal benefit.
The Company's Certificate of Incorporation provides for mandatory
indemnification of directors and officers of the Company against any expense,
liability and loss to which they become subject, or which they may incur as a
result of having been a director or officer of the Company. In addition, the
Company must advance or reimburse directors and officers for expenses incurred
by them in connection with certain claims.
In addition to the indemnification provision in the Certificate of
Incorporation, the Company will enter into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individuals
may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will
continue to be, provided to them.
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Potential Anti-Takeover Effect of Certain Provisions of the Certificate of
Incorporation and By-laws
The Certificate of Incorporation and By-laws of the Company contain
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited proposal
from a third party which has acquired a block of stock of the Company, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders.
The Certificate of Incorporation provides that the Board be divided
into three classes of directors serving staggered three-year terms. The
classification of the Board has the effect of making it more difficult for
stockholders to change the composition of the Board in a relatively short period
of time. At least two annual meetings of stockholders, instead of one, generally
will be required to effect a change in a majority of the Board. Such a delay may
help ensure that the Board and the stockholders, if confronted with an
unsolicited proposal by a stockholder attempting to force a stock repurchase at
a premium above market, a proxy contest or an extraordinary corporate
transaction, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to the best interest
of the stockholders. Directors, if any, elected by holders of preferred stock
voting as a class, will not be classified as aforesaid. In addition, under
Delaware law, in the case of a corporation having a classified board,
stockholders may remove a director only for cause. This provision will preclude
a stockholder from removing incumbent directors without cause.
In addition, the Certificate of Incorporation restricts the ability
of the stockholders to take any action by written consent by requiring the
approval of two-thirds, instead of a majority, of the outstanding capital stock,
and contains a fair price requirement, pursuant to which certain merger,
combination or sale transaction proposals shall require the approval of
two-thirds, instead of a majority, of the outstanding capital stock, unless the
proposal is approved by two-thirds of the full Board or all holders of the then
outstanding capital stock (other than the stockholder making the bid) receive
cash in an amount at least equal to the highest price paid by the bidding
stockholder for shares of the capital stock during the three-year period
preceding the date of such stockholder's offer or proposal. Such a provision may
have the effect of deterring takeover offers. The Certificate of Incorporation
also provides that the stockholders may not amend any of the foregoing
provisions without the approval of two-thirds of the outstanding capital stock.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Common Stock is American
Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and consummation of the Reorganization,
there will be shares of Common Stock outstanding. Of these shares, the
shares ( if the Underwriters' over-allotment option is
exercised in full) sold in the Offering will be freely tradeable without
restriction or registration under the Securities Act (except shares purchased by
affiliates of the Company). The remaining shares have not been
registered under the Securities Act and accordingly may be resold publicly only
upon registration under the Securities Act or in compliance with Rule 144
promulgated under the Securities Act ("Rule 144") or another exemption from
registration under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
shares for one year, including an "affiliate" as that term is defined under the
Securities Act, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
Common Stock or the average weekly trading volume of the Common Stock on all
exchanges and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission
(the "Commission"). Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed to have been an "affiliate" of the Company at any time during
the 90 days preceding a sale, and who has beneficially owned the shares proposed
to be sold for two years, would be entitled to sell such shares under Rule
144(k) without regard to the limitations described above. Pursuant to the
Contribution Agreement, the Company has agreed to file all information,
documents and reports with the Commission and otherwise make generally available
to the public such financial and other information as may be necessary to permit
the Existing Stockholders and their transferees to sell their shares pursuant to
Rule 144.
All of the directors and executive officers of the Company and the
former stockholders of the Constituent Entities will agree with the Underwriters
that they will not, directly or indirectly, offer, sell, offer to sell, pledge,
contract to sell or grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, pledge, contract for sale or grant
of any option to purchase or other sale or disposition of) any shares of Common
Stock or of equity securities of the Company substantially similar thereto or
any other securities convertible into, or exchangeable or exercisable for, any
shares of Common Stock or such similar securities for a period of 180 days after
the date of this Prospectus, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters. In addition, the Company
has agreed that it will not, directly or indirectly, offer, sell, offer to sell,
pledge contract to sell or grant any option to purchase or otherwise sell or
dispose of (or announce any offer, sale, offer of sale, pledge contract for sale
or grant of any option to purchase or other sale or disposition of) any shares
of Common Stock or of equity securities of the Company substantially similar
thereto or any other securities convertible into, or exchangeable or exercisable
for, any shares of Common Stock or such similar securities for a period of 180
days after the date of this Prospectus, without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, except that
during such period, shares of Common Stock may be issued upon the exercise of
outstanding stock options and warrants and the Company may issue employee stock
options and warrants which are exercisable after the 180th day after the date of
this Prospectus. Prudential Securities Incorporated may, in its sole discretion,
at any time and without prior notice release all or any portion of the shares of
Common Stock subject to such agreements.
The Company will have outstanding under its Incentive Plan options
to purchase an aggregate of 450,000 shares of Common Stock. Upon consummation of
the Offering, the shares issuable upon exercise of any such options will not
have been registered under the Securities Act
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and, accordingly, may be resold publicly only upon registration under the
Securities Act or in compliance with Rule 144 or another exemption from
registration under the Securities Act. However, the Company intends to register
shares issuable upon exercise of options granted under the Incentive Plan
shortly after consummation of the Offering.
The Company will grant to the Existing Stockholders "piggyback"
registration rights exercisable on or after one year following the date of the
Offering to require the Company to register their shares of Common Stock under
the Securities Act, at such time as the Company registers any additional shares
on its own behalf. Under such "piggyback" registration rights, with certain
exceptions, the Company is required to notify each holder of such shares each
time the Company proposes to file a registration statement under the Securities
Act and to use its best efforts to include, to the maximum extent possible, any
shares of Common Stock requested to be registered by such holders in connection
with such registration statement. Holders of shares of Common Stock who request
such registration pursuant to "piggyback" rights are required to pay their pro
rata share of all underwriting discounts and selling commissions applicable to
the sale of the shares so registered. The Company and each of the holders on
whose behalf registration is effected severally agree to indemnify each other
and each underwriter of the shares being registered against certain liabilities,
including liabilities under the Securities Act.
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UNDERWRITING
The underwriters named below (the "Underwriters"), for whom
Prudential Securities Incorporated is acting as representative (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock set forth below opposite their respective names:
Number
Underwriter of Shares
----------- ---------
Prudential Securities Incorporated...........
---------
Total................................. 3,000,000
=========
The Company is obligated to sell, and the Underwriters are obligated
to purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters, through the Representative, have advised the
Company that they propose to offer the Common Stock initially at the public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per share; and
that such dealers may reallow a concession of $ per share to certain other
dealers. After the initial public offering, the offering price and the
concessions may be changed by the Representative.
The Company will grant to the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to 3,000,000 shares.
All of the directors and executive officers of the Company and the
former stockholders of the Constituent Entities will agree that they will not,
directly or indirectly, offer, sell, offer to sell, pledge contract to sell or
grant any option to purchase or otherwise sell or dispose of (or announce any
offer, sale, offer of sale, pledge contract for sale or grant of any option to
purchase or other sale or disposition of) any shares of Common Stock or of
equity securities of the Company substantially similar thereto or any other
securities convertible into, or exchangeable or exercisable for, any shares of
Common Stock or such similar securities for a period of 180 days after the date
of this Prospectus, without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters. In addition, the Company has agreed
that it will not, directly or indirectly, offer, sell, offer to sell, pledge
contract to sell or grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, pledge contract for sale or grant
of any option to purchase or other sale or disposition of) any shares of Common
57
<PAGE>
Stock or of equity securities of the Company substantially similar thereto or
any other securities convertible into, or exchangeable or exercisable for, any
shares of Common Stock or such similar securities for a period of 180 days after
the date of this Prospectus, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except that during such
period, shares of Common Stock may be issued upon the exercise of outstanding
stock options and warrants and the Company may issue employee stock options and
warrants which are exercisable after the 180th day after the date of this
Prospectus. Prudential Securities Incorporated may, in its sole discretion, at
any time and without prior notice release all or any portion of the shares of
Common Stock subject to such agreements.
The Company and the Existing Stockholders will agree to indemnify
the several Underwriters against or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to any accounts over which they exercise
discretionary authority.
Prior to the Offering made hereby, there has been no public market
for the Common Stock. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representative.
Among the factors to be considered in making such determination will be
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and prospects for the industry in general, the
management of the Company and the market prices of securities for companies in
businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling
group members (if any) and their respective affiliates may engage in
transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the Offering
then they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to 450,000 shares of Common Stock,
by exercising the Underwriters' over-allotment option referred to above. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering) for the account of the other Underwriters, the selling concession with
respect to the Common Stock that is distributed in the Offering but subsequently
purchased for the account of the Underwriters in the open market. Any of the
transactions described in this paragraph may result in the maintenance of the
price of the Common Stock at a level above that which might otherwise prevail in
the open market. None of the transactions described in this paragraph is
required, and, if any is undertaken, it may be discontinued at any time.
58
<PAGE>
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon
for the Company by Morgan, Lewis & Bockius LLP, New York, New York. Certain
legal matters related to the Offering will be passed upon for the Underwriters
by Stroock & Stroock & Lavan LLP, New York, New York.
EXPERTS
The Predecessor Combined Financial Statements of 800-JR Cigar, Inc.
as of October 31, 1996 and for the ten-month period then ended, appearing in
this Prospectus and Registration Statement, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing. The Predecessor Combined
Financial Statements of 800-JR Cigar, Inc. as of December 31, 1994 and 1995 and
for the years ended December 31, 1993, 1994 and 1995, appearing in this
Prospectus and Registration Statement, have been audited by J.H. Cohn LLP,
independent public accountants, as set forth in their report appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
Effective as of October 5, 1996, the Company's Board dismissed J.H.
Cohn LLP and appointed Ernst & Young LLP as the Company's independent public
accountants. The report of J.H. Cohn LLP on the Company's combined financial
statements as of December 31, 1994 and 1995 and for the years ended December 31,
1993, 1994 and 1995, did not contain an adverse opinion or disclaimer of opinion
and was not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with the audits for the years ended December 31, 1993,
1994 and 1995 and through October 5, 1996, there were no disagreements with J.H.
Cohn LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure at the time of the change of
independent public accountants or with respect to the Company's financial
statements. Prior to retaining Ernst & Young LLP, the Company had not consulted
with Ernst & Young LLP regarding the application of accounting principles or the
type of audit opinion that might be rendered on the Company's financial
statements.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission
(the "Commission"), Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus as to the contents of any
contract or any other document are not necessarily complete, and, in each
instance, reference is made to the copy of such contract or document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza Building,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and its regional
offices located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such materials may be obtained from the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission also maintains a website at:
http:\www.sec.gov.
59
<PAGE>
INDEX TO
PREDECESSOR COMBINED FINANCIAL STATEMENTS
Reports of Independent Auditors............................................F-2
Predecessor Combined Balance Sheets as of December 31, 1994 and 1995
and October 31, 1996....................................................F-4
Predecessor Combined Statements of Income for the Years Ended
December 31, 1993, 1994 and 1995 and for the Ten-Month Periods Ended
October 31, 1995 (unaudited) and 1996...................................F-5
Predecessor Combined Statements of Stockholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995 and for the Ten-Month Period Ended
October 31, 1996........................................................F-6
Predecessor Combined Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995 and for the Ten-Month Periods Ended
October 31, 1995 (unaudited) and 1996...................................F-7
Notes to Predecessor Combined Financial Statements.........................F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
800-JR Cigar, Inc.
We have audited the accompanying predecessor combined balance sheet of 800-JR
Cigar, Inc. as of October 31, 1996 and the related predecessor combined
statements of income, stockholders' equity and cash flows for the ten-month
period then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the combined financial position of 800-JR Cigar, Inc.
as of October 31, 1996 and the combined results of their operations and cash
flows for the ten-month period then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Metro Park, New Jersey
December 18, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
800-JR Cigar, Inc.
We have audited the accompanying predecessor combined balance sheets
of 800-JR Cigar, Inc. as of December 31, 1994 and 1995, and the related combined
statements of income, stockholders' equity and cash flows for the years ended
December 31, 1993, 1994 and 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the predecessor combined financial statements
referred to above present fairly, in all material respects, the financial
position of 800-JR Cigar, Inc. as of December 31, 1994 and 1995, and its results
of operations and cash flows for the years ended December 31, 1993, 1994 and
1995, in conformity with generally accepted accounting principles.
As described in Note 1 to the predecessor combined financial
statements, the Company changed its method of accounting for income taxes in
1993.
J. H. COHN LLP
Roseland, New Jersey
May 21, 1996
F-3
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
December 31, October 31,
-------------------- -----------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents ................................. $ 3,504 $ 3,202 $ 4,820
Accounts receivable, net of allowance for doubtful
accounts of $50, $83 and $245 at December 31, 1994
and 1995 and October 31, 1996 .......................... 1,879 1,345 2,281
Merchandise inventory ..................................... 16,778 16,722 21,030
Prepaid expenses and other current assets ................. 237 240 517
Loans receivable - affiliates and other associated entities 943 830 668
Loans receivable - stockholders ........................... 369 1,533 2,390
-------- -------- --------
Total current assets .......................................... 23,710 23,872 31,706
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization .................. 6,027 8,649 10,819
Other assets .................................................. 137 129 90
Deferred tax assets, net ...................................... 77 20 21
-------- -------- --------
Total assets .................................................. $ 29,951 $ 32,670 $ 42,636
======== ======== ========
Liabilities and stockholders' equity Current liabilities:
Borrowings under revolving line of credit ................. $ 1,550 $ 2,500 --
Current portion of long-term debt ......................... 1,520 1,604 $ 2,110
Current portion of capital lease obligations .............. 78 84 88
Accounts payable .......................................... 8,223 8,944 9,373
Accrued expenses .......................................... 1,405 1,665 1,859
Accrued compensation ...................................... 89 161 1,330
-------- -------- --------
Total current liabilities ..................................... 12,865 14,958 14,760
Long-term debt, less current portion .......................... 7,184 5,525 6,513
Capital lease obligations, less current portion ............... 173 89 15
Other ......................................................... 25 8 --
-------- -------- --------
Total liabilities ............................................. 20,247 20,580 21,288
Commitments and contingencies
Stockholders' equity:
Common stock .............................................. 21 21 21
Additional paid-in capital ................................ 28 28 28
Retained earnings ......................................... 10,073 12,459 21,717
-------- -------- --------
10,122 12,508 21,766
Less treasury stock, at cost .............................. (418) (418) (418)
-------- -------- --------
Total stockholders' equity .................................... 9,704 12,090 21,348
-------- -------- --------
Total liabilities and stockholders' equity .................... $ 29,951 $ 32,670 $ 42,636
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales .................................. $ 74,581 $ 109,297 $ 152,695 $ 121,934 $ 155,278
Cost of goods sold ......................... 62,660 91,588 130,645 104,351 128,291
-------- --------- --------- --------- ---------
Gross profit ............................... 11,921 17,709 22,050 17,583 26,987
Operating expenses:
Selling ................................ 2,148 3,046 3,977 3,142 3,324
General and administrative ............. 7,566 11,404 14,791 12,051 13,689
Depreciation and amortization .......... 361 447 493 379 558
-------- --------- --------- --------- ---------
Income from operations ..................... 1,846 2,812 2,789 2,011 9,416
Other income (expense):
Interest expense ....................... (481) (710) (785) (659) (681)
Interest income ........................ 39 63 158 120 140
Rental income .......................... 240 240 150 115 152
Insurance settlement ................... 265
Other, net ............................. 125 151 -- -- (9)
-------- --------- --------- --------- ---------
Income before income taxes and cumulative
effect of change in accounting method .. 1,769 2,556 2,312 1,587 9,283
Provision (credit) for income taxes ........ 160 257 (74) (115) 25
-------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting method ...................... 1,609 2,299 2,386 1,702 9,258
Cumulative effect of change in
accounting for income taxes ............ 58 -- -- -- --
-------- --------- --------- --------- ---------
Net income ................................. $ 1,667 $ 2,299 $ 2,386 $ 1,702 $ 9,258
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Ten Months Ended
December 31, 1995 October 31, 1996
----------------- ----------------
<S> <C> <C>
Pro forma - unaudited
Historical income before provision for income
taxes............................................ $ 2,312 $ 9,283
Pro forma adjustments other than income taxes.... 543 620
-------- --------
Pro forma income before income taxes............. 2,855 9,903
Pro forma provision for income taxes............. 1,148 3,971
-------- --------
Pro forma net income............................. $ 1,707 $ 5,932
======== ========
Pro forma earnings per share.....................
Pro forma common shares outstanding..............
</TABLE>
See accompanying notes.
F-5
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional
Common Paid-in Retained Treasury
Stock Capital Earnings Stock Total
----- ------- -------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 .... $ 24 $ 25 $ 6,175 $(486) $ 5,738
Net income ................ 1,667 1,667
------- ------ -------- ----- -------
Balance at December 31, 1993 .. 24 25 7,842 (486) 7,405
Net income ................. 2,299 2,299
Retirement of treasury stock (3) 3 (68) 68 --
------- ------ -------- ----- -------
Balance at December 31, 1994 .. 21 28 10,073 (418) 9,704
Net income ................. 2,386 2,386
------- ------ -------- ----- -------
Balance at December 31, 1995 .. 21 28 12,459 (418) 12,090
Net income ................. 9,258 9,258
------- ------ -------- ----- -------
Balance at October 31, 1996 ... $ 21 $ 28 $ 21,717 $(418) $21,348
======= ====== ======== ===== =======
</TABLE>
See accompanying notes.
F-6
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Ten Months Ended
Year Ended December 31, October 31,
---------------------------- ----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net income ......................................... $ 1,667 $ 2,299 $ 2,386 $ 1,702 $ 9,258
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization .................. 361 447 493 379 558
Provision for uncollectible accounts ........... 53 51 33 -- 162
Deferred income taxes .......................... (70) 1 57 45 (1)
Other .......................................... (17) (17) (17) (14) (8)
(Gain) loss on sale of assets .................. -- (32) (8) (8) 28
Changes in operating assets and liabilities:
Accounts receivable ......................... 65 (814) 501 (145) (1,098)
Merchandise inventory ....................... (4,635) (3,031) 56 1,494 (4,308)
Prepaid expenses and other current assets ... 8 (160) (3) 66 (277)
Other assets ................................ (50) 2 4 39
Accounts payable and accrued expenses ....... 1,998 2,680 1,053 (370) 1,792
------- ------- ------- ------- -------
Net cash provided by (used in) operating activities (620) 1,424 4,553 3,153 6,145
------- ------- ------- ------- -------
Cash flows from investing activities
Purchase of property and equipment ................. (1,101) (1,274) (3,176) (1,943) (2,756)
Loans repaid by (extended to) affiliates and other
associated entities ............................. 414 (718) 113 235 162
Proceeds from sale of assets ....................... -- -- 75 75 --
Loans extended to stockholders ..................... -- -- -- (514) (857)
------- ------- ------- ------- -------
Net cash used in investing activities .............. (687) (1,992) (3,060) (2,147) (3,451)
------- ------- ------- ------- -------
Cash flows from financing activities
Proceeds (repayments) of borrowings under
revolving
line of credit ................................. (150) (450) 950 (800) 500
Proceeds of long-term debt ......................... 7,261 2,000 -- -- --
Payments of long-term debt ......................... (3,776) (1,125) (1,575) (1,318) (1,506)
Payments of capital lease obligations .............. (71) (74) (78) (65) (70)
Payments of loans payable - stockholders ........... (724) (346) (1,164) (477) --
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities 2,540 5 (1,795) (2,660) (1,076)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,233 (563) (302) (1,654) 1,618
Cash and cash equivalents, beginning of period ..... 2,834 4,067 3,504 3,504 3,202
------- ------- ------- ------- -------
Cash and cash equivalents, end of period ........... $ 4,067 $ 3,504 $ 3,202 $ 1,850 $ 4,820
======= ======= ======= ======= =======
Supplemental disclosure of cash flow data
Income taxes paid .................................. $ 67 $ 185 $ 325 $ 325 $ --
======= ======= ======= ======= =======
Interest paid ...................................... $ 618 $ 735 $ 874 $ 807 $ 665
======= ======= ======= ======= =======
Supplemental disclosure of noncash investing
and financing activities
Equipment purchases financed with capital lease.... $ 396
=======
Real estate purchase financed with note payable.... $ 2,000
=======
Line of credit refinanced with note payable........ $ 3,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Amounts)
October 31, 1996
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
1. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies
Basis of Presentation
The accompanying predecessor combined financial statements include the
operations of J.R. Tobacco of America, Inc., J.N.R. Grocery Corp., J&R Tobacco
(New Jersey) Corp., J.R. Tobacco Company of Michigan, Inc., Cigars by Santa
Clara, N.A., Inc., J.R. Tobacco Outlet, Inc., J.R.-46th Street, Inc., J.R.
Tobacco NC, Inc., and J.R. Statesville, Inc. (together, the "Company" or the
"Predecessor Entities"). The Predecessor Entities are corporations that have
elected to be taxed as S Corporations pursuant to the Internal Revenue Code and
certain state and local tax regulations.
In connection with the Company's initial public offering of stock (the
"Offering"), the principal stockholders are simultaneously contributing to
800-JR Cigar, Inc. all of the outstanding stock in the Predecessor Entities in
exchange for common stock (the "Reorganization"). As consideration for the
contribution of their interest in the Predecessor Entities, the principal
stockholders will receive an aggregate of shares of common stock of 800-JR
Cigar, Inc.
The financial statements of the Predecessor Entities are being
presented on a combined basis because of their common ownership. The combined
financial statements have been prepared as if the Predecessor Entities had
operated as a single consolidated group since their respective dates of
organization. All significant intercompany balances and transactions have been
eliminated. Because 800-JR Cigar, Inc. will conduct no business operations prior
to its acquisition of the Predecessor Entities, the financial statements for
800-JR Cigar, Inc. are not included herewith.
The combined interim financial statements for the ten-month period
ended October 31, 1995 are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Pro Forma Adjustments (Unaudited)
The unaudited pro forma statement of income information for the year
ended December 31, 1995 and the ten-month period ended October 31, 1996 reflects
the Reorganization, the Offering and the following adjustments as if they had
occurred on January 1 of each period: a) a decrease in aggregate compensation
from $1,511 to $400 for the year ended December 31, 1995 and from $1,500 to $333
for the ten-month period ended October 31, 1996 for two of the Company's
executives pursuant to their new employment agreements; b) an increase in
interest expense of $1,275 for the year ended December 31, 1995 and $1,093 for
the ten-month period ended October 31, 1996 assuming the issuance of the
Distribution Notes; c) a reduction in interest expense of $785 for the year
ended December 31, 1995 and $681 for the ten-month period ended October 31, 1996
assuming the application of proceeds from the Offering to repay all of the
Company's indebtedness other than capital lease obligations; d) a reduction in
interest income of $78 for the year ended December 31, 1995 and $135 for the
ten-month period ended October 31, 1996 assuming the repayment to the Company of
loans receivable from stockholders; and e)
F-8
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
1. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
an increase of $1,263 for the year ended December 31, 1995 and $3,946 for the
ten-month period ended October 31, 1996 for income taxes based upon pro forma
pre-tax income as if the Company had been subject to federal and additional
state income taxes.
The Company will issue Distribution Notes to the principal
stockholders of the Predecessor Entities in the amount of $20,800, representing
estimated undistributed cumulative S Corporation earnings through the date of
the Offering which were taxable to those stockholders. The Distribution Notes
are net of loans receivable from those stockholders of $2,390, a distribution
made in December 1996 of $795 and anticipated additional distributions of $5,000
to be made prior to the consummation of the Offering to enable the stockholders
to pay income taxes on their allocable portions of the 1996 and 1997
undistributed S Corporation estimated earnings through the date of the Offering.
These notes, which will bear interest at the rate of 7.0% per annum, will be
payable on a quarterly basis over the three-year period following the Offering.
The following table sets forth the capitalization of the Company at
October 31, 1996, and the pro forma capitalization of the Company as of such
date after giving effect to the issuance of the Distribution Notes to the
stockholders, recording of a distribution of $795 made in December 1996 and
anticipated additional distributions of $5,000 to be made prior to the Offering
and the recording of a deferred tax asset of approximately $700, in connection
with the Company becoming subject to federal and additional state and local
income taxes. Additionally, the resulting deficit in retained earnings has been
reclassified to additional paid-in capital.
Actual Pro Forma
------ ---------
Common stock ................................ $ 21 $ 21
Additional paid-in capital .................. 28 (6,540)
Retained earnings ........................... 21,717 --
Treasury stock .............................. (418) (418)
-------- -------
Total stockholders' equity (deficit) ........ $ 21,348 $(6,937)
======== =======
Pro Forma Earnings Per Share (Unaudited)
The number of shares and the Offering price per share have not yet
been determined, and, accordingly, the pro forma earnings per share has not been
included.
Pro forma earnings per share is based on ___ shares of common stock
outstanding prior to the Offering, increased by the sale of shares of common
stock assuming an initial public offering price of $___ per share ($___, net of
underwriting discounts and commissions and estimated offering expenses), the
F-9
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
1. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
proceeds of which would be necessary to pay approximately $6.9 million, the
current portion of the Distribution Notes. The net income used in the
calculation of pro forma earnings per share has been: (i) increased by the
interest expense of $302 ($181 on an after-tax basis) for the year ended
December 31, 1995, and $282 ($169 on an after-tax basis) for the ten-month
period ended October 31, 1996 related to the current portion of the Distribution
Notes to be repaid from the proceeds of the Offering; and (ii) decreased by the
interest on debt of $785 ($469 on an after-tax basis) for the year ended
December 31, 1995, and $681 ($401 on an after-tax basis) for the ten-month
period ended October 31, 1996.
Supplementary pro forma earnings per share for the year ended December
31, 1995, and the ten-month period ended October 31, 1996 are $ and $ ,
respectively, based on shares of common stock outstanding prior to the
Offering, increased by (a) the sale of shares of common stock assuming an
initial public offering price of $ per share ($ , net of underwriting
discounts and commissions and estimated offering expenses), the proceeds of
which would be necessary to pay approximately $6.9 million, the current portion
of the Distribution Notes, and (b) the sale of shares of common stock
assuming an initial public offering price of $ per share ($ , net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to repay approximately $8.6 million in
outstanding debt. The net income used in the calculation of supplementary pro
forma earnings per share is $1,888 and $6,101 for the year ended December 31,
1995 and the ten-month period ended October 31, 1996. Such net income has been
increased by the interest expense of $302 ($181 on an after-tax basis) for the
year ended December 31, 1995, and $282 ($169 on an after-tax basis) for the
ten-month period ended October 31, 1996 related to the current portion of the
Distribution Notes to be repaid from the proceeds of the Offering.
Business
The Company is primarily engaged in the retail/wholesale distribution
of tobacco and tobacco related products throughout the United States.
The Company's business is impacted by the general seasonal trends that
are characteristic of the retail industry, and it generally experiences lower
net revenues and net income in the first half of each fiscal year compared to
the second half of the fiscal year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual results
could differ from those estimates.
F-10
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
1. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less when acquired. The carrying
amount reported for cash equivalents approximates fair value.
Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
cash and cash equivalents and trade accounts receivable. The Company places its
temporary cash investments with high credit quality financial institutions to
limit its credit exposure. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base, their dispersion across different geographic areas and
generally short payment terms.
Merchandise Inventory
Merchandise inventory is stated at the lower of cost (determined by
the first-in, first-out method) or market; market represents the lower of
replacement cost or estimated net realizable value. Merchandise inventory
consists of goods held for re-sale.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation
and amortization of assets, including those under capital lease, is computed
using the straight-line and accelerated methods over the lesser of the estimated
useful lives of the related assets or the lease term. These lives range from 3
to 31 years.
Advertising
The Company expenses the cost of advertising and promotions as
incurred. Advertising and promotion costs amounted to $951, $1,494 and $1,892
for the years ended December 31, 1993, 1994 and 1995, and $1,505 (unaudited) and
$932 for the ten-month periods ended October 31, 1995 and 1996.
Income Taxes
The entities in the combined group have elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and local
tax regulations. Therefore, no provision has been made in the accompanying
financial statements for federal and certain state and local income taxes, since
such taxes are the liability of the principals. The provision for income taxes
principally reflects taxes levied by certain state and local governments (see
Note 8).
F-11
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
1. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
Effective January 1, 1993, the Company changed its method of
accounting for income taxes from the deferred method to the liability method
required by Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". The cumulative effect of the change in the method
of accounting for income taxes on years prior to 1993 was approximately $58.
Revenue Recognition
Sales are recognized upon shipment of products or, in the case of
sales by Company owned stores, when payment is received.
Stock Options
The Company intends to grant stock options for a fixed number of
shares to employees with an exercise price equal to the fair value of the shares
on the date of grant. The Company will account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, anticipates recognizing no compensation expense for such stock
option grants.
F-12
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
2. Property, Equipment and Improvements
Property, equipment and improvements consist of the following:
December 31, October 31,
-------------------- -----------
1994 1995 1996
---- ---- ----
Land.............................. $ 130 $1,593 $ 1,593
Building and improvements......... 2,026 3,571 5,854
Machinery and equipment........... 1,242 1,429 1,718
Furniture and fixtures............ 1,131 1,183 1,225
Leasehold improvements............ 733 3,507 3,599
Automobiles....................... 160 151 128
Land and building in progress..... 2,920 -- --
------- ------ -------
8,342 11,434 14,117
Less accumulated depreciation and
amortization.................... 2,315 2,785 3,298
------- ------ -------
$6,027 $8,649 $10,819
======= ====== =======
3. Long-Term Debt and Line of Credit
Long-term debt is comprised as follows:
December 31, October 31,
----------------- -----------
1994 1995 1996
---- ---- ----
Mortgage payable - seller, due in monthly
installments of interest only at 8.25%
through October 1, 2001, at which time
all unpaid principal and interest shall
be due (secured by certain property,
equipment and improvements with a net
book value of approximately $7,330 at
October 31, 1996)....................... $2,000 $2,000 $2,000
Mortgage payable - bank, due in monthly
installments with interest at the prime
rate (8.25% at October 31, 1996) through
December 31, 1998 (secured by certain
property, equipment and improvements
with a net book value of approximately
$2,587 at October 31, 1996) ............ 32 703 513
F-13
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
3. Long-Term Debt and Line of Credit (continued)
December 31, October 31,
--------------- -----------
1994 1995 1996
------ ------ ------
Note payable - bank, due in monthly
installments with interest at 6.6% through
August 25, 1998 ............................. $3,447 $2,593 $1,836
Note payable - bank, due in monthly
installments with interest at 8.25%
through September 18, 1999 .................. 1,973 1,622 1,318
Note payable - bank, due in monthly
installments with interest at 7.5% through
May 23, 2003 ................................ -- -- 2,821
Notes payable - former stockholder, due in
monthly installments of $7,500 plus
interest at 12% through April 30, 1998 ...... 300 211 135
Other ........................................... 52 -- --
------ ------ ------
8,704 7,129 8,623
Less current portion ............................ 1,520 1,604 2,110
------ ------ ------
Long-term debt .................................. $7,184 $5,525 $6,513
====== ====== ======
The Company has a $4,000,000 line of credit with a bank, borrowings
under which bear interest at the bank's base rate less 0.5% or the London
Inter-Bank Offering Rate ("LIBOR") plus 2%. The weighted average interest rates
on borrowings under the line of credit are 8.30% and 7.87% at December 31, 1994
and 1995.
Borrowings under the line of credit and the notes payable - bank are
secured by all accounts receivable and certain inventory and furniture and
fixtures, and are personally guaranteed by the principal stockholders of the
Predecessor Companies up to $1,000,000 in the aggregate. Covenants under the
line of credit agreement require the Company to maintain specific minimum
financial ratios and minimum levels of inventory.
The fair value of the Company's long-term debt approximates its
carrying value as the interest rates are either variable or substantially the
same as are currently available to other companies for similar debt instruments.
F-14
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
3. Long-Term Debt and Line of Credit (continued)
Scheduled maturities of long-term debt outstanding at October 31, 1996
and for the next five years are as follows:
Amount
---------
Two months ended December 31, 1996............ $ 354
1997.......................................... 2,157
1998.......................................... 1,852
1999.......................................... 798
2000.......................................... 430
2001.......................................... 2,430
Thereafter.................................... 602
------
$8,623
======
4. Income Taxes
The provision (credit) for income taxes consists of the following:
Ten Months
Ended
Year Ended December 31, October 31,
---------------------------------- ------------
1993 1994 1995 1996
---- ---- ---- ----
Current .................. $ 171 $ 246 $(129) $18
Deferred ................. (11) 11 55 7
----- ----- ----- ---
$ 160 $ 257 $ (74) $25
===== ===== ===== ===
The income tax credit in 1995 and the nominal provision in 1996 are
due to reversals of income taxes accrued in prior years which, through a later
tax election, became the responsibility of the principal stockholders.
F-15
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
4. Income Taxes (continued)
Deferred tax assets and liabilities consist of the following:
December 31, October 31,
-------------- -----------
1994 1995 1996
---- ---- ----
Deferred tax assets............... $180 $21 $21
Deferred tax liabilities.......... (29) (1) -
Valuation allowance............... (74) - -
--- --- ---
Deferred tax assets, net.......... $77 $20 $21
=== === ===
Deferred tax assets result primarily from available operating loss
carryforwards and certain accrued expenses which will not be deductible for
income tax purposes until paid. Deferred tax liabilities result primarily from
the use of accelerated methods of depreciation for tax reporting purposes. The
valuation allowance relates to uncertainties as to the Company's ability to
realize future benefits from available operating loss carryforwards.
5. Common Stock
Common stock at stated and par value consist of the following at
October 31, 1996:
<TABLE>
<CAPTION>
Additional
Common Paid-in Treasury
Stock Capital Stock
----- ------- -----
<S> <C> <C> <C>
J.R. Tobacco of America, Inc.; authorized 1,000
$1 par value shares, 300 issued and outstanding....... $ 0.3 $8 $175
Cigars by Santa Clara, N.A., Inc.; authorized
1,000 $1 par value shares, 300 issued and
outstanding........................................... 0.3 5 185
J.N.R. Grocery Corp.; authorized 200 no par value
shares, 90 issued and outstanding..................... 10 -- 29
J.R. Tobacco NC, Inc.; authorized 1,000 $1 par
value shares, 200 issued and outstanding.............. 0.2 1 --
J&R Tobacco (New Jersey) Corp.; authorized
2,500 no par value shares, 40 issued and
outstanding........................................... 5 -- --
</TABLE>
F-16
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
5. Common Stock (continued)
<TABLE>
<CAPTION>
Additional
Common Paid-in Treasury
Stock Capital Stock
----- ------- -----
<S> <C> <C> <C>
J.R. Tobacco Company of Michigan, Inc.;
authorized 50,000 $1 par value shares, 1,050
issued and outstanding................................. $1 $14 $ 29
J.R.-46th Street, Inc.; authorized 200 no par value
shares, 200 issued and outstanding..................... 1 -- --
J.R. Tobacco Outlet, Inc.; authorized 100 no par
value shares, 100 issued and outstanding............... 3 -- --
J.R. Statesville, Inc.; authorized 1,000 $1 par value
shares, 200 issued and outstanding..................... 0.2 -- --
----- --- ----
$21 $28 $418
===== === ====
</TABLE>
6. Related Party Transactions
From time to time, the Company makes or receives cash advances from
the stockholders. Such advances bear interest at 9% and have no established due
dates. Net interest income (expense) amounted to ($58), ($45) and $78 in 1993,
1994 and 1995, and $59 (unaudited) and $135 for the ten-month periods ended
October 31, 1995 and 1996, respectively.
7. Commitments and Contingencies
Leases
The Company is obligated under various noncancelable lease agreements
for the rental of premises classified as operating leases. Several of the leases
contain escalation clauses which provide for scheduled increases.
F-17
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
7. Commitments and Contingencies (continued)
Future minimum lease payments for operating leases as of October 31,
1996 are as follows:
Operating
Leases
-----------
Two months ended December 31, 1996............. $87
1997........................................... 499
1998........................................... 397
1999........................................... 387
2000........................................... 215
2001........................................... 215
Thereafter..................................... 646
------
Total minimum lease payments................... $2,446
======
Rental expense under operating leases amounted to $602, $816, $774,
$638 (unaudited) and $730 for 1993, 1994, 1995 and the ten-month periods ended
October 31, 1995 and 1996, respectively.
The obligations relating to the leasing of computer equipment, which
expire during 1997, are classified as capital leases. Equipment under capital
leases totaled approximately $238, $158 and $92, net of accumulated
depreciation, at December 31, 1994 and 1995 and October 31, 1996, respectively.
Management Agreement
The Company has a management agreement with a management company which
provides certain administrative services to the Company. Management fee expense
in 1993, 1994 and 1995 and for the ten-month periods ended October 31, 1995 and
1996 amounted to $1,447, $2,060, $2,792 and $2,242 (unaudited) and $2,605,
respectively. In addition, the management company paid rent to the Company in
the amount of $120 in 1993, 1994 and 1995 and $100 for the ten-month periods
ended October 31, 1995 (unaudited) and 1996, respectively.
Litigation
Included in general and administrative expense for the year ended
December 31, 1995 and the ten-month period ended October 31, 1995 are legal fees
and settlement costs in connection with certain litigation with a former
licensee in the amounts of $1,000 and $400, respectively.
The Company, from time to time, may be a defendant in actions arising
in the ordinary course of business. In the opinion of management, such
litigation will not have a material effect on the Company's combined financial
condition.
F-18
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
7. Commitments and Contingencies (continued)
Self-Insurance
Effective April 25, 1994, the Company established the Pyramid
Insurance Trust Fund (the "Trust") to provide health and welfare benefits to
eligible employees. Contributions to the Trust by the Company shall be in
amounts sufficient to pay all costs and expenses of the Trust, including, but
not limited to, the cost of self-insured benefit claim payments, a reserve for
self-insured benefit claims and premiums for any fully insured benefit coverage.
Contributions to the Trust, all of which were charged to operations, amounted to
$275 and $517 in 1994 and 1995 and $425 (unaudited) and $507 for the ten-month
periods ended October 31, 1995 and 1996, respectively.
8. Pro Forma Income Taxes (Unaudited)
As discussed in Note 1, the entities in the combined group are
corporations that have elected to be taxed as S Corporations pursuant to the
Internal Revenue Code and certain state and local tax regulations. In connection
with the Offering made hereby, the Company will become subject to federal and
additional state income taxes. The pro forma provision for income taxes
represents the income tax provisions that would have been reported had the
Company been subject to federal and additional state income taxes during the
year ended December 31, 1995 and the ten-month period ended October 31, 1996.
Also, as discussed in Note 1, the Company has adopted the provisions
of SFAS No. 109. SFAS No. 109 requires the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between the financial carrying amounts and the tax bases of existing
assets and liabilities. The pro forma income tax provision has been prepared
according to SFAS No. 109.
F-19
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
(Amounts and disclosures applicable to October 31, 1995 are unaudited)
8. Pro Forma Income Taxes (Unaudited) (continued)
Concurrent with becoming subject to federal and additional state
income taxes, the Company will record a deferred tax asset and a corresponding
tax benefit in the statement of income in accordance with the provisions of SFAS
No. 109. The deferred tax asset at December 31, 1995 and October 31, 1996 would
have been approximately $600 and $700, respectively.
The pro forma income tax provision consists of the following (in
thousands):
Ten Months
Year Ended Ended
December 31, October 31,
------------ -----------
1995 1996
------------ -----------
Current income taxes:
Federal taxes......................... $ 963 $3,158
State and local taxes................. 290 915
------ ------
1,253 4,073
Deferred income tax benefit............... (105) (102)
------ ------
$1,148 $3,971
====== ======
A reconciliation setting forth the differences between the pro forma
effective tax rate of the Company and the U.S. federal statutory tax rate is as
follows:
Ten Months
Year Ended Ended
December 31, October 31,
------------ -----------
1995 1996
---- ----
Federal statutory rate.............................. 34.0% 34.2%
State and local taxes, net of federal tax benefits.. 6.3 6.0
Other items, net, none of which individually
exceeds 5% of federal taxes at statutory rates... (0.1) (0.1)
---- ----
Effective tax rate.................................. 40.2% 40.1%
==== ====
F-20
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS - (Continued)
(In Thousands, Except Per Share Amounts)
8. Pro Forma Income Taxes (Unaudited) (continued)
Pro forma deferred income taxes will reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
pro forma financial reporting and the amounts used for income tax purposes.
Significant components of the Company's pro forma deferred tax asset as of
December 31, 1995 and October 31, 1996 are as follows (in thousands):
1995 1996
---- ----
Book over tax depreciation.......... $143 $162
Allowance for doubtful accounts..... 33 33
Uniform inventory capitalization.... 71 82
Other book accruals................. 353 423
---- ----
$600 $700
==== ====
F-21
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made by this Prospectus and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or any of the Underwriters. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Common Stock by anyone in any jurisdiction in which such offer or solicitation
is not authorized, or in which the person making such offer or solicitation is
not qualified to do so, or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that
information contained herein is correct as of any time subsequent to the date
hereof.
Until ___________, 1997, all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
----------
TABLE OF CONTENTS
Page
----
Prospectus Summary.................... 3
Risk Factors.......................... 9
Reorganization of the Company......... 15
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 20
Selected Combined Financial Data...... 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 24
Business.............................. 30
Management............................ 44
Certain Related Transactions.......... 49
Principal Stockholders................ 51
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 55
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 59
Index to Predecessor Combined
Financial Statements.............. F-1
================================================================================
================================================================================
3,000,000 Shares
[Logo]
800-JR Cigar, Inc.
Common Stock
_____________
PROSPECTUS
_____________
Prudential Securities Incorporated
, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses expected to be incurred
by the Registrant in connection with the offering described in this Registration
Statement, other than the underwriting discount. All of such amounts are
estimated except for the SEC Registration Fee, the National Association of
Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee.
SEC Registration Fee....................... $ *
NASD Filing Fee............................ *
Nasdaq National Market Listing Fee......... *
Printing and Engraving Costs............... *
Blue Sky Fees and Expenses................. *
Legal Fees and Expenses.................... *
Transfer Agent Fee......................... *
Accounting Fees and Expenses............... *
Miscellaneous.............................. *
---------
Total................................
=========
- ----------
* To be completed by amendment.
Item 14. Indemnification of Directors and Officers.
The Company's Certificate of Incorporation provides that the Company
shall, to the fullest extent permitted by Section 145 of the General Corporation
Law of the State of Delaware, as amended from time to time, indemnify all
persons whom it may indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware
permits a corporation, under specified circumstances, to indemnify its
directors, officers, employees or agents against expenses (including attorney's
fees), judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
II-1
<PAGE>
Article Ten of the Company's Certificate of Incorporation provides
that the Company's directors will not be personally liable to the Company or its
shareholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the General Corporation Law of the State of Delaware, which makes
directors liable for unlawful dividends or unlawful stock repurchases or
redemptions or (d) for transactions from which directors derive improper
personal benefit.
The Company's directors and officers will be covered by insurance
policies indemnifying them against certain civil liabilities, including
liabilities under the federal securities laws, which might be incurred by them
in such capacity. In addition, such directors and officers will enter into
indemnification agreements with the Company, pursuant to which the Company will
agree to indemnify such persons for all losses or expenses not otherwise insured
against incurred by reason of any breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done, wrongfully attempted or
alleged to have been done or wrongfully attempted by such officer or director
solely by reason of him or her being an officer of director or both.
The Underwriting Agreement to be filed as Exhibit 1.1 will provide
that the Underwriters named therein will indemnify and hold harmless the Company
and each director, officer or controlling person of the Company from and against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"), and the Underwriting Agreement will provide that
such Underwriters will contribute to certain liabilities of such persons under
the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
None. Upon the closings of the transactions contemplated to occur
pursuant to the Contribution Agreement, dated ____________, 1997, by and among
800-JR Cigar, Inc., and the stockholders of each of J.R. Tobacco of America,
Inc., Cigars by Santa Clara, N.A., Inc., J.N.R. Grocery Corp., J.R. Tobacco NC,
Inc., J&R Tobacco (New Jersey) Corp., J.R. Tobacco Company of Michigan, Inc.,
J.R.-46th Street, Inc., J.R. Tobacco Outlet, Inc. and J.R. Statesville, Inc. the
Company will issue ____ shares in a private placement as described in the
Prospectus under the caption "Reorganization of the Company."
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
Exhibit No. Description of Document
- ----------- -----------------------
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
*4.1 Form of Certificate for Common Stock of the Company.
*5.1 Opinion of Morgan, Lewis & Bockius LLP.
*10.1 The Company's 1997 Long-Term Incentive Plan.
*10.2 The Company's 1997 Non-Employee Directors' Stock Plan.
*10.3 The Company's Employee Stock Purchase Plan.
*10.4 1997 Employee Bonus Pool Plan.
10.5 Employment Agreement, dated March 13, 1997 between the Company and
Lewis I. Rothman.
10.6 Employment Agreement, dated March 13, 1997 between the Company and
LaVonda M. Rothman.
10.7 Employment Agreement, dated March 13, 1997 between the Company and
Jane Vargas.
*10.8 Management Agreement dated ___________, 1997 by and between MC
Management and the Company.
*10.9 Form of Indemnification Agreement.
*10.10 Contribution Agreement dated ___________, 1997 by and among Lewis I.
Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the Luke
Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust
and the Company.
*10.11 Tax Agreement dated ___________, 1997 by and among Lewis I. Rothman,
LaVonda M. Rothman, the Shane Rothman Trust, the Luke Rothman Trust,
the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
10.12 Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
N.A., Inc. and Nicaraguan-American Tobacco Company, Inc. ("Natco").
10.13 Agreement dated March 13, 1997 by and between Natco and
Nicaraguan-American Tobacco Sociedad Anonima, S.A.
10.14 Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
N.A., Inc. and Tabacalera Nacional Dominicana, S.A.
10.15 Lease Agreement, dated July 19, 1993 by and between J.R. Tobacco of
America, Inc. and Interstate Development Company, as amended by
First Amendment to Lease, dated November 2, 1993, by and between
J.R. Tobacco of America, Inc. and Interstate Development Company.
*10.16 Lease Agreement, dated ___________, 1996 by and between J.R. Outlet,
Inc. and Casa Blanca, Inc.
*10.17 Form of Note.
*10.18 Form of Additional Note.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of J.H. Cohn LLP.
23.3 Consent of Nominee Directors.
*23.5 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
- -----------
* To be filed by amendment.
II-3
<PAGE>
(b) Financial Statement Schedules:
The financial statement schedules have been omitted because
they are either not applicable or the information is included elsewhere in the
financial statements.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Company has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Whippany, State of New Jersey, on the 13th day of March, 1997.
800-JR CIGAR, INC.
By: /s/ Lew Rothman
-----------------------
Lew Rothman
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Lew Rothman and LaVonda M. Rothman and
each of them as his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) and supplements to this Registration
Statement, and any registration statement relating to any offering made in
connection with the offering covered by this Registration Statement that is to
be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Capacity in Which Signed Date
--------- ------------------------ ----
/s/ Lew Rothman Chief Executive Officer and March 13, 1997
- ----------------------- Chairman of the Board of Directors
Lew Rothman (Chief Operating Officer)
/s/ Timothy P. Shannon Chief Financial Officer March 13, 1997
- ----------------------- (Chief Accounting Officer)
Timothy P. Shannon
/s/ LaVonda M. Rothman Director March 13, 1997
- -----------------------
LaVonda M. Rothman
/s/ Maureen A. Colleton Director March 13, 1997
- -----------------------
Maureen A. Colleton
/s/ Jane Vargas Director March 13, 1997
- -----------------------
Jane Vargas
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Document
- ----------- -----------------------
*1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Company.
3.2 By-Laws of the Company.
*4.1 Form of Certificate for Common Stock of the Company.
*5.1 Opinion of Morgan, Lewis & Bockius LLP.
*10.1 The Company's 1997 Long-Term Incentive Plan.
*10.2 The Company's 1997 Non-Employee Directors' Stock Plan.
*10.3 The Company's Employee Stock Purchase Plan.
*10.4 1997 Employee Bonus Pool Plan.
10.5 Employment Agreement, dated March 13, 1997 between the Company and
Lewis I. Rothman.
10.6 Employment Agreement, dated March 13, 1997 between the Company and
LaVonda M. Rothman.
10.7 Employment Agreement, dated March 13, 1997 between the Company and
Jane Vargas.
*10.8 Management Agreement dated ___________, 1997 by and between MC
Management and the Company.
*10.9 Form of Indemnification Agreement.
*10.10 Contribution Agreement dated ___________, 1997 by and among Lewis I.
Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the Luke
Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust
and the Company.
*10.11 Tax Agreement dated ___________, 1997 by and among Lewis I. Rothman,
LaVonda M. Rothman, the Shane Rothman Trust, the Luke Rothman Trust,
the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
10.12 Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
N.A., Inc. and Nicaraguan-American Tobacco Company, Inc. ("Natco").
10.13 Agreement dated March 13, 1997 by and between Natco and
Nicaraguan-American Tobacco Sociedad Anonima, S.A.
10.14 Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
N.A., Inc. and Tabacalera Nacional Dominicana, S.A.
10.15 Lease Agreement, dated July 19, 1993 by and between J.R. Tobacco of
America, Inc. and Interstate Development Company, as amended by
First Amendment to Lease, dated November 2, 1993, by and between
J.R. Tobacco of America, Inc. and Interstate Development Company.
*10.16 Lease Agreement, dated ___________, 1996 by and between J.R. Outlet,
Inc. and Casa Blanca, Inc.
*10.17 Form of Note.
*10.18 Form of Additional Note.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of J.H. Cohn LLP.
23.3 Consent of Nominee Directors.
*23.5 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
- -----------
* To be filed by amendment.
CERTIFICATE OF INCORPORATION
OF
800-JR CIGAR, INC.
The undersigned incorporator, for the purpose of incorporating or
organizing a corporation under the General Corporation Law of the State of
Delaware, certifies:
ARTICLE ONE
The name of the corporation is 800-JR Cigar, Inc.
ARTICLE TWO
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
ARTICLE THREE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
Delaware.
ARTICLE FOUR
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is forty-five million (45,000,000) shares, of
which five million (5,000,000) shares, designated as Preferred Stock, shall have
a par value of One Cent ($.01) per share (the "Preferred Stock"), and forty
million (40,000,000) shares, designated as Common Stock, shall have a par value
of One Cent ($.01) per share (the "Common Stock").
A statement of the powers, preferences and rights, and the qualifications,
limitations or restrictions thereof, in respect of each class of stock of the
Corporation is as follows:
<PAGE>
PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of this Certificate of Incorporation and the limitations prescribed by law, the
Board of Directors is expressly authorized by adopting resolutions to issue the
shares, fix the number of shares and change the number of shares constituting
any class or series of the Preferred Stock, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (and whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any class or series of the Preferred Stock, without any further action or vote
by the stockholders.
COMMON STOCK
1. Dividends.
Subject to the preferred rights of the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with respect to
any such class or series of Preferred Stock, the holders of the Common Stock
shall be entitled to receive, as and when declared by the Board of Directors out
of the funds of the Corporation legally available therefor, such dividends
(payable in cash, stock or otherwise) as the Board of Directors may from time to
time determine, payable to stockholders of record on such dates, not exceeding
60 days preceding the dividend payment dates, as shall be fixed for such purpose
by the Board of Directors in advance of payment of each particular dividend.
2. Liquidation.
In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, after the distribution or payment
to the holders of shares of any class or series of Preferred Stock as provided
by the Board of Directors with respect to any such class or series of Preferred
Stock, the remaining assets of the Corporation available for distribution to
stockholders shall be distributed among and paid to the holders of Common Stock
ratably in proportion to the number of shares of Common Stock held by them
respectively.
3. Voting Rights.
Except as otherwise required by law or as provided by the Board of
Directors with respect to any class or series of Preferred Stock, the entire
voting power and all voting rights shall be vested exclusively in the Common
Stock. Each holder of shares of Common Stock shall be entitled to one vote for
each share standing in his name on the books of the Corporation.
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<PAGE>
ARTICLE FIVE
1. Board of Directors.
The Directors shall be classified with respect to the time for which they
shall severally hold office into three classes as nearly equal in number as
possible. The Class I Directors shall be elected to hold office for an initial
term expiring at the 1998 annual meeting of stockholders, the Class II Directors
shall be elected to hold office for an initial term expiring at the 1999 annual
meeting of stockholders and the Class III Directors shall be elected to hold
office for an initial term expiring at the 2000 annual meeting of stockholders,
with the members of each class of directors to hold office until their
respective successors have been duly elected and qualified. Thereafter, at each
annual meeting of stockholders, the successors to the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election and until their respective successors have been duly elected
and qualified. At each annual meeting of stockholders at which a quorum is
present, the persons receiving a plurality of the votes cast shall be directors.
No director or class of directors may be removed from office by a vote of the
stockholders at any time except for cause.
2. Vacancies.
Any vacancy on the Board of Directors resulting from death, retirement,
resignation, disqualification or removal from office or other cause, as well as
any vacancy resulting from an increase in the number of directors which occurs
between annual meetings of the stockholders at which directors are elected,
shall be filled only by a majority vote of the remaining directors then in
office, though less than a quorum, except that those vacancies resulting from
removal from office by a vote of the stockholders may be filled by a vote of the
stockholders at the same meeting at which such removal occurs. The directors
chosen to fill vacancies shall hold office for a term expiring at the end of the
next annual meeting of stockholders at which the term of the class to which they
have been elected expires. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of one or more classes
or series of Preferred Stock shall have the right, voting separately, as a class
or series, to elect directors, the election, term of office, filling of
vacancies, removal and other features of such directorships shall be governed by
the terms of the resolution or resolutions adopted by the Board of Directors
pursuant to ARTICLE FOUR applicable thereto, and each director so elected shall
not be subject to the provisions of this ARTICLE FIVE unless otherwise provided
therein.
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<PAGE>
ARTICLE SIX
Elections of directors need not be by ballot unless the By-Laws of the
Corporation shall so provide.
ARTICLE SEVEN
The Board of Directors of the Corporation may make By-Laws and from time to
time may alter, amend or repeal By-Laws.
ARTICLE EIGHT
The Corporation shall, to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, as the same may be amended and
supplemented, indemnify each director and officer of the Corporation from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section and the indemnification provided for herein shall not
be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-Law, agreement, vote of stockholders, vote of
disinterested directors or otherwise, and shall continue as to a person who has
ceased to be a director or officer and shall inure to the benefit of the heirs,
executors and administrators of such persons and the Corporation may purchase
and maintain insurance on behalf of any director or officer to the extent
permitted by Section 145 of the Delaware General Corporation Law.
ARTICLE NINE
The name and mailing address of the incorporator is Samuel B. Fortenbaugh
III, Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178.
-4-
<PAGE>
ARTICLE TEN
No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit.
ARTICLE ELEVEN
Whenever a compromise or arrangement is proposed between this Corporation
and its creditors or any class of them and/or between this Corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
Corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this Corporation under the provisions of
section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
the provisions of section 279 of Title 8 of the Delaware Code order a meeting of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, to be summoned in such
manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
ARTICLE TWELVE
Any action required to be taken at any annual or special meeting of the
stockholders, or any action which may be taken at any annual or special meeting
of such stockholders, may be taken without a meeting, without prior notice, and
without a vote, if a consent or consents in writing, setting forth the action so
taken, shall be signed by the holders of outstanding shares having not less than
two thirds (2/3) of the combined voting power of all the then outstanding shares
of the Corporation entitled to vote.
-5-
<PAGE>
ARTICLE THIRTEEN
Any merger or combination between the Corporation and any entity or person
owning, directly or indirectly, fifteen percent (15%) or more of the
Corporation's shares (an "Interested Purchaser") or any sale by the Corporation
of all or substantially all of the assets of the Corporation to an Interested
Purchaser (a "Transaction") will require the affirmative vote of at least
two-thirds (2/3) of the combined voting power of all of the then outstanding
shares of the Corporation entitled to vote, unless either (i) the Transaction is
approved by two-thirds (2/3) of the full Board of Directors, or (ii) as a result
of the Transaction all holders of then outstanding shares of the Corporation
(other than the Interested Purchaser) receive as a result of the Transaction
cash in an amount at least equal to the highest price paid by the Interested
Purchaser for any shares of the Corporation acquired by such Interested
Purchaser during the thirty-six month period preceding the date of any offer or
proposal to effect a Transaction.
ARTICLE FOURTEEN
The Corporation reserves the right to amend, alter, change or repeal any
provision of this Certificate of Incorporation, in the manner now or hereafter
prescribed by statute, provided, however, notwithstanding any provision of this
Certificate of Incorporation and of the By-Laws, and notwithstanding the fact
that a lesser percentage may be specified by Delaware law, unless such action
has been approved by two-thirds (2/3) of the full Board of Directors, the
affirmative vote of 66-2/3 percent of the votes which all holders of the then
outstanding shares of capital stock of the Corporation would be entitled to cast
thereon, voting together as a single class, shall be required to amend or repeal
any provision of ARTICLE FIVE, TWELVE, THIRTEEN or FOURTEEN or to adopt any
provision inconsistent with ARTICLE FIVE, TWELVE, THIRTEEN or FOURTEEN. In the
event such action has been previously approved by two-thirds (2/3) of the full
Board of Directors, the affirmative vote of a majority of the outstanding stock
entitled to vote thereon shall be sufficient to amend or repeal any provision of
ARTICLE FIVE, TWELVE, THIRTEEN or FOURTEEN or adopt any provision inconsistent
with ARTICLE FIVE, TWELVE, THIRTEEN or FOURTEEN.
-6-
<PAGE>
IN WITNESS WHEREOF, I have signed this Certificate this 11th day of March,
1997.
/s/ Samuel B. Fortenbaugh III
-----------------------------
Samuel B. Fortenbaugh III
-7-
BY-LAWS
OF
800-JR CIGAR, INC.
ARTICLE I
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders of the
Corporation shall be held on such date, at such time and at such place within or
without the State of Delaware as may be designated by the Board of Directors,
for the purpose of electing Directors and for the transaction of such other
business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Except as otherwise provided in the
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors or the President
and shall be called by the President or the Secretary at the request in writing
of stockholders holding together at least ten percent (10%) of the number of
shares of stock outstanding and entitled to vote at such meeting. Any special
meeting of the stockholders shall be held on such date, at such time and at such
place within or without the State of Delaware as the Board of Directors or the
officer calling the meeting may designate.
<PAGE>
If a special meeting is called by any person or persons other than the
Board of Directors, the request shall be in writing, specifying the time of such
meeting and the general nature of the business proposed to be transacted, and
shall be delivered personally or sent by registered mail or by telegraphic or
other facsimile transmission to the President or the Secretary of the
Corporation. No business may be transacted at such special meeting otherwise
than as specified in such notice. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Section 3 of Article I. Nothing contained in this
paragraph of this Section 2 shall be construed as limiting, fixing, or affecting
the time when a meeting of stockholders called by action of the Board of
Directors may be held.
At a special meeting of the stockholders, no business shall be transacted
and no corporate action shall be taken other than that stated in the notice of
the meeting unless all of the stockholders are present in person or by proxy, in
which case any and all business may be transacted at the meeting even though the
meeting is held without notice.
SECTION 3. Notice of Meetings. Except as otherwise provided in these
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his or her address as it appears on the records of the Corporation.
The notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
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<PAGE>
SECTION 4. Quorum. At any meeting of the stockholders, the holders of a
majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
SECTION 5. Adjourned Meetings. Whether or not a quorum shall be present in
person or represented at any meeting of the stockholders, the holders of a
majority in number of the shares of stock of the Corporation present in person
or represented by proxy and entitled to vote at such meeting may adjourn from
time to time; provided, however, that if the holders of any class of stock of
the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the
-3-
<PAGE>
adjourned meeting the stockholders, or the holder of any class of stock entitled
to vote separately as a class, as the case may be, may transact any business
which might have been transacted by them at the original meeting. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
adjourned meeting.
SECTION 6. Organization. The President or, in the absence of the President,
the Executive Vice President or, in the absence of the President and the
Executive Vice President, a Vice President shall call all meetings of the
stockholders to order, and shall act as chairman of such meetings. In the
absence of the President, the Executive Vice President and all of the Vice
Presidents, the holders of a majority in number of the shares of stock of the
Corporation present in person or represented by proxy and entitled to vote at
such meeting shall elect a chairman of the meeting.
The Secretary of the Corporation shall act as secretary of all meetings of
the stockholders; but in the absence of the Secretary, the Chairman may appoint
any person to act as secretary of the meeting. It shall be the duty of the
Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days
-4-
<PAGE>
next preceding the meeting, to the examination of any stockholder, for any
purpose germane to the meeting, during ordinary business hours, and shall be
produced and kept at the time and place of the meeting during the whole time
thereof and subject to the inspection of any stockholder who may be present.
SECTION 7. Voting. Except as otherwise provided in the Certificate of
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him or her by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
When directed by the presiding officer or upon the demand of any stockholder,
the vote upon any matter before a meeting of stockholders shall be by ballot.
Except as otherwise provided by law or by the Certificate of Incorporation,
Directors shall be elected by a plurality of the votes cast at a meeting of
stockholders by the stockholders entitled to vote in the election and, whenever
any corporate action, other than the election of Directors is to be taken, it
shall be authorized by a majority of the votes cast at a meeting of stockholders
by the stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the Corporation
or to another corporation, if a majority of the shares entitled to vote in the
election of directors of such
-5-
<PAGE>
other corporation is held, directly or indirectly, by the Corporation, shall
neither be entitled to vote nor be counted for quorum purposes.
SECTION 8. Inspectors. When required by law or directed by the presiding
officer or upon the demand of any stockholder entitled to vote, but not
otherwise, the polls shall be opened and closed, the proxies and ballots shall
be received and taken in charge, and all questions touching the qualification of
voters, the validity of proxies and the acceptance or rejection of votes shall
be decided at any meeting of the stockholders by two or more Inspectors who may
be appointed by the Board of Directors before the meeting or, if not so
appointed, shall be appointed by the presiding officer at the meeting. If any
person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner.
SECTION 9. Advanced Notice of Stockholder Nominees and Stockholder
Business. To be properly brought before an annual meeting or a special meeting,
nominations for the election of Director, or other business must be (a)
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors, (b) otherwise properly brought before
the meeting by or at the direction of the Board of Directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of such stockholder's intent to bring such business before such meeting. To be
timely, such stockholder's notice must be delivered to or mailed and received by
the Secretary of the Corporation not less than sixty (60) days nor more than
ninety
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<PAGE>
(90) days prior to the meeting; provided, however, that in the event that less
than forty-five (45) days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the tenth day
following the day on which such notice of the date of the meeting was mailed or
such public disclosure was made. To be in proper form, such stockholder's notice
to the Secretary of the Corporation shall set forth:
(i) The name and address of such stockholder who intends to make the
nominations or propose the business and, as the case may be, the name and
address of the person or persons to be nominated or the nature of the business
to be proposed;
(ii) A representation that such stockholder is a holder of record of stock
of the Corporation entitled to vote at such meeting and, if applicable, intends
to appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice or introduce the business specified in the notice;
(iii) If applicable, a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder;
(iv) Such other information regarding each nominee or each matter of
business to be proposed by such stockholder as would be required to be included
in a proxy statement filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or intended to be nominated,
or the matter been proposed, or intended to be proposed by the Board of
Directors; and
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(v) If applicable, the consent of each nominee to serve as Director of the
Corporation if so elected.
The Chairman of the meeting may refuse to acknowledge the nomination of any
person or the proposal of any business not made in compliance with the foregoing
procedure.
SECTION 10. Manner of Giving Notice; Affidavit of Notice. Written notice of
any meeting of stockholders, if mailed, is given to a stockholder when deposited
in the United States mail, postage prepaid, directed to such stockholder at such
stockholder's address as it appears on the records of the Corporation. An
affidavit of the Secretary or an assistant Secretary of the Corporation or of
the transfer agent of the Corporation that the notice has been given shall, in
the absence of fraud, be prima facie evidence of the facts stated therein.
SECTION 11. Consent of Stockholders in Lieu of Meeting. Unless otherwise
provided in the Certificate of Incorporation, any action required to be taken or
which may be taken at any annual or special meeting of the stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than
two-thirds (2/3) of the combined voting power of all of the outstanding stock
entitled to vote thereon. Prompt notice of the taking of any such corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
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ARTICLE II
Board of Directors
SECTION 1. Number and Term of Office. The business and affairs of the
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be fixed from time to time by
resolution passed by two-thirds (2/3) of the full Board of Directors. The
Directors shall, except as hereinafter otherwise provided for filling vacancies,
be elected at the annual meeting of stockholders, and shall hold office until
their respective successors are elected and qualified or until their earlier
resignation or removal.
SECTION 2. Removal, Vacancies and Additional Directors. The stockholders
may, at any special meeting the notice of which shall state that it is called
for that purpose, remove, with or without cause, any Director and fill the
vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation or series thereof voting
separately as a class under the provisions of the Certificate of Incorporation,
such Director may be removed and the vacancy filled only by the holders of that
class of stock or series thereof voting separately as a class or by a sole
remaining Director so elected; and provided further so long as the Certificate
of Incorporation provides for a classified Board of Directors, no director or
class of directors may be removed from office by a vote of the stockholders at
any time except for cause. Vacancies caused by any such removal and not filled
by the stockholders at the meeting at which such removal shall have been made,
or any vacancy caused by the death or
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resignation of any Director or for any other reason, and any newly created
directorship resulting from any increase in the authorized number of Directors,
may be filled by the affirmative vote of a majority of the Directors then in
office, although less than a quorum, or by a sole remaining Director, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. Place of Meeting. The Board of Directors may hold its meetings
in such place or places in the State of Delaware or outside the State of
Delaware as the Board from time to time shall determine.
SECTION 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such times and places as the Board from time to time by
resolution shall determine. No notice shall be required for any regular meeting
of the Board of Directors; but a copy of every resolution fixing or changing the
time or place of regular meetings shall be mailed to every Director at least
five days before the first meeting held in pursuance thereof.
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SECTION 5. Special Meetings. Special meetings of the Board of Directors
shall be held whenever called by direction of the President or by any two of the
Directors then in office.
Notice of the day, hour and place of holding of each special meeting shall
be given by mailing the same at least two days before the meeting or by causing
the same to be transmitted by facsimile, telegram or telephone at least one day
before the meeting to each Director. Unless otherwise indicated in the notice
thereof, any and all business other than an amendment of these By-Laws may be
transacted at any special meeting, and an amendment of these By-Laws may be
acted upon if the notice of the meeting shall have stated that the amendment of
these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
SECTION 6. Quorum. Subject to the provisions of Section 2 of this Article
II and Section 3 of Article IV, a majority of the members of the Board of
Directors in office (but in no case less than one-third of the total number of
Directors nor less than two Directors) shall constitute a quorum for the
transaction of business and the vote of the majority of the Directors present at
any meeting of the Board of Directors at which a quorum is present shall be the
act of the Board of Directors. If at any meeting of the Board there is less than
a quorum present, a majority of those present may adjourn the meeting from time
to time.
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SECTION 7. Organization. The President shall preside at all meetings of the
Board of Directors. In the absence of the President, a chairman of the meeting
shall be elected from the Directors present. The Secretary of the Corporation
shall act as secretary of all meetings of the Directors; but in the absence of
the Secretary, the chairman of the meeting may appoint any person to act as
secretary of the meeting.
SECTION 8. Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the Directors of the
Corporation. The Board may designate one or more Directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided by resolution of the Board, shall have and may
exercise all the powers and authority of the Board of Directors in the
management of the business and the affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
approving or adopting, or recommending to the stockholders, any action or matter
expressly required by law to be submitted to stockholders for approval, or
adopting, amending or repealing these By-laws.
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SECTION 9. Conference Telephone Meetings. Unless otherwise restricted by
the Certificate of Incorporation or by these By-Laws, the members of the Board
of Directors or any committee designated by the Board, may participate in a
meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. Consent of Directors or Committee in Lieu of Meeting. Unless
otherwise restricted by the Certificate of Incorporation or by these By-Laws,
any action required or permitted to be taken at any meeting of the Board
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
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ARTICLE III
Officers
SECTION 1. Officers. The officers of the Corporation shall be a President,
an Executive Vice President, one or more Vice Presidents, a Secretary and a
Treasurer, and such additional officers, if any, as shall be elected by the
Board of Directors pursuant to the provisions of Section 7 of this Article III.
The President, one or more Vice Presidents, the Secretary and the Treasurer
shall be elected by the Board of Directors at its first meeting after each
annual meeting of the stockholders. The failure to hold such election shall not
of itself terminate the term of office of any officer. All officers shall hold
office at the pleasure of the Board of Directors. Any officer may resign at any
time upon written notice to the Corporation. Officers may, but need not, be
Directors. Any number of offices may be held by the same person.
All officers, agents and employees shall be subject to removal, with or
without cause, at any time by the Board of Directors. The removal of an officer
without cause shall be without prejudice to his or her contract rights, if any.
The election or appointment of an officer shall not of itself create contract
rights. All agents and employees other than officers elected by the Board of
Directors shall also be subject to removal, with or without cause, at any time
by the officers appointing them.
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Any vacancy caused by the death, resignation or removal of any officer, or
otherwise, may be filled by the Board of Directors, and any officer so elected
shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties of the officers of the Corporation as
set forth in these By-Laws, the officers shall have such authority and shall
perform such duties as from time to time may be determined by the Board of
Directors.
SECTION 2. Powers and Duties of the President. The President shall be the
chief executive officer of the Corporation and, subject to the control of the
Board of Directors, shall have general charge and control of all its business
and affairs and shall have all powers and shall perform all duties incident to
the office of President. The President shall preside at all meetings of the
stockholders and at all meetings of the Board of Directors and shall have such
other powers and perform such other duties as may from time to time be assigned
by these By-Laws or by the Board of Directors.
SECTION 3. Powers and Duties of the Executive Vice President. The Executive
Vice President shall have all powers and shall perform all duties incident to
the office of Executive Vice President and shall have such other powers and
perform such other duties as may from time to time be assigned by these By-Laws
or by the Board of Directors or the President.
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SECTION 4. Powers and Duties of the Vice Presidents. Each Vice President
shall have all powers and shall perform all duties incident to the office of
Vice President and shall have such other powers and perform such other duties as
may from time to time be assigned by these By-Laws or by the Board of Directors
or the President.
SECTION 5. Powers and Duties of the Secretary. The Secretary shall keep the
minutes of all meetings of the Board of Directors and the minutes of all
meetings of the stockholders in books provided for that purpose. The Secretary
shall attend to the giving or serving of all notices of the Corporation; shall
have custody of the corporate seal of the Corporation and shall affix the same
to such documents and other papers as the Board of Directors or the President
shall authorize and direct; shall have charge of the stock certificate books,
transfer books and stock ledgers and such other books and papers as the Board of
Directors or the President shall direct, all of which shall at all reasonable
times be open to the examination of any Director, upon application, at the
office of the Corporation during business hours. The Secretary shall have all
powers and shall perform all duties incident to the office of Secretary and
shall also have such other powers and shall perform such other duties as may
from time to time be assigned by these By-Laws or by the Board of Directors or
the President.
SECTION 6. Powers and Duties of the Treasurer. The Treasurer shall have
custody of, and when proper shall pay out, disburse or otherwise dispose of, all
funds and securities of the Corporation. The Treasurer may endorse on behalf of
the Corporation for collection checks, notes and other obligations and shall
deposit the same to the credit of the Corporation in such
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bank or banks or depositary or depositaries as the Board of Directors may
designate; shall sign all receipts and vouchers for payments made to the
Corporation; shall enter or cause to be entered regularly in the books of the
Corporation kept for the purpose full and accurate accounts of all moneys
received or paid or otherwise disposed of and whenever required by the Board of
Directors or the President shall render statements of such accounts; and shall,
at all reasonable times, exhibit the books and accounts to any Director of the
Corporation upon application at the office of the Corporation during business
hours. The Treasurer shall have all powers and shall perform all duties incident
of the office of Treasurer and shall also have such other powers and shall
perform such other duties as may from time to time be assigned by these By-Laws
or by the Board of Directors or the President.
SECTION 7. Additional Officers. The Board of Directors may from time to
time elect such other officers (who may but need not be Directors), including a
Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned by
the Board of Directors or the President.
The Board of Directors may from time to time by resolution delegate to any
Assistant Treasurer or Assistant Treasurers any of the powers or duties herein
assigned to the Treasurer; and may similarly delegate to any Assistant Secretary
or Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
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SECTION 8. Giving of Bond by Officers. All officers of the Corporation, if
required to do so by the Board of Directors, shall furnish bonds to the
Corporation for the faithful performance of their duties, in such penalties and
with such conditions and security as the Board shall require.
SECTION 9. Voting Upon Stocks. Unless otherwise ordered by the Board of
Directors, the President or any Vice President shall have full power and
authority on behalf of the Corporation to attend and to act and to vote, or in
the name of the Corporation to execute proxies to vote, at any meeting of
stockholders of any corporation in which the Corporation may hold stock, and at
any such meeting shall possess and may exercise, in person or by proxy, any and
all rights, powers and privileges incident to the ownership of such stock. The
Board of Directors may from time to time, by resolution, confer like powers upon
any other person or persons.
SECTION 10. Compensation of Officers. The officers of the Corporation shall
be entitled to receive such compensation for their services as shall from time
to time be determined by the Board of Directors.
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ARTICLE IV
Indemnification of Directors and Officers
Section 1. Nature of Indemnity. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
or has agreed to become a Director or officer of the Corporation, or is or was
serving or has agreed to serve at the request of the Corporation as a Director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of any action alleged to have been taken or omitted in
such capacity, and may indemnify any person who was or is a party or is
threatened to be made a party to such an action, suit or proceeding by reason of
the fact that he or she is or was or has agreed to become an employee or agent
of the Corporation, or is or was serving or has agreed to serve at the request
of the Corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person or on his or her behalf in connection with such action,
suit or proceeding and any appeal therefrom, if such person acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful;
except that in the case of an action or suit by or in the right of the
Corporation to procure a judgment in its favor (1) such indemnification shall be
limited to expenses (including attorneys' fees) actually and reasonably incurred
by such person in
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the defense or settlement of such action or suit, and (2) no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to the
extent that the Delaware Court of Chancery or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Delaware
Court of Chancery or such other court shall deem proper.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he or she reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his or her
conduct was unlawful.
Section 2. Successful Defense. To the extent that a Director, officer,
employee or agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Section 1
of this Article IV or in defense of any claim, issue or matter therein, he or
she shall be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him or her in connection therewith.
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Section 3. Determination that Indemnification is Proper. Any
indemnification of a Director or officer of the Corporation under Section 1 of
this Article IV (unless ordered by a court) shall be made by the Corporation
unless a determination is made that indemnification of the Director or officer
is not proper in the circumstances because he or she has not met the applicable
standard of conduct set forth in said Section 1. Any indemnification of an
employee or agent of the Corporation under said Section 1 (unless ordered by a
court) may be made by the Corporation upon a determination that indemnification
of the employee or agent is proper in the circumstances because he or she has
met the applicable standard of conduct set forth in said Section 1. Any such
determination shall be made (1) by a majority vote of the Directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(2) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (3) by the stockholders.
Section 4. Advance Payment of Expenses. Unless the Board of Directors
otherwise determines in a specific case, expenses incurred by a Director or
officer in defending a civil or criminal action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of the Director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Corporation as authorized in this
Article IV. Such expenses incurred by other employees and agents may be so paid
upon such terms and conditions, if any, as the Board of Directors deems
appropriate. The Board of Directors may authorize the
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Corporation's legal counsel to represent such Director, officer, employee or
agent in any action, suit or proceeding, whether or not the Corporation is a
party to such action, suit or proceeding.
Section 5. Survival; Preservation of Other Rights. The foregoing
indemnification provisions shall be deemed to be a contract between the
Corporation and each Director, officer, employee and agent who serves in any
such capacity at any time while these provisions as well as the relevant
provisions of the Delaware General Corporation Law are in effect and any repeal
or modification thereof shall not affect any right or obligation then existing
with respect to any state of facts then or previously existing or any action,
suit, or proceeding previously or thereafter brought or threatened based in
whole or in part upon any such state of facts. Such a contract right may not be
modified retroactively without the consent of such Director, officer, employee
or agent.
The indemnification provided by this Article IV shall not be deemed
exclusive of any other rights to which a person indemnified may be entitled
under any by-law, agreement, vote of stockholders or disinterested Directors or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a Director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person. The
Corporation may enter into an agreement with any of its Directors, officers,
employees or agents providing for indemnification and advancement of expenses,
including attorneys fees, that may change, enhance, qualify or limit any right
to indemnification or advancement of expenses created by this Article IV.
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Section 6. Severability. If this Article IV or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Director or officer and may
indemnify each employee or agent of the Corporation as to costs, charges and
expenses (including attorneys' fees), judgment, fines and amounts paid in
settlement with respect to any action, suit or proceeding, whether civil,
criminal, administrative or investigative, including an action by or in the
right of the Corporation, to the fullest extent permitted by any applicable
portion of this Article IV that shall not have been invalidated and to the
fullest extent permitted by applicable law.
Section 7. Subrogation. In the event of payment of indemnification to a
person described in Section 1 of this Article IV, the Corporation shall be
subrogated to the extent of such payment to any right of recovery such person
may have and such person, as a condition of receiving indemnification from the
Corporation, shall execute all documents and do all things that the Corporation
may deem necessary or desirable to perfect such right of recovery, including the
execution of such documents necessary to enable the Corporation effectively to
enforce any such recovery.
Section 8. No Duplication of Payments. The Corporation shall not be liable
under this Article IV to make any payment in connection with any claim made
against a person described in Section 1 of this Article IV to the extent such
person has otherwise received payment (under any insurance policy, by-law or
otherwise) of the amounts otherwise payable as indemnity hereunder.
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ARTICLE V
Stock-Seal-Fiscal Year
SECTION 1. Certificates For Shares of Stock. The certificates for shares of
stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be approved by the Board of Directors.
All certificates shall be signed by the President or a Vice President and by the
Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer,
and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be issued and delivered as though the person or
persons who signed such certificate or certificates had not ceased to be such
officer or officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered as the
same are issued. The name of the person owning the shares represented thereby
with the number of such shares and the date of issue thereof shall be entered on
the books of the Corporation.
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Except as hereinafter provided, all certificates surrendered to the
Corporation for transfer shall be cancelled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and cancelled.
SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person owning
a certificate for shares of stock of the Corporation alleges that it has been
lost, stolen or destroyed, he or she shall file in the office of the Corporation
an affidavit setting forth, to the best of his or her knowledge and belief, the
time, place and circumstances of the loss, theft or destruction, and, if
required by the Board of Directors, a bond of indemnity or other indemnification
sufficient in the opinion of the Board of Directors to indemnify the Corporation
and its agents against any claim that may be made against it or them on account
of the alleged loss, theft or destruction of any such certificate or the
issuance of a new certificate in replacement therefor. Thereupon the Corporation
may cause to be issued to such person a new certificate in replacement for the
certificate alleged to have been lost, stolen or destroyed. Upon the stub of
every new certificate so issued shall be noted the fact of such issue and the
number, date and the name of the registered owner of the lost, stolen or
destroyed certificate in lieu of which the new certificate is issued.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation shall be
transferred on the books of the Corporation by the holder thereof, in person or
by his or her attorney duly authorized in writing, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in Section 2 of this Article IV.
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SECTION 4. Regulations. The Board of Directors shall have power and
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
as the case may be, the Board of Directors may fix, in advance, a record date,
which shall not be (i) more than sixty (60) nor less than ten (10) days before
the date of such meeting, or (ii) in the case of corporate action to be taken by
consent in writing without a meeting, prior to, or more than ten (10) days
after, the date upon which the resolution fixing the record date is adopted by
the Board of Directors, or (iii) more than sixty (60) days prior to any other
action.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held; the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the first
date on which the signed written consent setting forth the action taken or
proposed to be taken is delivered to the
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Corporation; and the record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 6. Dividends. Subject to the provisions of the Certificate of
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors shall determine. If the date fixed for
the payment of any dividend shall in any year fall upon a legal holiday, then
the dividend payable on such date shall be paid on the next day not a legal
holiday.
SECTION 7. Corporate Seal. The Board of Directors shall provide a suitable
seal, containing the name of the Corporation, which seal shall be kept in the
custody of the Secretary. A duplicate of the seal may be kept and be used by any
officer of the Corporation designated by the Board of Directors or the
President.
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SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be such
fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
Miscellaneous Provisions.
SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange,
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
SECTION 2. Loans. No loans and no renewals of any loans shall be contracted
on behalf of the Corporation except as authorized by the Board of Directors.
When authorized to do so, any officer or agent of the Corporation may effect
loans and advances for the Corporation from any bank, trust company or other
institution or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the Corporation. When authorized so to do, any
officer or agent of
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the Corporation may pledge, hypothecate or transfer, as security for the payment
of any and all loans, advances, indebtedness and liabilities of the Corporation,
any and all stocks, securities and other personal property at any time held by
the Corporation, and to that end may endorse, assign and deliver the same. Such
authority may be general or confined to specific instances.
SECTION 3. Contracts. Except as otherwise provided in these By-Laws or by
law or as otherwise directed by the Board of Directors, the President or any
Vice President shall be authorized to execute and deliver, in the name and on
behalf of the Corporation, all agreements, bonds, contracts, deeds, mortgages,
and other instruments, either for the Corporation's own account or in a
fiduciary or other capacity, and the seal of the Corporation, if appropriate,
shall be affixed thereto by any of such officers or the Secretary or an
Assistant Secretary. The Board of Directors, the President or any Vice President
designated by the Board of Directors may authorize any other officer, employee
or agent to execute and deliver, in the name and on behalf of the Corporation,
agreements, bonds, contracts, deeds, mortgages, and other instruments, either
for the Corporation's own account or in a fiduciary or other capacity, and, if
appropriate, to affix the seal of the Corporation thereto. The grant of such
authority by the Board or any such officer may be general or confined to
specific instances.
SECTION 4. Waivers of Notice. Whenever any notice whatever is required to
be given by law, by the Certificate of Incorporation or by these By-Laws to any
person or persons, a waiver thereof in writing, signed by the person or persons
entitled to the notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
-29-
<PAGE>
SECTION 5. Offices Outside of Delaware. Except as otherwise required by the
laws of the State of Delaware, the Corporation may have an office or offices and
keep its books, documents and papers outside of the State of Delaware at such
place or places as from time to time may be determined by the Board of Directors
or the President.
ARTICLE VII
Amendments
These By-Laws and any amendment thereof may be altered, amended or
repealed, or new By-Laws may be adopted, by the Board of Directors at any
regular or special meeting by the affirmative vote of two-thirds (2/3) of the
full Board, provided in the case of any special meeting at which all of the
members of the Board are not present, that the notice of such meeting shall have
stated that the amendment of these By-Laws was one of the purposes of the
meeting. In addition, these By-Laws and any amendment thereof may be altered,
amended or repealed or new By-Laws may be adopted by the holders of [a majority
of the total] or [at least two-thirds (2/3) of the combined voting power of all
of the then outstanding stock] of the Corporation entitled to vote at any annual
meeting or at any special meeting, provided, in the case of any special meeting,
that notice of such proposed alteration, amendment, repeal or adoption is
included in the notice of the meeting.
-30-
EMPLOYMENT AGREEMENT
AGREEMENT made as of March 13, 1997 between 800-JR CIGAR, INC., a
Delaware corporation (the "Company"), and LEWIS I. ROTHMAN ("Executive").
WHEREAS, the Company wishes to employ Executive and Executive is
willing to accept such employment, all upon the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date on which the Company sells
shares of its common stock in an initial public offering (the "Employment Date")
and ending as provided in paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as the
President and Chief Executive Officer of the Company and, subject to the control
of the Board of Directors, shall have general charge and control of all its
business and affairs and shall have all powers and perform all duties incident
to the office of President and Chief Executive Officer.
(b) Executive shall report to the Board of Directors of the Company
(the "Board"), and Executive shall devote his best efforts and his full business
time and attention to the business and affairs of the Company and its
Subsidiaries (as defined), except for permitted vacation periods and reasonable
periods of illness or other incapacity and except for such time and effort as he
shall devote in the performance of his duties as an officer of
Nicaraguan-American Tobacco Co., Inc., Nicaraguan-American Tobacco Sociedad
Anonima, S.A. and Tabacalera Nacional Dominicana, S.A.; provided, however, such
duties shall not interfere with his duties and responsibilities relating to the
business and operations of the Company. Executive shall perform his duties and
responsibilities to the best of his abilities in a diligent, trustworthy,
businesslike and efficient manner.
(c) For purposes of this Agreement, "Subsidiary" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
<PAGE>
3. Base Salary and Benefits.
(a) During the Employment Period, Executive's base salary shall be
$200,000 per annum or such higher rate as the Board, in its sole discretion, may
designate from time to time (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices. In addition, during the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit programs,
including insurance and pension plans, for which senior executive employees of
the Company and its Subsidiaries are generally eligible, and Executive shall be
entitled to four (4) weeks of paid vacation each year.
(b) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(c) During the Employment Period, Executive shall be entitled to
receive such bonus or bonuses, if any, as determined by the Board in its
discretion.
4. Term.
(a) Unless renewed by the mutual agreement of the Company and
Executive, the Employment Period shall end on the third anniversary of the
Employment Date; provided that the Employment Period (i) shall terminate prior
to such date upon Executive's death, and (ii) may be terminated at any time by
the Company upon written notice of termination given by the Company to Executive
(a) if Executive shall be unable to perform his duties hereunder for at least 90
consecutive days or any 110 non-consecutive days in any 180-day period by reason
of Executive's mental or physical disability or incapacity or (b) for Cause (as
defined below).
(b) If the Employment Period is terminated due to Executive's death
or by the Company due to Executive's mental or physical disability or incapacity
prior to the third anniversary of the Employment Date, Executive's estate or
Executive, as the case may be, shall be entitled to receive Executive's Base
Salary (as in effect on the date of such termination) payable on the Company's
regular payroll dates for a period equal to the lesser of (i) the remainder of
the then remaining Employment Period and (ii) one year after such termination,
so long as Executive has not breached the provisions of paragraphs 5 and 6
hereof.
(c) If the Employment Period is terminated by the Company for Cause,
Executive shall only be entitled to receive his Base Salary through the date of
termination.
(d) All of Executive's rights to fringe benefits and bonuses
hereunder (if any) accruing after the termination of the Employment Period shall
cease upon such termination.
(e) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or a crime involving moral turpitude or the commission of
any other act involving
-2-
<PAGE>
dishonesty, disloyalty or fraud with respect to the Company or any of its
Subsidiaries, (ii) conduct tending to bring the Company or any of its
Subsidiaries into substantial public disgrace or disrepute, (iii) substantial
and repeated failure to perform duties as reasonably directed by the Board, (iv)
gross negligence or willful misconduct with respect to the Company or any of its
Subsidiaries or (v) any other material breach of this Agreement which is not
cured within 15 days after written notice thereof by the Board of Diredtors to
Executive.
5. Confidential Information. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company concerning the business or affairs of the Company or any Subsidiary
("Confidential Information") are the property of the Company or such Subsidiary.
Therefore, Executive agrees that Executive shall not disclose to any
unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions to
act. Executive shall deliver to the Company at the termination of the Employment
Period, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes and software and other documents and
data (and copies thereof) relating to the Confidential Information or the
business of the Company or any Subsidiary which Executive may then possess or
have under Executive's control.
6. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of Executive's
employment with the Company Executive will become familiar with the Company's
trade secrets and with other confidential information concerning the Company and
its predecessors and that Executive's services have been and will be of special,
unique and extraordinary value to the Company. Therefore, Executive agrees that,
during the Employment Period and for two years thereafter (the "Noncompete
Period"), Executive shall not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business competing with the businesses of the Company or its Subsidiaries as
such businesses exist or are in process on the date of the termination of
Executive's employment, within any geographical area in which the Company or its
Subsidiaries engage or plan to engage in such businesses. Nothing herein shall
prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded, so
long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof or (ii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company or any
Subsidiary to cease doing business with the Company or such Subsidiary, or in
any way interfere with the relationship between any such customer, supplier,
licensee or business relation and the Company or any Subsidiary.
-3-
<PAGE>
(c) If, at the time of enforcement of this paragraph 6, a court
shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law.
(d) In the event of the breach or a threatened breach by Executive
of any of the provisions of this paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security).
7. Executive Representations. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms.
8. Survival. Paragraphs 5 and 6 shall survive and continue in full
force in accordance with their terms notwithstanding any termination of the
Employment Period.
9. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
Notices to Executive:
Lewis I. Rothman
20 Normandy Parkway
Morristown, New Jersey 07960
Notices to the Company:
800-JR Cigar, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Attention: Secretary
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or mailed.
10. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of
-4-
<PAGE>
this Agreement is held to be invalid, illegal or unenforceable in any respect
under any applicable law or rule in any jurisdiction, such invalidity,
illegality or unenforceability will not affect any other provision or any other
jurisdiction, but this Agreement will be reformed, construed and enforced in
such jurisdiction as if such invalid, illegal or unenforceable provision had
never been contained herein.
11. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
12. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
13. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
his rights or delegate his obligations hereunder without the prior written
consent of the Company.
14. Choice of Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of New Jersey, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New Jersey or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of New Jersey.
15. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
800-JR CIGAR, INC.
By /s/ Lewis I. Rothman
-------------------------------
Name: Lewis I. Rothman
Title: Chief Executive Officer
/s/ Lewis I. Rothman
-------------------------------
Lewis I. Rothman
-6-
EMPLOYMENT AGREEMENT
AGREEMENT made as of March 13, 1997 between 800-JR CIGAR, INC., a
Delaware corporation (the "Company"), and LAVONDA M. ROTHMAN ("Executive").
WHEREAS, the Company wishes to employ Executive and Executive is
willing to accept such employment, all upon the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date on which the Company sells
shares of its common stock in an initial public offering (the "Employment Date")
and ending as provided in paragraph 4 hereof (the "Employment Period").
2. Positions and Duties.
(a) During the Employment Period, Executive shall serve as the
Executive Vice President and Secretary of the Company and, subject to the
control of the Board of Directors, shall have all powers and perform all duties
incident to the offices of Executive Vice President and Secretary.
(b) Executive shall report to the President of the Company, and
Executive shall devote her best efforts and her full business time and attention
to the business and affairs of the Company and its Subsidiaries (as defined),
except for permitted vacation periods and reasonable periods of illness or other
incapacity and except for such time and effort as she shall devote in the
performance of her duties as an officer and director of Casa Blanca, Inc.,
provided, however, such duties shall not interfere with her duties and
responsibilities relating to the business and operations of the Company.
Executive shall perform her duties and responsibilities to the best of her
abilities in a diligent, trustworthy, businesslike and efficient manner.
(c) For purposes of this Agreement, "Subsidiary" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
<PAGE>
3. Base Salary and Benefits.
(a) During the Employment Period, Executive's base salary shall be
$200,000 per annum or such higher rate as the Board, in its sole discretion, may
designate from time to time (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices. In addition, during the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit programs,
including insurance and pension plans, for which senior executive employees of
the Company and its Subsidiaries are generally eligible, and Executive shall be
entitled to four (4) weeks of paid vacation each year.
(b) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(c) During the Employment Period, Executive shall be entitled to
receive such bonus or bonuses, if any, as determined by the Board in its
discretion.
4. Term.
(a) Unless renewed by the mutual agreement of the Company and
Executive, the Employment Period shall end on the third anniversary of the
Employment Date; provided that the Employment Period (i) shall terminate prior
to such date upon Executive's death, and (ii) may be terminated at any time by
the Company upon written notice of termination given by the Company to Executive
(a) if Executive shall be unable to perform his duties hereunder for at least 90
consecutive days or any 110 non-consecutive days in any 180-day period by reason
of Executive's mental or physical disability or incapacity or (b) for Cause (as
defined below).
(b) If the Employment Period is terminated due to Executive's death
or by the Company due to Executive's mental or physical disability or incapacity
prior to the third anniversary of the Employment Date, Executive's estate or
Executive, as the case may be, shall be entitled to receive Executive's Base
Salary (as in effect on the date of such termination) payable on the Company's
regular payroll dates for a period equal to the lesser of (i) the remainder of
the then remaining Employment Period and (ii) one year after such termination,
so long as Executive has not breached the provisions of paragraphs 5 and 6
hereof.
(c) If the Employment Period is terminated by the Company for Cause,
Executive shall only be entitled to receive her Base Salary through the date of
termination.
(d) All of Executive's rights to fringe benefits and bonuses
hereunder (if any) accruing after the termination of the Employment Period shall
cease upon such termination.
-2-
<PAGE>
(e) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or a crime involving moral turpitude or the commission of
any other act involving dishonesty, disloyalty or fraud with respect to the
Company or any of its Subsidiaries, (ii) conduct tending to bring the Company or
any of its Subsidiaries into substantial public disgrace or disrepute, (iii)
substantial and repeated failure to perform duties as reasonably directed by the
Board, (iv) gross negligence or willful misconduct with respect to the Company
or any of its Subsidiaries or (v) any other material breach of this Agreement
which is not cured within 15 days after written notice thereof by the Board of
Directors to Executive.
5. Confidential Information. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company concerning the business or affairs of the Company or any Subsidiary
("Confidential Information") are the property of the Company or such Subsidiary.
Therefore, Executive agrees that Executive shall not disclose to any
unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions to
act. Executive shall deliver to the Company at the termination of the Employment
Period, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes and software and other documents and
data (and copies thereof) relating to the Confidential Information or the
business of the Company or any Subsidiary which Executive may then possess or
have under Executive's control.
6. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of Executive's
employment with the Company Executive will become familiar with the Company's
trade secrets and with other confidential information concerning the Company and
its predecessors and that Executive's services have been and will be of special,
unique and extraordinary value to the Company. Therefore, Executive agrees that,
during the Employment Period and for two years thereafter (the "Noncompete
Period"), Executive shall not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business competing with the businesses of the Company or its Subsidiaries as
such businesses exist or are in process on the date of the termination of
Executive's employment, within any geographical area in which the Company or its
Subsidiaries engage or plan to engage in such businesses. Nothing herein shall
prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded, so
long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof or (ii) induce or attempt to induce any
customer, supplier, licensee or other business relation of the Company or any
Subsidiary to cease doing business with the Company or such Subsidiary, or in
any way
-3-
<PAGE>
interfere with the relationship between any such customer, supplier, licensee or
business relation and the Company or any Subsidiary.
(c) If, at the time of enforcement of this paragraph 6, a court
shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law.
(d) In the event of the breach or a threatened breach by Executive
of any of the provisions of this paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security).
7. Executive Representations. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms.
8. Survival. Paragraphs 5 and 6 shall survive and continue in full
force in accordance with their terms notwithstanding any termination of the
Employment Period.
9. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
Notices to Executive:
LaVonda M. Rothman
20 Normandy Parkway
Morristown, New Jersey 07960
Notices to the Company:
800-JR Cigar, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Attention: Secretary
-4-
<PAGE>
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or mailed.
10. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
12. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
13. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
her rights or delegate her obligations hereunder without the prior written
consent of the Company.
14. Choice of Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of New Jersey, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New Jersey or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of New Jersey.
15. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
800-JR CIGAR, INC.
By /s/ Lewis I. Rothman
-------------------------------
Name: Lewis I. Rothman
Title: Chief Executive Officer
/s/ LaVonda M. Rothman
-------------------------------
LaVonda M. Rothman
-6-
EMPLOYMENT AGREEMENT
AGREEMENT made as of March 13, 1997 between 800-JR CIGAR, INC., a
Delaware corporation (the "Company"), and JANE VARGAS ("Executive").
WHEREAS, the Company wishes to employ Executive and Executive is
willing to accept such employment, all upon the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Employment. The Company shall employ Executive, and Executive
accepts employment with the Company, upon the terms and conditions set forth in
this Agreement for the period beginning on the date on which the Company sells
shares of its common stock in an initial public offering (the "Employment Date")
and ending as provided in paragraph 4 hereof (the "Employment Period").
2. Position and Duties.
(a) During the Employment Period, Executive shall serve as a Vice
President of the Company and, subject to the control of the Board of Directors
of the Company (the "Board"), shall have all powers and perform all duties
incident to the office of Vice President.
(b) Executive shall report to the President of the Company, and
Executive shall devote her best efforts and her full business time and attention
to the business and affairs of the Company and its Subsidiaries (as defined),
except for permitted vacation periods and reasonable periods of illness or other
incapacity. Executive shall perform her duties and responsibilities to the best
of her abilities in a diligent, trustworthy, businesslike and efficient manner.
(c) For purposes of this Agreement, "Subsidiary" shall mean any
corporation of which the securities having a majority of the voting power in
electing directors are, at the time of determination, owned by the Company,
directly or through one or more Subsidiaries.
-1-
<PAGE>
3. Compensation and Benefits.
(a) During the Employment Period, Executive's base salary shall be
$105,000 per annum or such higher rate as the Board, in its sole discretion, may
designate from time to time (the "Base Salary"), which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices. In addition, during the Employment Period, Executive shall be
entitled to participate in all of the Company's employee benefit programs,
including insurance and pension plans, for which senior executive employees of
the Company and its Subsidiaries are generally eligible, and Executive shall be
entitled to four (4) weeks of paid vacation each year.
(b) The Company shall reimburse Executive for all reasonable
expenses incurred by Executive in the course of performing Executive's duties
under this Agreement which are consistent with the Company's policies in effect
from time to time with respect to travel, entertainment and other business
expenses, subject to the Company's requirements with respect to reporting and
documentation of such expenses.
(c) In consideration of Executive's performance of services
hereunder and of Executive entering into this Agreement, Executive shall receive
a one-time signing bonus of $500,000 payable by the Company as soon as
practicable following the Employment Date. In addition, during the Employment
Period, Executive shall be entitled to receive such bonus or bonuses, if any, as
determined by the Board in its discretion.
4. Term.
(a) Unless renewed by the mutual agreement of the Company and
Executive, the Employment Period shall end on the fifth anniversary of the
Employment Date; provided that the Employment Period (i) shall terminate prior
to such date upon Executive's death, and (ii) may be terminated at any time by
the Company upon written notice of termination given by the Company to Executive
(a) if Executive shall be unable to perform his duties hereunder for at least 90
consecutive days or any 110 non-consecutive days in any 180-day period by reason
of Executive's mental or physical disability or incapacity or (b) for Cause (as
defined below).
(b) If the Employment Period is terminated due to Executive's death
or by the Company due to Executive's mental or physical disability or incapacity
prior to the third anniversary of the Employment Date, Executive's estate or
Executive, as the case may be, shall be entitled to receive Executive's Base
Salary (as in effect on the date of such termination) payable on the Company's
regular payroll dates for a period equal to the lesser of (i) the remainder of
the then remaining Employment Period and (ii) one year after such termination,
so long as Executive has not breached the provisions of paragraphs 5 and 6
hereof.
(c) If the Employment Period is terminated by the Company for Cause,
Executive shall only be entitled to receive her Base Salary through the date of
termination.
-2-
<PAGE>
(d) All of Executive's rights to fringe benefits and bonuses
hereunder (if any) accruing after the termination of the Employment Period shall
cease upon such termination.
(e) For purposes of this Agreement, "Cause" shall mean (i) the
commission of a felony or a crime involving moral turpitude or the commission of
any other act involving dishonesty, disloyalty or fraud with respect to the
Company or any of its Subsidiaries, (ii) conduct tending to bring the Company or
any of its Subsidiaries into substantial public disgrace or disrepute, (iii)
substantial and repeated failure to perform duties as reasonably directed by the
Board, (iv) gross negligence or willful misconduct with respect to the Company
or any of its Subsidiaries or (v) any other material breach of this Agreement
which is not cured within 15 days after written notice thereof by the Board of
Directors to Executive.
5. Confidential Information. Executive acknowledges that the
information, observations and data obtained by Executive while employed by the
Company concerning the business or affairs of the Company or any Subsidiary
("Confidential Information") are the property of the Company or such Subsidiary.
Therefore, Executive agrees that Executive shall not disclose to any
unauthorized person or use for Executive's own account any Confidential
Information without the prior written consent of the Board, unless and to the
extent that the aforementioned matters become generally known to and available
for use by the public other than as a result of Executive's acts or omissions to
act. Executive shall deliver to the Company at the termination of the Employment
Period, or at any other time the Company may request, all memoranda, notes,
plans, records, reports, computer tapes and software and other documents and
data (and copies thereof) relating to the Confidential Information or the
business of the Company or any Subsidiary which Executive may then possess or
have under Executive's control.
6. Non-Compete, Non-Solicitation.
(a) Executive acknowledges that in the course of Executive's
employment with the Company Executive will become familiar with the Company's
trade secrets and with other confidential information concerning the Company and
its predecessors and that Executive's services have been and will be of special,
unique and extraordinary value to the Company. Therefore, Executive agrees that,
during the Employment Period and for two years thereafter (the "Noncompete
Period"), Executive shall not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any business competing with the businesses of the Company or its Subsidiaries as
such businesses exist or are in process on the date of the termination of
Executive's employment, within any geographical area in which the Company or its
Subsidiaries engage or plan to engage in such businesses. Nothing herein shall
prohibit Executive from being a passive owner of not more than 2% of the
outstanding stock of any class of a corporation which is publicly traded, so
long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any
-3-
<PAGE>
Subsidiary to leave the employ of the Company or such Subsidiary, or in any way
interfere with the relationship between the Company or any Subsidiary and any
employee thereof or (ii) induce or attempt to induce any customer, supplier,
licensee or other business relation of the Company or any Subsidiary to cease
doing business with the Company or such Subsidiary, or in any way interfere with
the relationship between any such customer, supplier, licensee or business
relation and the Company or any Subsidiary.
(c) If, at the time of enforcement of this paragraph 6, a court
shall hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law.
(d) In the event of the breach or a threatened breach by Executive
of any of the provisions of this paragraph 6, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security).
7. Executive Representations. Executive hereby represents and
warrants to the Company that (i) the execution, delivery and performance of this
Agreement by Executive does not and will not conflict with, breach, violate or
cause a default under any contract, agreement, instrument, order, judgment or
decree to which Executive is a party or by which Executive is bound, (ii)
Executive is not a party to or bound by any employment agreement, noncompete
agreement or confidentiality agreement with any other person or entity and (iii)
upon the execution and delivery of this Agreement by the Company, this Agreement
shall be the valid and binding obligation of Executive, enforceable in
accordance with its terms.
8. Survival. Paragraphs 5 and 6 shall survive and continue in full
force in accordance with their terms notwithstanding any termination of the
Employment Period.
9. Notices. Any notice provided for in this Agreement shall be in
writing and shall be either personally delivered, or mailed by first class mail,
return receipt requested, to the recipient at the address below indicated:
Notices to Executive:
Jane Vargas, Vice President
800-JR Cigar, Inc.
301 Route 10 East
Whippany, New Jersey 07981
-4-
<PAGE>
Notices to the Company:
800-JR Cigar, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Attention: Secretary
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Agreement will be deemed to have been given when so delivered
or mailed.
10. Severability. Whenever possible, each provision of this
Agreement will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be invalid,
illegal or unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
11. Complete Agreement. This Agreement embodies the complete
agreement and understanding among the parties and supersedes and preempts any
prior understandings, agreements or representations by or among the parties,
written or oral, which may have related to the subject matter hereof in any way.
12. Counterparts. This Agreement may be executed in separate
counterparts, each of which is deemed to be an original and all of which taken
together constitute one and the same agreement.
13. Successors and Assigns. This Agreement is intended to bind and
inure to the benefit of and be enforceable by Executive, the Company and their
respective heirs, successors and assigns, except that Executive may not assign
her rights or delegate her obligations hereunder without the prior written
consent of the Company.
14. Choice of Law. This Agreement shall be governed by and construed
in accordance with the domestic laws of the State of New Jersey, without giving
effect to any choice of law or conflict of law provision or rule (whether of the
State of New Jersey or any other jurisdiction) that would cause the application
of the laws of any jurisdiction other than the State of New Jersey.
15. Amendment and Waiver. The provisions of this Agreement may be
amended or waived only with the prior written consent of the Company and
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first written above.
800-JR CIGAR, INC.
By /s/ Lewis I. Rothman
-------------------------------
Name: Lewis I. Rothman
Title: Chief Executive Officer
/s/ Jane Vargas
-------------------------------
Jane Vargas
-6-
AGREEMENT
AGREEMENT made and entered into this 13th day of March, 1997, by and
between NICARAGUAN-AMERICAN TOBACCO CO., INC., a corporation organized and
existing under the laws of the State of Delaware and having its principal
offices in the State of New Jersey (hereinafter, the "Importer") and CIGARS BY
SANTA CLARA, N.A., INC., a corporation organized and existing under the laws of
the State of North Carolina and having its principal offices in the State of
North Carolina (hereinafter, the "Buyer").
WHEREAS, Buyer requires a stable supply of its proprietary premium cigars;
and
WHEREAS, Importer has entered into an agreement with Nicaraguan-American
Tobacco Sociedad Anonima, S.A. ("NATSA") in the form attached hereto as Exhibit
A, pursuant to which NATSA has agreed to sell all of its premium cigar
production exclusively to Importer; and
WHEREAS, Importer is willing to sell such products exclusively to Buyer,
and Buyer is desirous of purchasing such products from Importer throughout the
period hereinafter specified;
NOW THEREFORE, in consideration of the foregoing and the obligations of
Importer and Buyer herein contained, the parties do hereby agree as follows:
1. Quantity. Importer agrees to import for sale exclusively to Buyer, and
Buyer agrees to purchase from Importer, a quantity of premium cigars equal to
not less than all of the premium cigars annually imported by Importer from
NATSA.
2. Quality and Price. Importer understands and agrees that Buyer shall
have the exclusive right to designate all products to be produced by NATSA for
sale to Importer. Importer agrees that all premium cigars sold to Buyer
hereunder shall be purchased from NATSA. Cigars provided to Buyer hereunder
shall be of a quality and packaged in a manner approved by Buyer; it being
understood that any premium cigars which are unsaleable at the time of delivery
to Buyer shall be replaced by Importer at no charge to Buyer. The unit price
charged to Buyer shall equal $100 per 1,000 units above amounts invoiced to
Importer by NATSA.
3. Force Majeure. Neither party hereto shall be liable for any failure by
it to make or take any delivery hereunder, or for any delay by it in making or
taking such delivery, if such failure or delay is due to any contingency which
is beyond the reasonable control of such party, including, without limitation,
acts of God, drought or other adverse weather conditions, earthquakes, flood,
fires, explosions, wars, strikes, and any other causes beyond the reasonable
control of the party in question whether of the kind herein enumerated or
otherwise.
4. Term. This Agreement shall become effective from the date first above
written and shall continue in force for a period of one (1) year. This Agreement
shall automatically be
<PAGE>
extended for nine (9) additional periods of one-year each unless Buyer shall
give Importer written notice of termination at the end of the initial term or
any such one-year period at least 120 days prior to the end of the initial term
or such one-year period, as the case may be, in which event this Agreement shall
terminate at the end of the initial term or such one-year period, as the case
may be.
5. Successors and Assigns. The benefits of this Agreement shall inure to
the respective representatives and successors of the parties hereto, and the
obligations assumed in this Agreement by the parties hereto shall be binding
upon their respective successors.
6. Assignment. Buyer shall have the right to sell or assign this
Agreement. Importer may not assign this Agreement without the prior written
consent of Buyer.
7. Governing Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the laws of the State of
North Carolina without reference to its choice of law provisions.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed and delivered on its behalf by its officer thereunto duly
authorized as of the date first above written.
NICARAGUAN-AMERICAN TOBACCO CIGARS BY SANTA CLARA,
CO., INC. N.A., INC.
By: /s/ Lewis I. Rothman By: /s/ Lewis I. Rothman
------------------------- ------------------------
Name: Lewis I. Rothman Name: Lewis I. Rothman
Title: Secretary Title: President
AGREEMENT
AGREEMENT made and entered into this 13th day of March, 1997, by and
between NICARAGUAN-AMERICAN TOBACCO SOCIEDAD ANONIMA, S.A., a corporation
organized and existing under the laws of Nicaragua and having its principal
offices in Nicaragua (hereinafter, the "Manufacturer") and NICARAGUAN-AMERICAN
TOBACCO CO., INC., a corporation organized and existing under the laws of the
State of Delaware and having its principal offices in the State of New Jersey
(hereinafter, the "Importer").
WHEREAS, Importer is an importer of premium cigars and requires a stable
supply of premium cigars for resale; and
WHEREAS, Manufacturer is desirous of manufacturing premium cigars to
Importer's specifications and selling such products exclusively to Importer
throughout the period hereinafter specified;
NOW THEREFORE, in consideration of the foregoing and the obligations of
Manufacturer and Importer herein contained, the parties do hereby agree as
follows:
1. Quantity. Manufacturer agrees to produce for sale exclusively to
Importer, and Importer agrees to purchase from Manufacturer, a quantity of
premium cigars, under such brand name labels as Importer shall specify, equal to
not less than all of Manufacturer's annual premium cigar production.
Manufacturer agrees that its annual premium cigar production during the term of
this agreement shall equal or exceed 13,000,000 units.
2. Quality and Price. Cigars provided to Importer hereunder shall be of a
quality and packaged in a manner designated by Cigars By Santa Clara, N.A., Inc.
and approved by Importer; it being understood that any premium cigars which are
unsaleable at the time of delivery to Importer shall be replaced by Manufacturer
at no charge to Importer. The base unit price charged to Importer shall be the
Manufacturer's actual cost of the unit. The base unit price may be adjusted from
time to time by mutual agreement of Manufacturer and Importer; provided,
however, that in no event shall any increase in such unit price exceed the
average increase in unit prices of all premium cigars produced in Nicaragua sold
by the manufacturers thereof to distributors, as reported by the Cigar
Association of America.
3. Delivery; Force Majeure. The products under this agreement shall be
deemed to have been delivered to Importer at the port of discharge in Tampa,
Florida in the United States of America, and title and risk of loss shall pass
to Importer at such point of delivery. Neither party hereto shall be liable for
any failure by it to make or take any delivery hereunder, or for any delay by it
in making or taking such delivery, if such failure or delay is due to any
contingency which is beyond the reasonable control of such party, including,
without limitation, acts of God, drought or other adverse weather conditions,
earthquakes, flood, fires, explosions, wars, strikes,
<PAGE>
and any other causes beyond the reasonable control of the party in question
whether of the kind herein enumerated or otherwise.
4. Term. This Agreement shall become effective from the date first above
written and shall continue in force for a period of one (1) year. This Agreement
shall automatically be extended for nine (9) additional periods of one-year each
unless Importer shall give Manufacturer written notice of termination at the end
of the initial term or any such one-year period at least 120 days prior to the
end of the initial term or such one-year period, as the case may be, in which
event this Agreement shall terminate at the end of the initial term or such
one-year period, as the case may be.
5. Successors and Assigns. The benefits of this Agreement shall inure to
the respective representatives and successors of the parties hereto, and the
obligations assumed in this Agreement by the parties hereto shall be binding
upon their respective successors.
6. Assignment. Importer shall have the right to sell or assign this
Agreement. Manufacturer may not assign this Agreement without the prior written
consent of Importer.
7. Governing Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the laws of the State of
North Carolina without reference to its choice of law provisions.
8. Consent to Jurisdiction. EACH OF MANUFACTURER AND IMPORTER CONSENTS TO
THE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF
IREDELL, STATE OF NORTH CAROLINA AND IRREVOCABLY AGREES THAT ALL ACTIONS OR
PROCEEDINGS RELATING TO THIS AGREEMENT MAY BE LITIGATED IN SUCH COURTS. EACH OF
MANUFACTURER AND IMPORTER ACCEPTS, GENERALLY AND UNCONDITIONALLY, THE
NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF
FORUM NON CONVENIENS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH THIS AGREEMENT. EACH OF MANUFACTURER AND
IMPORTER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT OF ANY OF
THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF
COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE PARTY AT
THE ADDRESS SPECIFIED ON THE SIGNATURE PAGE OF THIS AGREEMENT, SUCH SERVICE TO
BECOME EFFECTIVE FIFTEEN (15) DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL IN
ANY WAY BE DEEMED TO LIMIT THE ABILITY OF ANY PARTY HERETO TO SERVE ANY SUCH
LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS IN ANY OTHER MANNER PERMITTED BY
APPLICABLE LAW OR TO OBTAIN JURISDICTION OVER OR TO BRING ANY ACTION, SUIT OR
PROCEEDING AGAINST THE OTHER PARTY HERETO
<PAGE>
IN SUCH OTHER JURISDICTIONS, AND IN SUCH MANNER, AS MAY BE PERMITTED BY ANY
APPLICABLE LAW.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed and delivered on its behalf by its officer thereunto duly
authorized as of the date first above written.
NICARAGUAN-AMERICAN TOBACCO NICARAGUAN-AMERICAN
SOCIEDAD ANONIMA, S.A. TOBACCO CO., INC.
By: /s/ Lewis I. Rothman By: /s/ Lewis I. Rothman
------------------------- ------------------------
Name: Lewis I. Rothman Name: Lewis I. Rothman
Title: Secretary Title: Secretary
APTDO, Postal No . 64 2008 18th Street
- -------------------------------------- ---------------------------
Esteli, Nicaragua Tampa, Florida 33601
- -------------------------------------- ---------------------------
(Address) (Address)
AGREEMENT
AGREEMENT made and entered into this 13th day of March, 1997, by and
between TABACALERA NACIONAL DOMINICANA, S.A., a company organized and existing
under the laws of the Dominican Republic and having its principal offices in the
Dominican Republic (hereinafter, the "Seller") and CIGARS BY SANTA CLARA, N.A.,
INC., a corporation organized and existing under the laws of the State of North
Carolina and having its principal offices in the State of North Carolina
(hereinafter, the "Buyer").
WHEREAS, Buyer requires a stable supply of its proprietary premium cigars;
and
WHEREAS, Seller is desirous of manufacturing premium cigars of or under
Buyer's trademarked brand names and selling such products exclusively to Buyer
throughout the period hereinafter specified;
NOW THEREFORE, in consideration of the foregoing and the obligations of
Seller and Buyer herein contained, the parties do hereby agree as follows:
1. Quantity. Seller agrees to produce for sale exclusively to Buyer, and
Buyer agrees to purchase from Seller, a quantity of premium cigars, under such
brand name labels as Buyer shall specify, equal to not less than one-third
(331/3%) of Seller's annual premium cigar production. Seller agrees to commence
production of its premium cigars in May 1997 and that its annual premium cigar
production during the term of this agreement shall equal or exceed 2,600,000
units.
2. Quality and Price. Cigars provided to Buyer hereunder shall be of a
quality and packaged in a manner approved by Buyer; it being understood that any
premium cigars which are unsaleable at the time of delivery to Buyer shall be
replaced by Seller at no charge to Buyer. The base unit price charged to Buyer
shall be negotiated between Buyer and Seller and shall be set forth on an
invoice signed by both parties attached hereto and made a part hereof. The base
unit price may be adjusted from time to time by mutual agreement of Buyer and
Seller; provided, however, that in no event shall any increase in such unit
price exceed the average increase in unit prices of all premium cigars produced
in the Dominican Republic sold by the manufacturers thereof to distributors, as
reported by the Cigar Association of America.
3. Force Majeure. Neither party hereto shall be liable for any failure by
it to make or take any delivery hereunder, or for any delay by it in making or
taking such delivery, if such failure or delay is due to any contingency which
is beyond the reasonable control of such party, including, without limitation,
acts of God, drought or other adverse weather conditions, earthquakes, flood,
fires, explosions, wars, strikes, and any other causes beyond the reasonable
control of the party in question, whether of the kind herein enumerated or
otherwise.
<PAGE>
4. Term. This Agreement shall become effective from the date first above
written and shall continue in force for a period of one (1) year. This Agreement
shall automatically be extended for nine (9) additional periods of one-year each
unless Buyer shall give Seller written notice of termination at the end of the
initial term or any such one-year period at least 180 days prior to the end of
the initial term or such one-year period, as the case may be, in which event
this Agreement shall terminate at the end of the initial term or such one-year
period, as the case may be.
5. Successors and Assigns. The benefits of this Agreement shall inure to
the respective representatives and successors of the parties hereto, and the
obligations assumed in this Agreement by the parties hereto shall be binding
upon their respective successors.
6. Assignment. Buyer shall have the right to sell or assign this
Agreement. Seller may not assign this Agreement without the prior written
consent of Buyer.
7. Governing Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the laws of the State of
North Carolina without reference to its choice of law provisions.
8. Consent to Jurisdiction. EACH OF SELLER AND BUYER CONSENTS TO THE
JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED WITHIN THE COUNTY OF IREDELL,
STATE OF NORTH CAROLINA AND IRREVOCABLY AGREES THAT ALL ACTIONS OR PROCEEDINGS
RELATING TO THIS AGREEMENT MAY BE LITIGATED IN SUCH COURTS. EACH OF SELLER AND
BUYER ACCEPTS, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF
THE AFORESAID COURTS AND WAIVES ANY DEFENSE OF FORUM NON CONVENIENS, AND
IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION
WITH THIS AGREEMENT. EACH OF SELLER AND BUYER FURTHER IRREVOCABLY CONSENTS TO
THE SERVICE OF PROCESS OUT OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH
ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED
MAIL, POSTAGE PREPAID, TO THE PARTY AT THE ADDRESS SPECIFIED ON THE SIGNATURE
PAGE OF THIS AGREEMENT, SUCH SERVICE TO BECOME EFFECTIVE FIFTEEN (15) DAYS AFTER
SUCH MAILING. NOTHING HEREIN SHALL IN ANY WAY BE DEEMED TO LIMIT THE ABILITY OF
ANY PARTY HERETO TO SERVE ANY SUCH LEGAL PROCESS, SUMMONS, NOTICES AND DOCUMENTS
IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW OR TO OBTAIN JURISDICTION OVER
OR TO BRING ANY ACTION, SUIT OR PROCEEDING AGAINST THE OTHER PARTY HERETO IN
SUCH OTHER JURISDICTIONS, AND IN SUCH MANNER, AS MAY BE PERMITTED BY ANY
APPLICABLE LAW.
2
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed and delivered on its behalf by its officer thereunto duly
authorized as of the date first above written.
TABACALERA NACIONAL CIGARS BY SANTA CLARA,
DOMINICANA, S.A N.A., INC.
By: /s/ Lewis I. Rothman By: /s/ Lewis I. Rothman
------------------------- ------------------------
Name: Lewis I. Rothman Name: Lewis I. Rothman
Title: Vice President and Treasurer Title: President
Zona Franca 1515 E. Broad Street
- -------------------------------------- ---------------------------
Santiago, Dominican Republic Statesville, NC 28677
- -------------------------------------- ---------------------------
(Address) (Address)
3
LEASE AGREEMENT
THIS LEASE AGREEMENT is made as of the 2nd day of May, 1993, by and between
INTERSTATE DEVELOPMENT COMPANY, a North Carolina corporation with its principal
offices in Statesville, North Carolina, hereinafter called "Landlord", and JR
TOBACCO OF AMERICA, INC., a New Jersey corporation with its principal offices in
Selma, North Carolina, hereinafter called "Tenant";
W I T N E S S E T H:
The parties hereto agree for themselves, their successors and assigns, as
follows:
1. Basic Lease Provisions. The following terms, whenever used in this Lease
with the first letter of each word capitalized, shall have only the meanings set
forth in this Paragraph, unless those meanings are expressly modified, limited
or expanded elsewhere in this Lease:
(a) Demised Premises: Space outlined in red on Exhibit A, containing a
total floor area of approximately fifty-three thousand eight hundred sixteen
(53,816) square feet, as may be adjusted pursuant to Paragraph 2.
(b) Shopping Center: That land owned by Landlord on which the Demised
Premises are located, which is outlined in green on Exhibit A and described on
Exhibit B.
(c) Lease Term: Eleven (11) full Lease Years, plus the period from delivery
of possession of the Demised Premises until the Rent Commencement Date, together
with one (1) option to extend the Lease Term for a period of ten (10) years.
(d) Lease Year: The first Lease Year shall be the period commencing on the
Rent Commencement Date and terminating on the first December 31 that is at least
twelve (12) full calendar months thereafter. Each subsequent Lease Year shall be
a calendar year.
(e) Guaranteed Minimum Rent:
i. Eight Thousand Nine Hundred Sixty-Nine and 35/100 Dollars
($8,969.35) per month, during each of the first (1st) through
thirteenth (13th) months of the first (1st) Lease Year.
ii. Seventeen Thousand Nine Hundred Thirty-Eight and 70/100 Dollars
($17,938.70) per month, during each month of the remainder of the
first (1st) Lease Year.
<PAGE>
iii. Two Hundred Fifteen Thousand Two Hundred Sixty-Four and NO/100
Dollars ($215,264.00) per annum, payable in equal monthly
installments of Seventeen Thousand Nine Hundred Thirty-Eight and
70/100 Dollars ($17,938.70), during each of the second (2nd)
through the eleventh (11th) Lease Years.
iv. Two Hundred Forty-Two Thousand One Hundred Seventy-Two and NO/100
Dollars ($242,172.00) per annum, payable in equal monthly
installments of Twenty Thousand One Hundred Eighty-One and NO/100
Dollars ($20,181.00), during each of the twelfth (12th) through
the twenty-first (21st) Lease Years (the Renewal Period).
(f) Use Permitted: For the operation of a discount variety store and for
any other lawful purpose or purposes; provided, however, that Tenant shall not
use the Demised Premises for any prohibited use as set forth in Exhibit D
attached hereto.
(g) Trade Name: J.R. TOBACCO.
(h) Real Estate Taxes: Tenant's shares as set forth in Paragraph 4. The
initial estimated cost per square foot of Floor Area of the Demised Premises for
the first Lease Year is Thirty-Four Cents ($0.34).
(i) Insurance: During the initial Term of this Lease and the Renewal
Period, Tenant's share shall be Fifteen Cents ($.15) per square foot of Floor
Area of the Demised Premises.
(j) Common Area Maintenance and Security: During the initial Term of this
Lease (the 1st through 11th Lease Years), Tenant's share shall be Fifty Cents
($.50) per square foot of Floor Area of the Demised Premises, and during the
Renewal Period (the 12th through 21st Lease Years), Tenant's share shall be
Sixty Cents ($.60) per square foot of Floor Area of the Demised Premises.
(k) Landlord's Mailing Address: Post Office Box 366, Statesville, North
Carolina 28677-0366.
(l) Tenant's Mailing Address: Post Office Box 656, Selma, North Carolina
27576- 0656.
(m) Place to Pay Rent: Post Office Box 366, Statesville, North Carolina
28677-0366.
(n) Floor Area: The number of square feet of floor space within the Demised
Premises or other areas of the Shopping Center, as the case may be. All Floor
Areas shall be calculated by using dimension from the centerlines of interior or
party walls, and from the exterior faces of exterior walls.
2
<PAGE>
(o) Gross Leasable Area: Landlord warrants that, as of the date of this
Lease, the Gross Leasable Area of the Shopping Center is 154,867 square feet.
The Gross Leasable Area of the Shopping Center shall be defined as and shall
mean all leasable areas within the Shopping Center intended for the exclusive
use and occupancy by tenants of the Shopping Center. In the event the Gross
Leasable Area of the Shopping Center and/or the Floor Area of the Demised
Premises changes during the Lease Term, Tenant's pro rata share of any costs and
expenses shall be adjusted accordingly; provided, however, that in the event
that the Gross Leasable Area of the Shopping Center is reduced, Tenant's pro
rata share of Common Area Maintenance and Security expenses shall not be
increased above the amount set forth in Paragraph 1(j).
(p) Rent Commencement Date: The earlier to occur of: (i) the date Tenant
opens for business in the Demised Premises; (ii) one hundred-eighty (180) days
after Tenant has received its temporary or permanent Certificate of Occupancy
for the Demises Premises; or (iii) September 1, 1993.
(q) Exhibits: The following exhibits are attached to this Lease and are
hereby incorporated in and made a part of this Lease:
i. Exhibit A - Site Plan Identifying Demised Premises and the
Shopping Center
ii. Exhibit B - Legal Description of the Shopping Center Land
iii. Exhibit C - Memorandum of Lease
iv. Exhibit D - Prohibited Uses
v. Exhibit E - Punch List
vi. Exhibit F - Subordination, Nondisturbance and Attornment
Agreement
vii. Exhibit G - Site Plan of Shopping Center and Pylon Sign
viii. Exhibit H - Permitted Encumbrances
ix. Exhibit I - Approved Signage
Each reference in this Lease to any of the Basic Lease Provisions contained
in this Paragraph 1 shall be construed to incorporate all of the terms provided
by such Basic Lease Provisions. In the events of any conflict between the Basic
Lease Provisions and the balance of this Lease, including any exhibits, riders,
addenda or amendments, then the balance of this Lease shall control.
2. Premises. Landlord hereby leases to Tenant, and Tenant hereby accepts
and rents from Landlord at the rental, and upon the terms and conditions
hereinafter set forth, the interior of
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the Demised Premises as described in Paragraph 1(a), together with the
nonexclusive right to use the Common Areas (as defined in Paragraph 9) and the
nonexclusive right to enjoy the beneficial use of easements or rights-of-way, if
any, that benefit the Shopping Center. Within sixty (60) days after Tenant takes
possession of the Demised Premises, Tenant may, at Tenant option and expense,
have its architect recalculate the Floor Area of the Demised Premises. Tenant
shall submit such recalculation to Landlord for Landlord's approval, which shall
not be unreasonably withheld or delayed, and the Guaranteed Minimum Rent and all
additional charges based on the Floor Area of the Demised Premises shall be
proportionately adjusted to reflect the actual Floor Area of the Demised
Premises. The Floor Area of the Demised Premises shall be determined by
measuring from the exterior surface of exterior walls (and extensions thereof,
in the case of openings) and from the center line of demising walls, all of
which form the perimeter of the Demised Premises. Nothing contained in this
Lease shall be construed as a grant, rental or conveyance of: (i) any rights in
the roof or exterior of the building of which the Demised Premises constitute a
part; (ii) the air space (occupied or not) above a horizontal plane coterminous
with the bottom edge of the structural steel framework supporting the roof of
the Demised Premises; (iii) the Common Areas (except as expressly provided in
this Lease); (iv) the air space (occupied or not) below a horizontal plane
coterminous with the finished floor level of the Demised Premises; or (v) the
land upon which the Demised Premises are located.
3. Term. The Lease Term shall begin on the date of delivery of the Demised
Premises, as provided in Paragraph 5, and shall end at midnight on December 31,
2003, the date of expiration of the tenth (10th) Lease Year after the Rent
Commencement Date.
At the end of the Lease Term provided Tenant is not in default beyond the
expiration of any applicable cure period, Tenant shall have the option to renew
and extend the Lease Term for one (1) period of ten (10) years ("Renewal
Period"), upon the same terms and conditions set forth in this Lease, including
Guaranteed Minimum Rent as set forth in Paragraph 1(e). Tenant shall exercise
each renewal option by written notice to Landlord given on or before twelve (12)
months before the expiration of the original Lease Term. All references to the
"Lease Term" or the "Term of this Lease" shall, unless the context clearly
indicates a different meaning, be deemed to include any properly exercised
Renewal Period.
4. Rent. Tenant shall pay to Landlord for the use and occupancy of the
Demised Premises the following amounts:
(a) Guaranteed Minimum Rent. Commencing on the Rent Commencement Date,
Tenant shall pay to Landlord Guaranteed Minimum Rent at the rate per annum
specified in Paragraph 1(e), payable in equal monthly installments as specified
in Paragraph 1(e), in advance on or before the first day of each and every
calendar month, without demand, setoff or deduction, except as otherwise
provided herein. If the Rent Commencement Date falls on a day other than the
first day of the month, then the rent for the first fractional month shall be
computed on a daily basis (based on a 30-day month) and paid on the Rent
Commencement Date.
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Landlord makes no representations as to the period or periods that any
department stores or any other tenant in the Shopping Center will be open for
business, and this Lease will not be affected by any closing of such business.
(b) Real Estate Taxes. Commencing on the Rent Commencement Date, Tenant
shall pay to Landlord, as additional rent for each Lease Year, a pro rata share
of each of the following real estate taxes, based upon the fraction having as
its numerator the Floor Area of the Demised Premises, and as its denominator the
Gross Leasable Area:
i. All real estate taxes and assessments of every kind or nature
which are now or may hereafter be imposed or assessed upon the
Demised Premises or the Shopping Center; provided, however, that
such real estate taxes and assessments shall not include any
penalties or late fees or any of Landlord's franchise, income,
sales, transfer, gift, estate or inheritance tax.
ii. All taxes or excises on rent or any other tax, levy or charge
however described levied against the Landlord by the federal
government, the State of North Carolina or any political
subdivision of the State of North Carolina on account of rent or
other charges payable to Landlord under this Lease or based upon
the parking facilities and/or the number of parking spaces
provided by the Landlord in the Shopping Center to the extent
that any such taxes are levied in substitution for real estate
taxes; provided, however, that such taxes or excises shall not
include any penalties or late fees or any of Landlord's
franchise, income, sales, transfer, gift, estate or inheritance
tax.
To the extent that there is an increase in the taxes as a result of the
construction of new leasable floor area within the Shopping Center, Tenant's pro
rata share shall be recomputed based upon the change in the total leasable space
in the Shopping Center.
Payment shall be made by Tenant within fifteen (15) days after receipt of a
written statement from Landlord setting forth the amount of such expense,
showing in reasonable detail the manner in which it has been computed, together
with a copy of the tax or assessment bill. A copy of the tax or assessment bill
submitted by Landlord to Tenant shall at all times be sufficient evidence of the
amount of such taxes.
Landlord shall pay, as and when they become due, all real estate taxes and
special and general assessments levied or imposed on the Shopping Center
(including the Demised Premises). If Landlord fails to pay any such tax or
assessment upon the Shopping Center when due, Tenant may pay any or all of such
taxes. Landlord shall promptly after demand therefor, reimburse Tenant for any
such payment or expense. If Landlord fails to reimburse Tenant within fifteen
(15) days after such demand, Tenant may offset the amount of such payment
against the Guaranteed Minimum Rent.
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Landlord shall notify Tenant of any increases in the taxes and assessments
imposed or assessed upon the Demised Premises or the Shopping Center. Tenant
may, at its option and at its cost and expense, protest or appeal any such
increase provided that: (i) Tenant has given Landlord written notice of Tenant's
intention to file such protest and appeal and Landlord has not, within fifteen
(15) days after Landlord's receipt of such notice, notified Tenant that Landlord
has filed a protest or appeal or intends to file such protest and appeal within
the time permitted by law, and (ii) Tenant cooperates with other tenants in the
Shopping Center interested or involved in pursuing such a protest or appeal. If
required by law, Tenant may take any action in the name of Landlord who shall
cooperate with Tenant to such an extent as Tenant may reasonably require;
provided, however, that Tenant shall fully indemnify and save Landlord harmless
from all loss, cost, damage and expense incurred by or to be incurred by
Landlord as a result thereof. In the event Landlord desires to protest or appeal
any such increase, Tenant agrees, at no cost to Tenant, to cooperate with
Landlord and execute any documents which may be reasonably necessary and proper
for any proceeding related to such protest or appeal.
(c) Insurance Expenses. Commencing on the Rent Commencement Date, Tenant
shall pay to Landlord, as additional rent for each Lease Year, a share of the
cost to Landlord of insurance obtained by Landlord pursuant to Paragraphs 12 and
13. Tenant's share of such cost for each Lease Year during the Lease Term,
including the Renewal Period, shall be equal to Fifteen Cents ($.15) per square
foot of Floor Area of the Demised Premises. The annual charge shall be paid to
Landlord in twelve (12) equal monthly installments in advance on the first day
of each calendar month.
(d) Additional Rent. In addition to all other rent required to be paid
pursuant to the terms of this Paragraph 4, Tenant shall pay, as additional rent,
the sums required to be paid pursuant to other provisions of this Lease, whether
or not those sums are designated "additional rent." If the time for payment of
any such amounts or charges is not specified in this Lease, they shall be deemed
payable within ten (10) days after written demand from Landlord.
(e) Interest and Late Charges. If Tenant fails to pay, when due and
payable, any rent or any additional rent, or amounts or charges of any kind or
character provided in this Lease, such unpaid amounts shall bear interest at
Citicorp's prime rate per annum from the date that is ten (10) days after the
date due until the date of payment; provided, however, if two (2) times in any
calendar year Tenant fails to pay when due and payable any rent or additional
rent or amounts or charges of any kind or character provided in this Lease, any
subsequent amounts that Tenant fails to pay when due and payable during such
calendar year shall bear interest from the date due until the date of payment.
In addition to such interest, if Tenant fails to pay any installment of
Guaranteed Minimum Rent by the fifth (5th) day for the month in which such
installment is due, a late charge equal to two percent (2%) of the monthly
installment of Guaranteed Minimum Rent shall be assessed. In no event may any
late charge and/or interest provided in this Paragraph 4(e) exceed the maximum
permitted by law.
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(f) Payment of Rent. All rent and additional rent payments provided herein
shall be made payable to Interstate Development Company, Post Office Box 366,
Statesville, North Carolina 28677-0366, until notice to the contrary is given by
Landlord.
5. Improvements and Delivery of Demised Premises.
(a) Landlord warrants that it is the owner of the Shopping Center. Landlord
has previously developed the Shopping Center with commercial retail buildings
and other improvements as shown on Exhibit A.
(b) Landlord shall deliver possession of the Demised Premises to Tenant
upon the full execution of this Lease. Tenant expressly recognizes and agrees
that it has inspected the Demised Premises, that Landlord makes no warranty
whatsoever with respect to the condition thereof, that Tenant accepts the
Demised Premises in "AS IS" condition, and that there is no obligatioin
whatsoever on the part of Landlord to make any improvement to or other
modification of the Demised Premises. Notwithstanding the terms of the preceding
sentence, Landlord represents that the heating, air conditioning, electrical and
plumbing systems serving the Demised Premises are in working order, and
Landlord, at its expense, shall complete all of the repairs identified on the
punch list attached hereto as Exhibit E on or before the date that is forty-five
(45) days from the date hereof. In the event that Landlord does not complete the
repairs within such forty-five (45) day period, the Rent Commencement Date shall
be extended by one day for each day after the forty-five (45) day period that
Landlord does not complete such repairs.
(c) Upon delivery of the Demised Premises to Tenant, Tenant shall proceed
to install such stock, fixtures and equipment and to perform such other work as
shall be necessary or appropriate in order to prepare the Demised Premises for
the opening of business ("Tenant's Work"). Tenant's Work shall be performed by a
licensed contractor in a good and workman like manner with the use of good
grades of materials, in accordance with applicable laws and building codes and
in a manner so as not to structurally impair the Demised Premises or the
Shopping Center. Tenant shall be liable for any damage caused to the Demised
Premises or the Shopping Center arising as a result of or during Tenant's Work.
Notwithstanding the foregoing, Tenant shall not make any structural or exterior
changes to the Demised Premises without Landlord's prior written approval, which
approval shall not be unreasonably withheld. Landlord hereby agrees that Tenant
shall have the right to install an additional truck loading dock in the Demised
Premises in accordance with plans that have been approved in advance by
Landlord, which approval shall not be unreasonably withheld.
(d) By occupying the Demised Premises after the delivery of possession, to
install fixtures, facilities or equipment, or to perform finishing work, or for
any other purpose, Tenant shall be deemed to have accepted the same and to have
acknowledged that the Demised Premises are in the condition required by this
Lease, except as otherwise provided on Exhibit E.
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6. Use of the Premises.
(a) The Demised Premises shall, during the Lease Term, be used and occupied
only for the Use Permitted, and operated under the Trade Name, specifically set
forth in Paragraphs 1(f) and 1(g), and for no other purpose and under no other
name, without the written consent of Landlord, which consent shall not be
unreasonably withheld. Tenant shall install and maintain in the Demised Premises
store fixtures of high quality and shall, during the first Lease Year, operate
its business in the whole of the Demised Premises in a high-grade reputable
manner throughout the Lease Term, keeping the Demised Premises in a clean and
sanitary condition, and in general employing its best business judgment, efforts
and abilities to operate said business in an efficient and businesslike manner,
to the end that the maximum volume of sales which can be reasonably produced in
the Demised Premises shall be realized under Tenant's Trade Name.
(b) If at any time during the Lease Term, the Demised Premises shall be
closed for business for a period of sixty (60) consecutive days or more, other
than as a result of fire or other casualty, eminent domain or force majeure,
Landlord shall have the right to terminate this Lease upon thirty (30) days
written notice to Tenant. In the event that Landlord terminates this Lease in
accordance with the provisions of this paragraph, the Lease shall terminate
effective as of the date specified in Landlord's notice (but not earlier than
the date that is thirty (30) days after such notice) and neither party shall
have any further obligations hereunder, except that both parties shall remain
liable for any accrued obligations existing as of the date of termination.
Tenant shall execute a recordable cancellation agreement acceptable to Landlord
evidencing any early termination, and shall surrender the Demised Premises on
the termination date in accordance with Paragraphs 8 and 14.
(c) Tenant shall not use or suffer or permit to be used the Demised
Premises or any part thereof in violation of any law or ordinance or any
regulation of any governmental authority or in any manner that will constitute a
nuisance, or that will injure the reputation of the Shopping Center or any part
thereof, or for any hazardous purpose, or that will violate, suspend, void or
serve to increase the premium rate of or make inoperative any policy or policies
of insurance of any kind whatsoever at any time carried on any property,
buildings or improvements in the Shopping Center or any part thereof.
(d) During the Lease Term, Tenant agrees:
i. To keep the Demised Premises, including all vestibules, entrances
and returns located therein, all improvements thereon, and all
windows, doors and glass or plate glass fixtures, in a safe,
clean, orderly and sanitary condition at all times.
ii. To store or stock in the Demised Premises only such goods, wares,
merchandise, or other property as shall be reasonably required in
connection with Tenant's business in the Demised Premises.
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iii. To use for offices, clerical or other nonselling purposes only
such space in the Demised Premises as is from time to time
reasonably required for Tenant's business therein.
iv. To store all trash and garbage in adequate containers, maintained
in a neat and clean condition and located so as not to be visible
to the public in or outside the Shopping Center and so as not to
create or permit any health, safety or fire hazard, and not to
permit undue accumulation of garbage, trash, rubbish and other
refuse in the Demised Premises.
v. Not to burn any papers, trash or garbage of any kind in or about
the Demised Premises or the Shopping Center.
vi. Not to use or operate any equipment, fixtures or machinery which
in Landlord's reasonable opinion is harmful to it or disturbs
other tenants or customers in the Shopping Center.
vii. Not to use the plumbing facilities for any purpose other than
that for which they were constructed and not to dispose of any
damaging or injurious substance therein.
viii. Not to distribute any handbills or other advertising matter in
an unreasonable manner on or about any part of the Shopping
Center outside the Demised Premises, and in the event that Tenant
elects to distribute any such handbills or other advertising
matter, to promptly reimburse Landlord for any additional
cleaning expenses incurred by Landlord in connection therewith.
ix. Not to advertise any going out of business, removal, fire,
bankruptcy, auction or other distress sale on the Demised
Premises unless and until satisfactory proof has been supplied
that the person intending to conduct such sales has complied
meticulously with all legal requirements, including without
limitation any applicable rules and regulations of the Federal
Trade Commission.
x. Not to use any sidewalks, walkways or other common areas of the
Shopping Center for the keeping, displaying, advertising and/or
sale of any merchandise or other object; provided, however,
Tenant shall have the right to use, in a businesslike fashion,
the sidewalks immediately outside of and adjacent to the Demised
Premises for the exhibit and sale of its merchandise so long as
Tenant does not unreasonably interfere with pedestrian traffic in
the Shopping Center or unreasonably restrict pedestrian access by
sidewalk to other tenants in the Shopping Center.
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xi. Not to install on or about the Demised Premises any amplifiers or
similar devices and/or not to use in, on or about the Demised
Premises any advertising medium which may be heard or experienced
outside the Demised Premises, such as flashing lights,
searchlights, loudspeakers, phonographs, television or radio
broadcasts, and which unreasonably disturb and interfere with the
business conducted by other tenants in the Shopping Center.
xii. Not to install a television antenna outside the Demised Premises
without first notifying Landlord in writing; and, if Tenant is
permitted to connect with any master antenna provided by
Landlord, to furnish and install any and all wiring and booster
systems related to such connection and the operation within the
Demised Premises of television receivers, and to reimburse
Landlord for all connection charges incurred by Landlord.
xiii. To keep the Demised Premises clean, orderly, sanitary and free
from objectionable odors and from termites, insects, vermin and
other pests, and not to keep any live animals of any kind in,
upon or about the Demised Premises. Tenant agrees to establish at
its own cost and expense, a pest, vermin or other extermination
program for the Demised Premises. Any program of extermination
and the company or person performing the same shall be subject to
Landlord's approval, not to be unreasonably withheld.
xiv. To comply with any and all requirements of any of the constituted
public authorities, and with the terms of any State or federal
statute or local ordinance or regulation applicable to Tenant or
its use of the Demised Premises, and to save Landlord harmless
from penalties, fines, costs, expense or damages resulting from
failure to do so.
xv. To give to Landlord immediate verbal notice followed by prompt
written notice of any accident, fire or damage occurring on or to
the Demised Premises; provided, however, that Tenant shall not be
required to notify Landlord of any minor accidents or injuries
occurring on the Demised Premises.
xvi. To use its best efforts to perform all loading and unloading of
goods only in the areas and through such entrances as may be
designated for such purposes on Exhibit G. Trailers and/or trucks
servicing the Demised Premises shall follow such routes in the
Shopping Center as designated on Exhibit G and shall remain
parked in areas of the Shopping Center designated on Exhibit G.
xvii. To use its best efforts to require Tenant's employees to park
their cars only in those portions of the parking area or at such
other places as designated on Exhibit G.
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xviii. To comply with all reasonable rules and regulations of Landlord
in effect at the time of the execution of this Lease, or at any
time or times, and from time to time promulgated by Landlord,
which Landlord in its reasonable discretion shall deem necessary
for the proper operation of the Shopping Center, or the Demised
Premises, all in accordance with good standards for the operation
of a shopping center, including but not limited to the
installation of such fire extinguishers and other safety
equipment as Landlord may require; it being understood that
Landlord may except certain tenants leasing more than ten
thousand (10,000) square feet from compliance with all or part of
said rules and regulations. In the event that Landlord excepts
any such tenant from compliance with all or part of any rule or
regulation, Tenant shall also be excepted from compliance with
all or part of such rule or regulation.
(e) Subsequent to Tenant's occupancy and initial build out of the Demised
Premises as provided in Paragraph 5(c), Tenant shall have the right to make any
non-structural alterations and improvements costing less than $500,000.00 to the
interior of the Demised Premises without obtaining the prior written consent of
Landlord, provided that such alterations and improvements are constructed: (i)
in a good and workman like manner with the use of good grades of materials
equivalent to those used in Tenant's initial build out of the Demised Premises,
(ii) in accordance with applicable laws and building codes and (iii) in a manner
so as not to structurally impair the Demised Premises or the Shopping Center.
Tenant shall be liable for any damage caused to the Demised Premises or the
Shopping Center arising as a result of or during the construction of such
alterations and improvements.
Tenant shall not install or affix any sign, device, fixture or attachment
on or to the exterior of the Demised Premises, or the building containing the
Demised Premises, including the roof or the canopy, nor place any improvement,
sign or advertising device, or obstruction of any type or kind, upon the Common
Areas, or upon the exterior Demised Premises, without first obtaining Landlord's
written consent, which shall not be unreasonably withheld. All storefront signs
shall be individually illuminated channel letters (exposed raceways not
permitted), and shall be in compliance with municipal sign ordinances and plans
approved in advance by Landlord, which approval shall not be unreasonably
withheld. Landlord hereby approves Tenant's signage plans attached hereto as
Exhibit I. Tenant shall have the right to erect a highway pylon sign at a
location in the Shopping Center shown on Exhibit G provided that such sign shall
be in compliance with municipal sign ordinances and plans approved in advance by
Landlord, and Landlord agrees to cooperate with Tenant in connection with
Tenant's application for any permits necessary in connection with the erection
of such sign. Tenant shall use its best efforts to erect such sign outside of
the parking field of the Shopping Center. Notwithstanding the foregoing, in the
event that Tenant cannot locate its pylon sign outside of the parking field of
the Shopping Center due to any applicable right-of-way restrictions, Landlord
agrees that Tenant shall have the right to erect its pylon sign in the parking
field at a location to be agreed upon by Landlord and Tenant. In addition,
Tenant shall have the right to install, at its expense, a sign panel on the
Shopping Center pylon in the location previously occupied by the Roses sign
panel provided that such sign panel shall be in compliance with all
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municipal sign ordinances and plans approved in advance by Landlord. Tenant also
shall have the right, at its expense, to increase the height of the Shopping
Center pylon provided that (i) any adjustments that Tenant makes to the height
of such pylon shall be in compliance with municipal sign ordinances, any
restrictions affecting the Shopping Center and plans approved in advance by
Landlord, (ii) the tenants of the Major Stores (as hereinafter defined) do not
object to any such adjustments, and (iii) Tenant makes any such adjustments at a
time and in a manner that is reasonably satisfactory to Landlord. If Tenant
shall do any of the foregoing acts in contravention of this provision, without
limiting any other remedy Landlord may have therefor under this Lease, in law or
in equity, Landlord shall have the right to remove any sign, device, fixture or
attachment, and restore the Demised Premises and/or the Common Areas to the
condition thereof prior to such act; and the cost of such removal and
restoration shall be paid by Tenant to Landlord within ten (10) days after
demand therefor. If requested by Landlord, Tenant agrees to remove any and all
signs, awnings, canopies, fixtures, alterations, installations, additions and/or
improvements from the Demised Premises upon the expiration of the Lease Term.
7. Landlord's Covenant to Maintain. Landlord will, keep and maintain in
good order and repair during the Lease Term the foundations, plumbing,
electrical and sprinkler systems to the extent that such systems are outside of
the Demised Premises, the utility lines and connections to the Demised Premises,
the heating and air conditioning system serving the Demised Premises, the
exterior and principal structural portions of the buildings and other
improvements constituting the Shopping Center including, without limitation, the
roof, roof membrane, roof covering, load bearing walls, floor slabs and masonry
walls; provided, however, that Landlord will not be responsible for or required
to make, and Tenant will make, any repairs which may have been occasioned or
necessitated by the negligence of Tenant, its agents, employees or invitees.
Landlord shall not be liable for any damages resulting from its failure to make
repairs unless such failure continues beyond a reasonable time after receipt of
notice of the necessity for such repairs.
Notwithstanding the foregoing, if any repairs required to be made by
Landlord under this Lease are not completed within thirty (30) days after
written notice from Tenant, Tenant may at its option make such repairs and
offset the cost of such repairs against the Guaranteed Minimum Rent; provided,
however, Tenant shall not have the right to offset any amount exceeding $25,000
in each Lease Year unless the amounts to be offset were paid by Tenant in
connection with the replacement of the roof on the Demised Premises in which
event Tenant shall have the right to offset an amount not to exceed $100,000 in
such Lease Year. Tenant may exercise its right to offset for roof placement only
one time during the Lease Term, including the Renewal Period. If any repairs
required to be made by Landlord are commenced when necessary, but cannot be
completed within thirty (30) days, then Landlord shall have an additional
reasonable period to time to complete those repairs, so long as it continues to
prosecute the completion of such repairs with due diligence, and provided it
keeps Tenant fully informed on the progress of the repair work.
8. Tenant's Covenant to Maintain. Tenant will, at its own expense, keep and
maintain in good order and repair during the Lease Term the remainder of the
Demised Premises, including without limitation the entire interior and all
plumbing, wiring and electrical systems.
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All parts of the interior of the Demised Premises shall be painted or
otherwise decorated by the Tenant when reasonably necessary. Tenant will
surrender the Demised Premises at the expiration or earlier termination of this
Lease in as good condition as when initially delivered, excepting only
deterioration caused by ordinary wear and tear, and except as the contrary is
provided in this Lease. All replacements and modifications shall become the
property of Landlord at the end of the Lease Term, subject to the other
provisions of this Lease. Notwithstanding the foregoing, all of Tenant's trade
fixtures, equipment, pylon sign, other signs and other personal property shall
be and remain the sole property of Tenant.
If any repairs required to be made by Tenant under this Lease are not
completed within thirty (30) days, or in case of emergency if those repairs are
not made immediately, Landlord, without limiting any other right or remedy it
may have therefor, may at its option make such repairs without liability to
Tenant for any loss or damage which may result to its stock or business by
reason of such repairs; and, Tenant shall pay to Landlord, upon demand, as
additional rental hereunder, the cost of such repairs. If any repairs required
to be made by Tenant are commenced when necessary, but cannot be completed
within thirty (30) days, then Tenant shall have an additional reasonable period
of time to complete those repairs, so long as it continues to prosecute the
completion of such repairs with due diligence, and provided it keeps Landlord
fully informed on the progress of the repair work.
Except as expressly provided in Paragraph 5, Paragraph 7, Paragraph 8 and
Paragraph 13, Landlord shall have no obligation to repair, maintain, alter,
replace or modify the Demised Premises or any part thereof, or any plumbing,
electrical or mechanical installation located in or serving the Demised
Premises. Under no circumstances shall Landlord be obligated to repair, replace
or maintain any windows, doors, except when and to the extent that proceeds are
received from Landlord's fire, extended coverage or other hazard insurance.
9. Common Areas.
(a) All facilities furnished in the Shopping Center and designated for the
general use, in common, of occupants of the Shopping Center, including Tenant,
its officers, agents, assigns, employees and customers, including but not
limited to parking areas, streets, sidewalks, tunnels, bridges, canopies,
roadways, loading platforms, washrooms, shelters, ramps, landscaped areas and
other similar facilities ("Common Areas"), shall at all times be subject to the
exclusive control and management of Landlord; and Landlord shall have the right
from time to time to change, enlarge, diminish or rearrange the area, level,
location and arrangement of the Common Areas, to restrict parking by tenants and
their employees to employee parking areas, and to make all rules and regulations
and do such things from time to time as in Landlord's reasonable discretion may
be necessary regarding the Common Areas. Notwithstanding the foregoing, during
the Lease Term, Landlord, in the exercise of its rights hereunder, shall not
materially interfere with Tenant's use and occupancy of the Demised Premises and
shall not, without Tenant's prior written consent: (i) erect any building,
fence, wall, sign or other obstruction in the "no build area" shown cross
hatched on Exhibit G, (ii) build any expansion or addition to the Shopping
Center located over or under the Demised Premises, (iii) reduce the parking
ratio below a ratio of 5.5 parking spaces for each 1,000
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square feet of Gross Leasable Area of the Shopping Center, (iv) turn off the
lights in the parking area of the Shopping Center before 11:00 p.m., or (v)
allow any pay or commuter parking in the parking areas of the Shopping Center.
Landlord agrees to maintain that portion of the Shopping Center that is adjacent
to the right-of-way of I-77 so that the underbrush on that portion of the
Shopping Center does not reduce the visibility of the Demised Premises.
(b) Commencing on the Rent Commencement Date, Tenant will pay to Landlord,
as additional rent, without deduction or set-off, its share of Landlord's costs
for operating, maintaining and securing the Common Areas. During each Lease Year
of the initial Term of this Lease (the 1st through 11th Lease Years), Tenant's
share of such costs shall be equal to Fifty Cents ($.50) per square foot of
Floor Area of the Demised Premises, and during each Lease Year of the Renewal
Period (the 12th through 21st Lease Years), Tenant's share of such costs shall
be equal to Sixty Cents ($.60) per square foot of Floor Area of the Demised
Premises. This annual charge shall be paid to Landlord in twelve (12) equal
monthly installments in advance on the first day of each calendar month.
Landlord agrees that it shall require each tenant in the Shopping Center to
contribute to the cost of Common Area maintenance which contribution shall
either be: (i) taken into account by Landlord in determining the amount of the
tenant's rent, or (ii) set out as an additional charge.
(c) Notwithstanding any provisions of this Lease, if any governmental law,
statute, ordinance, regulation, executive order or proclamation or other
governmental requirement or any governmental regulation approved by Landlord
requires or recommends that Landlord not perform any obligation as contained
herein in connection with any energy generation and any energy conservation or
use program, Landlord may comply therewith without being deemed in violation of
this Lease.
10. Utilities. During the Lease Term, Tenant shall pay for all electricity,
heat, air conditioning, water, sewage, janitor service, garbage disposal and
other utilities or services required by it in the use of the Demised Premises.
Tenant's use of electricity, gas and water shall be separately metered.
Landlord shall not be liable to Tenant for any damages should any utilities
be interrupted or required to be terminated because of necessary repairs or
improvements or any cause beyond the reasonable control of Landlord. Nor shall
any such interruption or cessation relieve Tenant from the performance of any of
Tenant's covenants, conditions and agreements under this Lease. Notwithstanding
the foregoing, Landlord shall notify Tenant should Landlord become aware that
any such utilities will be interrupted or terminated and shall cooperate with
Tenant in its efforts to obtain: (i) the resumption of any such utility services
as soon as reasonably possible, and (ii) alternate utility sources during the
period of such interruption or termination.
11. Laws and Insurance Standards. Landlord shall, during the Lease Term, at
Landlord's sole cost and expense, promptly comply with all laws, ordinances,
rules, regulations, directives and standards of all federal, state, county and
municipal governments and all departments
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and agencies thereof having jurisdiction over the Common Areas of the Shopping
Center now or hereafter in effect. Tenant shall, during the Lease Term, at
Tenant's sole cost and expense, promptly comply with all laws, ordinances,
rules, regulations, directives and standards of all federal, state, county and
municipal governments and all departments and agencies thereof having
jurisdiction over the Demised Premises now or hereafter in effect. Tenant shall,
at Tenant's sole cost and expense, make all changes to the Demised Premises
which are or hereafter may be required in order to comply with the foregoing;
provided, however, that Tenant shall not be required to make any structural
changes to the Demised Premises unless such changes are necessitated by Tenant's
use of the Demised Premises. Tenant expressly covenants and agrees to indemnify
and save Landlord harmless from any penalties, damages or charges imposed for
any violation of any of the covenants herein expressed, whether occasioned by
Tenant or any person upon the Demised Premises by license or invitation of
Tenant or holding or occupying the same or any part thereof under or by right of
Tenant. If Tenant fails to comply with any of the foregoing, and as the result
thereof the premiums for any insurance which the Landlord may then or thereafter
have covering the Shopping Center or any part thereof be increased, then,
without limiting Landlord's other remedies or rights in regard to such failure,
Tenant shall pay to Landlord on demand all increases in any such insurance
premiums on the Shopping Center, or such part of any such increase as Landlord
may require on a reasonable basis.
Tenant shall have no claim against Landlord for any damages should Tenant's
use and occupancy of the Demised Premises for the purposes set forth in this
Lease be prohibited or substantially impaired by reason of any law, ordinance or
regulation of federal, state, county or municipal governments or by reason of
any part of any legal or governmental or other public authority.
12. Indemnification of Landlord and Tenant and Liability Insurance.
(a) Tenant shall indemnify, defend and hold Landlord harmless from suits,
actions, damages, liability and expense in connection with loss of life, bodily
or personal injury or property damage arising from or out of any occurrence in,
upon, at or from the Demised Premises, or the occupancy or use by Tenant of the
Demised Premises or any part thereof, or occasioned wholly or in part by any act
or omission by Tenant, its agents, contractors, employees, servants, invitees,
licensees or concessionaires; provided that Tenant's obligations under this
paragraph shall not apply to injury or damage resulting from the gross
negligence or intentional misconduct of Landlord. Tenant shall store its
property in, and shall occupy, the Demised Premises at its own risk, and Tenant
hereby releases Landlord, to the full extent permitted by law, from all claims
of every kind resulting in loss of life, personal or bodily injury or property
damage, no matter when or where same occurs. Landlord shall not be responsible
or liable at any time for any loss or damage to Tenant's merchandise, equipment,
fixtures or other personal property of Tenant or to Tenant's business unless
such loss or damage is caused by the gross negligence or intentional misconduct
of Landlord. Landlord shall not be responsible or liable to Tenant or to those
claiming by, through or under Tenant for any loss or damage to either the person
or property of Tenant that may be occasioned by or through the acts or omissions
of persons occupying adjacent, connecting or adjoining premises.
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Landlord shall not be responsible for any injury, loss or damage to any person
or to any property of Tenant or other person caused by or resulting from
bursting, breakage or from leakage, steam or snow or ice, running, backing up,
seepage, or the overflow of water or sewage in any part of the Demised Premises
or the Shopping Center or for any injury or damage caused by or resulting from
Acts of God or the elements. For the purposes of this Paragraph 12(a), the term
"Landlord" shall be deemed to include any person or entity with which Landlord
contracts to manage the Shopping Center.
(b) Tenant shall at all times during the term of this Lease Term maintain
in full force and effect the following insurance in standard form generally in
use in the State of North Carolina, with solvent insurance companies licensed to
do business in North Carolina on an admitted basis, which are satisfactory to
Landlord:
Comprehensive public liability insurance covering liability for bodily
injury, death and damage to property in the amount of at least One
Million and No/100 Dollars ($1,000,000.00) per occurrence, with an
aggregate limit of at least One Million and No/100 Dollars
($1,000,000.00).
The insurance required by this Paragraph 12(b) shall name Landlord and any
person or entity with which Landlord contracts to manage the Shopping Center as
additional insureds, and shall contain a contractual liability and a
non-imputation endorsement. In addition, the policy shall require at least
thirty (30) days' written notice from the insurance company to Landlord prior to
the cancellation or non-renewal of the policy, or any material change in the
scope or amount of coverage. Prior to the commencement of the Lease Term, and
thereafter at least thirty (30) days prior to the expiration of the policy,
Tenant shall deliver to Landlord a copy of the policy or a certificate
evidencing the required insurance coverage.
(c) Tenant shall, at all times during the Lease Term, maintain workmen's
compensation insurance to comply with the applicable laws of the State of North
Carolina.
(d) Landlord shall at all times during the Lease Term indemnify, defend and
hold Tenant harmless from suits, actions, damages, liability and expense in
connection with loss of life, bodily or personal injury or property damage
arising from or out of any occurrence in, upon, or at or from the Common Areas
of the Shopping Center (including the parking areas), when not a result of any
act or omission of Tenant, its agents, servants or employees; and, Landlord
shall maintain in full force and effect the following insurance on standard form
generally used in the State of North Carolina, with solvent insurance companies
licensed to do business in North Carolina on an admitted basis, covering the
Common Areas:
Comprehensive public liability insurance covering bodily injury, death
and damage to property in the amount of at least One Million and
No/100 Dollars ($1,000,000.00) per occurrence with an aggregate limit
of at least Two Million and No/100 Dollars ($2,000,000.00); provided,
however, that at no
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time will the aggregate amount of such insurance, less claims
incurred, be impaired below a limit of One Million and No/100 Dollars
($1,000,000.00).
The insurance required by this Paragraph 12(d) shall contain a non-imputation
endorsement.
(e) The insurance required by this Paragraph 12 may be included in policies
of insurance covering multiple locations, provided that: (i) in all other
respects, each such policy shall comply with the requirements of this Paragraph
12; (ii) the policy shall specify, or the insuring party shall furnish the other
party with a written certificate from the insurer specifying, (A) the maximum
amount of the total insurance afforded by the blanket policy to the Demised
Premises or the Shopping Center, as the case may be, and (B) any sublimits in
the blanket policy applicable to the Demised Premises or the Shopping Center, as
the case may be, which amounts shall not be less than the amounts required by
this Paragraph 12; and (iii) the protection afforded the insuring party under
the blanket policy shall be no less than that which would have been afforded
under a separate policy or policies relating only to the Demised Premises or the
Shopping Center, as the case may be.
13. Fire Insurance Damage and Destruction.
(a) Subject to the provisions of Paragraph 4, at all times during the Lease
Term, Landlord shall pay all premiums for and maintain in effect, with a
responsible insurance company licensed to do business in the State of North
Carolina on an admitted basis, policies of insurance covering the building of
which the Demised Premises constitute a party, providing protection to the
extent of not less than eighty percent (80%) of the insurable value of said
building against all casualties included under standard insurance industry
practices within the classification "Fire and Extended Coverage, Vandalism and
Malicious Mischief," including sprinkler leakage coverage. Landlord also shall
be responsible for carrying the rental interruption insurance, if any, covering
the Shopping Center. Nothing in this Paragraph 13(a) shall prevent the taking
out of policies of blanket insurance, which may cover real and/or personal
property and improvements in addition to the building of which the Demised
Premises constitute a part; provided, however, that in all other respects each
such policy shall comply with the other provisions of this Paragraph 13(a).
Nothing herein shall be construed to require Landlord to insure those items that
Tenant is obligated to insure pursuant to Paragraph 13(b).
(b) At all times during the Lease Term, Tenant shall pay all premiums for
and maintain in effect, with a responsible insurance company licensed to do
business in the State of North Carolina on an admitted basis, the following
policies of insurance:
Insurance covering Tenant's inventory, improvements, trade fixtures,
furniture and equipment used in the Demised Premises, providing
protection to the extent of eighty percent (80%) of the insurable
value of the same against all casualties included under standard
insurance industry practices within the classification "Fire and
Extended Coverage, Vandalism and Malicious Mischief," including
sprinkler leakage coverage.
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Tenant will furnish to Landlord, within thirty (30) days before Tenant
opens for business, and thereafter not less than thirty (30) days prior to the
expiration of any such policy, copies of policies or certificates of insurance
evidencing the coverages required by this Paragraph 13(b). All policies required
of Tenant shall contain endorsements requiring at least thirty (30) days' prior
written notice from the insurance company to Landlord prior to the cancellation
or non-renewal of the policy, or any material change in the scope or amount of
coverage.
(c) The policies of hazard insurance required by Paragraphs 13(a) and 13(b)
shall contain a waiver of any right of subrogation which Landlord's or Tenant's
insurer may acquire against the other party by virtue of payment of any claim
under such insurance policy, so long as such a waiver of subrogation is
available without the payment of additional premium. It is the intent of
Landlord and Tenant that there be a mutual waiver of subrogation. If the waiver
of subrogation is available only upon payment of any additional premium, the
party that would be benefitted by the waiver may require the insuring party to
obtain the waiver, provided that the benefitted party agrees to pay the
additional premium therefor.
(d) Unless this Lease is terminated as provided in Paragraph 13(f) after
any damage or destruction to the Demised Premises, Landlord shall, as soon as
reasonably possible, repair and restore those parts of the Demised Premises
constructed by it to substantially the same condition as existed immediately
prior to the damage. Tenant shall likewise, as soon as reasonably possible,
repair and restore all other parts of the Demised Premises (not required to be
repaired or restored by Landlord) substantially to the condition as existed
immediately prior to the damage, including all exterior signs, trade fixtures,
equipment, display cases, furniture, furnishings and other installations of
Tenant.
(e) All insurance proceeds payable with respect to the Demised Premises,
excluding the proceeds payable to Tenant pursuant to Paragraph 13(b), shall
belong to and shall be payable to Landlord. If this Lease is not terminated as
provided in Paragraph 13(f), Landlord shall disburse and apply any insurance
recovery as follows: first, to be applied against the cost to Landlord of
Landlord's restoration obligations; second, to be paid to Tenant to the extent
of the cost of Tenant's restoration obligations, not including furniture,
furnishings and movable trade fixtures and not including repairs covered by
insurance maintained by Tenant; and third, the balance of any insurance recovery
shall belong to and be the exclusive property of Landlord. Landlord shall retain
an independent insurance adjuster for the purpose of apportioning the balance of
Landlord's insurance recovery among affected tenants in the event that premises
other than the Demised Premises are damaged or destroyed as a result of the
insured casualty. The findings of the adjuster shall be binding and conclusive
upon all affected tenants. The cost of such adjuster's services shall be charged
and payable out of the balance of the insurance recovery.
(f) If the Demised Premises or any or all of the buildings of the Shopping
Center are damaged or destroyed by any casualty not covered by the insurance
maintained by Landlord pursuant to Paragraph 13(a), or if the Demised Premises
or any or all of the buildings of the Shopping Center are damaged or destroyed
by any casualty covered by the insurance maintained by
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Landlord pursuant to Paragraph 13(a) and either the proceeds therefrom are
insufficient to cover Landlord's restoration obligations or Landlord's architect
certifies that the extent of such damage or destruction is one-fifth (1/5th) or
more of the replacement value thereof immediately prior to the occurrence of
such damage or destruction, then Landlord shall have the option to terminate
this Lease by giving Tenant notice in writing any time within ninety (90) days
after the occurrence of such casualty; provided, however, that if the Demised
Premises are not damaged by such casualty or if the restoration thereof because
of any such casualty would be fully covered by the insurance maintained by
Landlord pursuant to Paragraph 13(a), and if Landlord continues to operate that
portion of the Shopping Center containing the Demised Premises and Tenant agrees
to continue its operation in accordance with the terms of this Lease, then
Landlord shall have no right under this Paragraph 13(f) to terminate Tenant
because of such destruction. If the Demised Premises are damaged or destroyed
during the last two Lease Years and Landlord's architect certifies that the
extent of such damage or destruction is one-fifth (1/5th) or more of the
replacement value thereof immediately prior to the occurrence of such damage or
destruction, Tenant shall have the option to terminate the Lease by giving
Landlord notice in writing any time within ninety (90) days after the occurrence
of such casualty.
(g) If the Demised Premises are damaged or destroyed, but this Lease is not
terminated pursuant to Paragraph 13(f), then upon the expiration of the
applicable ninety (90) day period provided for in Paragraph 13(f), or upon
notice by Landlord to Tenant prior thereto (but subsequent to the end of the
thirty (30) day period, if applicable) that Landlord has elected not to
terminate this Lease, Landlord and Tenant shall commence their respective
obligations under Paragraph 13(d) as soon as is reasonably possible and
prosecute the same to completion with all due diligence.
(h) In the event of any termination of this Lease under the provisions of
Paragraph 13(f), this Lease shall terminate on the date of the damage or
casualty, and Landlord shall return to Tenant any rent paid for the period after
such date. If the Demised Premises are damaged or destroyed by any casualty
covered by the insurance maintained by Landlord pursuant to Paragraph 13(a) but
this Lease is terminated pursuant to Paragraph 13(f), then, subject to the
rights of the first mortgagee, that portion of the insurance proceeds
attributable to Tenant's permanent leasehold improvements shall be allocated
between Landlord and Tenant, with Landlord reserving a percentage of such
proceeds equal to the percentage of the Lease Term completed on the date of such
termination.
(i) If the Demised Premises are damaged, Guaranteed Minimum Rent and other
charges payable under this Lease shall be abated in proportion to the degree in
which Tenant's use of the Demised Premises is impaired during the period of any
damage, repair or restoration provided for in this Paragraph 13. Tenant shall
continue to operate its business in the Demised Premises during any such period,
to the extent reasonably practicable from the standpoint of reasonable business
management. Except for the abatement of Guaranteed Minimum Rent and other
charges provided in this Paragraph 13, Tenant shall not be entitled to any
compensation or damage from Landlord for loss in the use of the whole or any
part of the Demised Premises and/or any inconvenience or annoyance occasioned by
any damage, destruction, repair or restoration.
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14. Ownership of Certain Property and Surrender of Premises. Upon the
termination of this Lease, Tenant shall surrender to Landlord the Demised
Premises, including, without limitation, all buildings, apparatus and fixtures
(except pylon signs, other signs, movable trade fixtures, equipment and
furniture installed by Tenant) then upon the Demised Premises, in good condition
and repair, and all alterations, improvements, additions, machinery and
equipment which may be made or installed from time to time by either part hereto
to, in, upon or about the Demised Premises; and, upon such termination, the same
shall be surrendered to Landlord by Tenant without any injury, damage or
disturbance thereto or payment therefor. The property to be surrendered to
Landlord shall include but not be limited to all components of the heating, air
conditioning (including the portion thereof outside the Demised Premises, if
any), plumbing and electrical systems, lighting fixtures and fluorescent tubes
and bulbs, all conveyors and partitions (whether removable or otherwise). Tenant
shall promptly repair any damage to the Demised Premises resulting from the
installation or removal of any of the foregoing items.
15. Landlord's Entry. Upon no less than twenty-four (24) hours prior notice
to Tenant (except in the case of an emergency in which event Landlord shall have
no obligation to notify Tenant), Landlord shall have the right to enter upon the
Demised Premises at all reasonable times during the Lease Term for the purposes
of inspection, maintenance, repair and alteration and, during the period
commencing sixty (60) days prior to the expiration of this Lease, to show the
same to prospective tenants.
16. Default. If Tenant fails to pay any rent or other sum of money payable
under this Lease within ten (10) days after notice of such default has been
given to Tenant, or if Tenant fails to perform any other of the terms,
conditions or covenants contained in this Lease to be observed or performed by
it and does not remedy such default within thirty (30) days after written notice
thereof or, if such default cannot be remedied in such period, does not within
such thirty (30) days commence such act or acts as shall be necessary to remedy
the default or does not complete such act or acts promptly, or if Tenant becomes
bankrupt or insolvent, or files any debtor proceedings, or files in any court
pursuant to any statute, either of the United States or of any State a petition
in bankruptcy or insolvency or for reorganization, or files or has filed against
it a petition for the appointment of a receiver or trustee for all or
substantially all of the assets of Tenant and such petition is not vacated or
set aside within thirty (30) days from the date of such appointment, or if
Tenant makes an assignment for the benefit of creditors, or petitions for or
enters into an arrangement, or suffers this Lease to be taken under any writ of
execution and such writ is not vacated or set aside within thirty (30) days,
then in any such event Landlord shall have the right to terminate and cancel
this Lease. In addition, Landlord, without excluding other rights or remedies
that it may have, shall have the immediate right of reentry and may remove all
persons and property from the Demised Premises and dispose of such property as
it sees fit, all without resort to legal process and without being deemed guilty
of trespass, or becoming liable for any loss or damage which may be occasioned
thereby. If Landlord elects to reenter as herein provided, or if it takes
possession pursuant to legal proceedings, it may either terminate this Lease or
it may from time to time without terminating this Lease, make such repairs as
may be necessary in order to relet the Demised Premises, and relet the Demised
Premises for such term and at such rentals and upon such
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other terms and conditions as Landlord may deem advisable. No such reentry or
taking possession of the Demised Premises by Landlord shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given by Landlord to Tenant at the time of such reentry; but, notwithstanding
any such reentry and reletting without termination, Landlord may at any time
thereafter elect to terminate this Lease for such previous breach. In the event
of any termination by Landlord, whether before or after reentry, Landlord may
immediately recover from Tenant damages incurred by reason of such breach,
including, but not limited to, the cost of recovering the Demised Premises, its
costs and expenses (including attorney's fees) incurred in connection with
Tenant's default, the cost or preparing the Demised Premises for occupancy by a
new tenant or tenants, and the difference in value between the rent which would
be payable by Tenant for the remainder of the Lease Term and the reasonable
rental value of the Demised Premises for the remainder of the Lease Term. In
determining amounts other than Guaranteed Minimum Rent that would be payable by
Tenant under this Lease, subsequent to default, the annual amount payable for
each year of the unexpired Lease Term shall be equal to the average annual
amount (including additional rent) paid or payable by Tenant from the
commencement of the Lease Term to the date of default. Notwithstanding anything
to the contrary set forth in this paragraph 16, Landlord agrees to make
reasonable efforts to mitigate its damages.
17. Remedies Cumulative - Nonwaiver. No remedy herein or otherwise
conferred upon or reserved to Landlord or Tenant shall be considered exclusive
of any other remedy, but the same shall be distinct, separate and cumulative and
shall be in addition to every other remedy given hereunder, or now or hereafter
existing at law or in equity or by statute; and every power and remedy given by
this Lease to Landlord or Tenant may be exercised from time to time as often as
occasion may arise, or as may be deemed expedient. No delay or omission of
Landlord or Tenant to exercise any right or power arising from any default on
the part of the other shall impair any such right or power, or shall be
construed to be a waiver of any such default or an acquiescence thereto. In
particular, the receipt by Landlord of rent with the knowledge of the breach of
any covenant of this Lease by Tenant shall not be deemed a waiver of such
breach. No provision of this Lease shall be deemed to have been waived by
Landlord or Tenant unless the waiver is in writing and signed by the benefiting
party.
18. Eminent Domain. If any substantial part of the Demised Premises or more
than fifteen percent (15%) of the total Shopping Center is taken under the power
of eminent domain (including any conveyance made in lieu thereof), and such
taking makes the operation of Tenant's business on the Demised Premises
impractical, then Tenant shall have the right to terminate this Lease by giving
Landlord written notice of such termination within thirty (30) days after such
taking. Notwithstanding the foregoing, any parking areas taken under the power
of eminent domain shall be excluded from that portion of the Shopping Center
taken for the purposes of determining Tenant's rights under this Paragraph 18
provided that Landlord notifies Tenant, within thirty (30) days of the date of
such taking, of Landlord's intention to replace such parking areas. If Tenant
does not so elect to terminate this Lease, Landlord, at its option, may either
terminate this Lease or apply the proceeds of such condemnation to repair and
restore the Demised Premises to tenantable condition; provided, however, that if
Landlord continues to operate or rebuilds that portion of the Shopping Center
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containing the Demised Premises and Tenant agrees to continue its operation in
accordance with the terms of this Lease, then Landlord shall have no right under
this Paragraph 18 to terminate Tenant because of such taking. In the event that
neither Tenant nor Landlord elect to terminate this Lease, the Guaranteed
Minimum Rent shall be reduced as of the date of the actual transfer of the
property so taken to any amount equal to the product obtained by multiplying the
Guaranteed Minimum Rent immediately preceding the taking by a fraction, the
numerator of which shall be the Floor Area of the Demised Premises remaining
after such taking and the denominator of which shall be the Floor Area of the
Demised Premises immediately prior to such taking. Guaranteed Minimum Rent also
shall be justly and equitably reduced to reflect a taking of or denial or
diminishing of adequate access to all or any part of the Common Area. During the
period of any restoration, Guaranteed Minimum Rent shall be abated in proportion
to that portion of the Demised Premises which is not used or occupied by Tenant
during such period.
All compensation awarded for any taking (or the proceeds of private sale in
lieu thereof), whether for the whole or a part of the Demised Premises, shall be
the property of Landlord, whether such award is compensation for damages to
Landlord's or Tenant's interest in the Demised Premises, and Tenant hereby
assigns all of its interest in any such award to Landlord; provided, however,
Landlord shall have no interest in any award made to Tenant for loss of
business, moving expenses or for the taking of Tenant's fixtures and other
property within the Demised Premises if a separate award of such items is made
to Tenant, but any such award to Tenant shall be subject to the prior rights of
the first mortgagee.
19. Financial Information. Tenant shall provide to Landlord, within thirty
(30) days after written request by Landlord, such financial information
concerning Tenant (and the guarantor of this Lease, if this Lease is guaranteed)
and Tenant's business operations as may be reasonably requested by any
prospective mortgagee or purchaser of the Shopping Center. Any financial
information delivered pursuant to this Paragraph 19 may be relied upon by any
prospective mortgagee or purchaser of the Shopping Center; provided, however,
that any such financial information shall be remain confidential and utilized
only for bona fide business reasons related to such mortgage, purchase and/or
the obtaining thereof, except where the contrary is required by law.
20. Assignment, Subletting and Hypothecation of Lease.
(a) Except as provided in Paragraph 20(b), not voluntarily or by operation
of law, assign, transfer, mortgage or otherwise encumber all or any part of
Tenant's interest in this Lease or in the Demised Premises or sublet the whole
or any part of the Demised Premises without first obtaining in each and every
instance the prior written consent of Landlord, which consent shall not be
unreasonably withheld. The consent by Landlord to any assignment or subletting
shall not constitute a waiver of the necessity for such consent to any
subsequent assignment or subletting. Receipt by Landlord of rent from any party
other than Tenant shall not be deemed to act as a consent to any such assignment
or subletting, nor relieve Tenant of its obligation to pay the rent provided
herein for the full term of this Lease.
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(b) Tenant shall have the right to assign the Lease to any corporation that
controls Tenant, is controlled by Tenant, or is under the control of a common
parent company with Tenant ("control" meaning the ownership of more than fifty
percent of the stock of a corporation), any corporation resulting from a merger
or consolidation with Tenant so long as the net worth of such successor equals
or exceeds Tenant's net worth, or any other entity experienced in the operation
of a retail establishment of the size and type contemplated by this Lease or,
subject to the restrictions set forth below, sublet all or any portion of the
Demised Premises without the consent of Landlord. Notwithstanding the foregoing,
it is understood that Landlord has agreed to lease the Demised Premises to
Tenant for the operation of an anchor store and that Tenant may not sublet
portions of the Demised Premises in contravention of this intent or so as to
create multiple stores or spaces within the Demised Premises with different
uses, names or purposes.
(c) If Landlord consents to any transfer of Tenant's interest in this
Lease, or if Landlord's consent is not required, then the term "Tenant" shall
thereafter be deemed to include, without further reference, the party to whom
such interest is transferred, which is, for example, but without limiting the
generality thereof, any subtenant, assignee, concessionaire or licensee.
Notwithstanding any assignment or sublease permitted hereby or consented to by
Landlord, Tenant, and any guarantor of this Lease, shall remain fully liable and
shall not be released from performing any of the terms of this Lease; but, in
case of amendment without Tenant's written consent, after assignment, Tenant's
obligations shall be limited to those existing at the time of the assignment. So
long as Tenant remains fully liable under the terms of this Lease, Tenant shall
be entitled to receive the excess of all rent and other consideration due from
any subtenant for any month over that portion of the Guaranteed Minimum Rent due
under this Lease for said month which is allocable on a square footage basis to
the space sublet.
21. Notices. All notices provided for in this Lease shall be in writing and
shall be deemed to be given when sent by prepaid registered or certified mail,
return receipt requested, addressed to the parties as follows:
to Landlord: Interstate Development Company
Post Office Box 366
Statesville, North Carolina 28677-0366
Attention: Robert A. Collier, Jr.
to Tenant: JR Tobacco of America, Inc.
Post Office Box 656
Selma, North Carolina 27576-0656
Attention: Robert Broglia
Either party may, from time to time, by notice as herein provided, designate a
different address to which notices to it shall be sent.
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22. Holding Over. If Tenant remains in possession of the Demised Premises
or any part thereof after the expiration of the Lease Term with Landlord's
acquiescence and without any written agreement of the parties, Tenant shall be
only a tenant from month to month, and there shall be no renewal of this Lease
or exercise of an option by operation of law.
23. Subordination. This Lease is subject and subordinate to any and all
mortgages or deeds of trust now or hereafter placed on the Demised Premises;
provided, however, that in each such case the holder of said mortgage or the
trustee of such deed of trust shall agree that this Lease shall not be divested
or in any way affected by a foreclosure or other default proceedings under the
mortgage, deed of trust or the obligations secured thereby, so long as Tenant
shall not be in default under the terms of this Lease; and Tenant agrees that
this Lease shall remain in full force and effect notwithstanding any such
default proceeding. Tenant further agrees that it will attorn to the mortgagee,
trustee or beneficiary of such mortgage or deed of trust, their successors or
assigns or to the purchaser or assignee under any such foreclosure. Tenant will,
upon request by Landlord, execute, deliver to Landlord, or to any other person
designated by Landlord, any instrument or instruments required to give effect to
the provisions of this Paragraph 23. Landlord shall obtain a subordination,
nondisturbance and attornment agreement from the holders and the trustees of any
existing deeds of trust in substantially the form attached hereto as Exhibit F,
provided that Tenant delivers to Landlord a copy of such agreement that has been
executed by Tenant.
24. Transfer of Landlord's Interest. In the event of the sale, assignment
or transfer by Landlord of its interest in the Shopping Center or in this Lease
(other than a collateral assignment to secure a debt of Landlord) to a successor
in interest that expressly assumes the obligations of Landlord under this Lease,
Landlord shall, upon notice to Tenant of such sale, assignment or transfer, be
released or discharged from all of its covenants and obligations hereunder,
except such obligations as shall have accrued prior to any such sale, assignment
or transfer; and Tenant agrees to look solely to such successor in interest of
Landlord for performance of such obligations. Landlord's assignment of this
Lease or of any or all of its rights herein shall in no manner affect Tenant's
benefits or obligations hereunder. Tenant shall thereafter attorn and look to
such assignee, as Landlord, provided Tenant has first received written notice of
such assignment of Landlord's interest.
25. Landlord's Warranties and Representations. Landlord warrants and
represents that:
(a) it shall not use the Shopping Center or any part thereof in violation
of any law or ordinance or any regulation of any governmental authority or in
any manner that will constitute a nuisance, or that will injure the reputation
of the Shopping Center or any part thereof, or for any hazardous purpose, or
that will violate, suspend, void or serve to increase the premium rate of or
make inoperative any policy or policies of insurance of any kind whatsoever at
any time carried on any property, buildings or improvements in the Shopping
Center or any part thereof.
24
<PAGE>
(b) it has full right and authority to lease the Demised Premises upon the
terms and conditions set forth in this Lease free and clear of all liens and
encumbrances except for the Permitted Encumbrances identified on Exhibit H;
(c) Tenant shall peacefully and quietly hold and enjoy the Demised Premises
for the full Lease Term so long as it does not default in the performance of any
of its covenants hereunder;
(d) it shall not, from and after the date hereof, lease any premises in the
Shopping Center for any noxious or offensive use or for the operation of a
auditorium, meeting hall, school or other place of public assembly, gymnasium,
health club, dance hall, night club, off-track betting business, billiard or
pool hall, bingo parlor, massage parlor, video game arcade, bowling alley,
skating rink, car wash, car repair or car rental agency or adult book or video
tape store, manufacturing facility, warehouse or office use (except as
incidental to a permitted use) or lease any premises in the Shopping Center
within two hundred fifty (250) feet of the Demised Premises for the operation of
a restaurant containing greater than 2,000 square feet of Floor Area or seating
for more than forty (40) people unless such restaurant is located in the space
now or formerly occupied by Glutton's restaurant or in the space now or formerly
occupied by the Sun Glass Hut; provided, however, that all of such restrictions
shall not apply to existing leases or tenants in the Shopping Center;
(e) it shall operate the Shopping Center in a manner consistent with the
operation of other first-class shopping centers in the Statesville, North
Carolina area;
(f) to the best of its knowledge, there are no pending or threatened
condemnation or eminent domain proceedings which would affect the Shopping
Center or the Demised Premises; and
(g) it shall, to the extent applicable, comply with the rules and
regulations of the Shopping Center as set forth in Paragraph 6(d) with respect
to the Common Areas of the Shopping Center.
26. Short Form Lease. Upon the Rent Commencement Date, the parties shall
execute a memorandum or short form lease agreement, in the form attached hereto
as Exhibit C, specifying the commencement and termination dates of the Lease
Term and including such other provisions of this Lease (exclusive of provisions
dealing with monetary terms) as either party may desire to incorporate therein.
27. Estoppel Certificate. Within ten (10) days after request therefor by
Landlord or any mortgagee or trustee under a mortgage or deed of trust covering
the Demised Premises, or if, upon any sale, assignment or other transfer of the
Demised Premises by Landlord, an estoppel certificate shall be required from
Tenant, Tenant shall deliver in recordable form a statement to any proposed
mortgagee or other transferee, or to Landlord, certifying any facts that are
then true with respect to this Lease, including without limitation (if such is
the case) that this Lease is in full force and effect, that Tenant is in
possession of the Demised Premises, that Tenant has commenced the payment of
rent, and that there are no defenses or offsets to this Lease claimed by Tenant.
25
<PAGE>
Within ten (10) days after request therefor by Tenant, Landlord shall
deliver in recordable form a statement to Tenant certifying any facts that are
then true with respect to this Lease, including without limitation (if such is
the case) that this Lease is in full force and effect, that Tenant is in
possession of the Demised Premises, that Tenant has commenced the payment of
rent, and that to the best of Landlord's knowledge there are no defenses or
offsets to this Lease claimed by Tenant.
28. Mechanics' Liens. Tenant covenants and agrees to do all things
necessary to prevent the filing of any mechanics' or other liens against the
Demised Premises or any part thereof by reason of work, labor, services or
materials supplied or claimed to have been supplied to Tenant, or anyone holding
the Demised Premises or any part thereof, through or under Tenant. If any such
lien shall at any time be filed against Tenant's interest in the Demised
Premises, Tenant shall cause the same to be discharged of record within twenty
(20) days after the date of filing of the same. Notwithstanding the foregoing,
Tenant shall have the right to contest the validity or amount of any such lien,
provided that the payment of such amount is bonded during the pendency of such
contest, but upon the final determination of such contest Tenant shall
immediately pay any judgment rendered with all proper costs and charges
(including reasonable attorneys' fees) and shall have the lien released at its
own expense. In lieu of bonding Tenant may obtain other security acceptable to
Landlord. If Tenant shall fail to discharge such lien within such period, then,
in addition to any other right or remedy of Landlord resulting from Tenant's
default, Landlord may, but shall not be obligated to, discharge the same either
by paying the amount claimed to be due or by procuring the discharge of such
lien by giving security or in such other manner as is, or may be, prescribed by
law. Nothing contained in this Paragraph 28 shall imply any consent or agreement
on the part of Landlord to subject Landlord's estate to liability under any
mechanics' or other lien law.
29. Force Majeure. If Landlord or Tenant is delayed, hindered or prevented
from the performance of any act required hereunder, by reason of governmental
restrictions, scarcity of labor or materials, strikes, fire, or any other
reasons beyond its control, the performance of such act shall be excused for the
period of delay, and the period for the performance of any such act shall be
extended for the period necessary to complete performance after the end of the
period of such delay. Notwithstanding the terms of the preceding sentence,
except as otherwise provided in this Lease, the provisions of this Paragraph 29
shall not be applicable to Tenant's obligations to pay rent or any other sums,
monies, costs, charges or expenses required to be paid by Tenant subsequent to
the Rent Commencement Date.
30. Limitation of Liability. Notwithstanding any provision in this Lease to
the contrary, Tenant agrees that it shall look solely to the estate and property
of Landlord in the land and buildings comprising the Shopping Center for the
collection of any judgment (or other judicial process) requiring the payment of
money by Landlord for any default or breach by Landlord of any of its
obligations under this Lease, subject, however, to the prior rights of any
ground or underlying landlord or the holder of any mortgage covering the
Shopping Center or Landlord's interest therein. No other assets of Landlord
shall be subject to levy, execution or other judicial process for the
satisfaction of Tenant's claim. This provision shall not be deemed, construed or
interpreted to be or constitute an agreement, express or implied, between
Landlord and Tenant that Landlord's interest
26
<PAGE>
in this Lease or in the Shopping Center shall be subject to impressment of an
equitable lien or otherwise.
31. Real Estate Brokers. Landlord and Tenant represent and warrant to each
other that no brokers' or real estate commissions will be due as a result of
this Lease, except for that commission to be paid by Landlord to Faison &
Associates, Inc. ("Faison") in accordance its agreement with Landlords and that
commission to be paid by Faison and Tenant to Holland Realty and Mortgage
Corporation in accordance with its agreement with Faison and Tenant. Landlord
and Tenant each agree to indemnify, defend and hold the other party harmless
from and against any and all claims, damages or liability (including reasonable
attorneys' fees) resulting from or relating to the untruth of the foregoing
representation by the indemnifying party.
32. Accord and Satisfaction. No payment by Tenant or receipt by Landlord of
a lesser amount than any installment or payment of rent or other charges due
under this Lease shall be deemed to be other than on account of the amount due,
and no endorsement or statement on any check or any letter accompanying any
check or payment of rent or other charges shall be deemed an accord and
satisfaction, and Landlord may accept such check or payment without prejudice to
Landlord's right to recover the balance of such installment or payment of rent
or other charge or pursue any other remedies available to Landlord. No receipt
of money by Landlord from Tenant after the termination of this Lease or Tenant's
right of possession of the Demised Premises shall reinstate, continue or extend
the Lease Term.
33. Nature and Extent of Agreement. This Lease, including all of the
Exhibits attached hereto, contains the complete agreement of the parties
regarding the terms and conditions of the lease of the Demised Premises and
Tenant's right to use the Common Areas, and there are no oral or written
conditions, terms, understandings or other agreements pertaining thereto which
have not been incorporated herein. This instrument creates only the relationship
of Landlord and Tenant between the parties hereto as to the Demised Premises;
and nothing herein shall in any way be construed to impose upon either party
hereto any obligations or restrictions not herein expressly set forth. The laws
of the State of North Carolina shall govern the validity, interpretation,
performance and enforcement of this Lease.
34. Binding Effect. This Lease shall be binding upon and shall inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
35. Restrictive Covenant. Landlord hereby covenants, provided this
restriction does not violate any law, regulation, or other legal requirement,
that until the earlier of (i) the date of expiration or earlier termination of
this Lease, or (ii) the date Tenant ceases to operate a discount variety store
in the Demised Premises, it shall not lease any portion of the Shopping Center,
not including the space occupied by the Major Stores (as defined in Paragraph
37), to any entity primarily for the purpose of the retail sale of books,
perfumes or other fragrances, bed and bath bedding, linens and towels, cigars or
cigarettes. Notwithstanding the foregoing, this restriction shall not apply to
existing tenants in the Shopping Center and Landlord shall have the right to
lease a
27
<PAGE>
portion of the Shopping Center to any entity engaged in the "incidental" sale of
books, perfume or other fragrances, bed and bath bedding, linens and towels,
cigars or cigarettes. For the purposes of this Paragraph 35, the "incidental"
sale of perfumes or other fragrances, bed and bath bedding, linens and towels,
cigars or cigarettes shall mean a use that occupies less than twenty-five (25)
square feet of Floor Area and the "incidental" sale of books shall mean a use
that occupies less than one hundred (100) square feet of Floor Area (including
aisles). Tenant shall indemnify, hold harmless and defend Landlord from any
demands, claims, losses, costs and liabilities arising out of this Paragraph 35.
36. Right of First-Refusal. If Tenant is not and has not been in default
under this Lease and Landlord intends to make an offer to lease space outlined
in yellow on Exhibit A to a third party, Landlord shall first give Tenant
written notice of the square footage, availability date and terms of the offer
Landlord intends to make. Tenant shall have ten (10) business days after receipt
of any such notice to elect to lease all such space on the terms offered. If
Tenant rejects any such offer, or fails to respond to any such offer within said
period, Landlord shall be free to lease the offered space to a third party and
Landlord shall have no er obligations under this Paragraph 36. If Tenant accepts
any such offer, the space offered shall be added to the Demised Premises at the
rental set forth in Landlord's offer on the same terms and conditions set forth
in Landlord's offer. In the event Tenant leases such space, Tenant's obligation
to pay Guaranteed Minimum Rent on such space shall commence upon delivery of
said space to Tenant. If Tenant rejects or fails to respond to any such offer
within the required period, this Paragraph 36 shall be of no further effect and
Landlord shall have no further obligations hereunder.
37. Operating Cotenancy. If both of the Major Stores (as hereinafter
defined) remain vacant for a period in excess of eighteen (18) months (exclusive
of periods when the occupants are unable to operate as a result of a casualty or
condemnation) (the "Vacancy Period") and Tenant's Gross Sales (as hereinafter
defined) from the Demised Premises during such Vacancy Period are at least ten
percent (10%) less than Tenant's Gross Sales during the eighteen (18) month
period immediately prior to such Vacancy Period, Tenant may terminate this Lease
by delivery of written notice to Landlord within sixty (60) days following the
expiration of the Vacancy Period. Tenant's notice shall specify an effective
date of termination, not less than thirty (30) nor more than ninety (90) days
from the date of the notice, and on the specified date, this Lease shall
terminate automatically, except as to defaults arising prior to the date of
termination. As used herein, the term "Major Stores" means those two store
premises in the Shopping Center currently occupied by Harris Teeter and Eckerd.
As used herein, the term "Gross Sales" means all sales, both cash and
charge, of merchandise and services made in, upon or from the Demised Premises,
including telephone sales and orders taken in or from the Demised Premises
although such orders may be filled elsewhere. "Gross Sales" shall not include
any sales, use or excise tax upon such merchandise or services if such tax is
separately stated and separately charged to the customer. A sale upon
installment or credit shall be treated as a sale for the amount of the purchase
price paid in any month during which such payment is made. Tenant shall keep at
the Demised Premises or at its general office complete and accurate books of
account and records in accordance with generally accepted accounting practices
with
28
<PAGE>
respect to all business conducted in, upon or from the Demised Premises; and in
the event Tenant exercises its right to terminate this Lease pursuant to this
Paragraph 37, Landlord shall have the right upon ten (10) days' notice to Tenant
to examine such books and records (but excluding all income tax returns and bank
records) or have them audited at Landlord's expense.
38. Hazardous Materials.
(a) Landlord hereby represents and warrants that except as provided in the
Phase I Environmental Site Assessment dated July 1, 1993, to the best of
Landlord's knowledge no material amounts of any Hazardous Materials (as
hereinafter defined) are located in the Shopping Center in violation of
applicable Environmental Laws (as hereinafter defined). Landlord hereby
represents and warrants that it shall not use, generate, treat, store, release,
discharge or dispose of on, in, or under the Shopping Center, or transport to or
from the Shopping Center, any Hazardous Material. Notwithstanding the foregoing,
Landlord may use and store Hazardous Materials on the Shopping Center to the
extent necessary in the operation of its Shopping Center, but only in strict
accordance with all applicable Environmental Laws and in accordance with all
safety and environmental protection procedures. Landlord agrees to defend,
indemnify and hold harmless Tenant, its successors and assigns from and against
any and all liabilities, losses, damages, costs, expenses (including, without
limitation, reasonable attorneys' fees and expenses) causes of action, suits,
claims, demands or judgements of any nature arising out of or in connection with
(i) the presence, generation, treatment, storage, disposal, transport, use or
release of any Hazardous Material on or from the Shopping Center, except to the
extent that such Hazardous Materials are present as the result of the
negligence, wilful misconduct or any act or omission of Tenant, its officers,
employees or agents, (ii) any failure by Landlord to comply with the terms of
any Environmental Law or (iii) any breach by Landlord of the provisions of this
Paragraph 38. Landlord's indemnification obligation under this Paragraph 38
shall survive the expiration or earlier termination of this Lease.
(b) The making and continued effectiveness of Tenant's obligations under
this Lease are expressly conditioned upon the fact that the Shopping Center is
free of contamination by material amounts of Hazardous Materials in violation of
applicable Environmental Law and Landlord hereby so warrants and represents to
Tenant. The discovery of contamination by Hazardous Materials in violation of
applicable Environmental Law, however caused, unless caused by Tenant in
violation of its obligations under this Paragraph 38, shall constitute the
failure of this condition. In the event of such discovery, Tenant may, but shall
not be required to, conduct reasonable investigation of the extent and nature of
the contamination, its physical effects, its effects on Tenant's business or any
other aspects of the response to contamination, before notifying the Landlord of
Tenant's intent to terminate this Lease for failure of the above stated
condition. Such investigation and the resultant delay in notification to
Landlord shall not be considered a waiver of this condition.
(c) Landlord agrees that if because of any change in the law the floor tile
in the Demised Premises must be removed due to the asbestos content in the
mastic, Landlord, at its cost and expense, shall cause all such floor tile to be
removed; provided, however, that Landlord shall not be
29
<PAGE>
responsible for the removal of any such floor tile that must be removed due to
the actions or omissions of Tenant.
(d) Tenant hereby represents and warrants that it shall not use, generate,
treat, store, release, discharge or dispose of on, in, or under the Demised
Premises, or transport to or from the Demised Premises, any Hazardous Material,
or allow any other person or entity to do so. Notwithstanding the foregoing,
Tenant may use and store Hazardous Materials on the Demised Premises to the
extent necessary in the operation of its variety store, but only in strict
accordance with all applicable Environmental Laws and in accordance with all
safety and environmental protection procedures. Tenant agrees to defend,
indemnify and hold harmless Landlord, its successors and assigns from and
against any and all liabilities, losses, damages, costs, expenses (including,
without limitation, reasonable attorneys' fees and expenses) causes of action,
suits, claims, demands or judgements of any nature arising out of or in
connection with (i) the presence, generation, treatment, storage, disposal,
transport, use or release of any Hazardous Material on or from the Demised
Premises or from any property of Tenant located on or in the Shopping Center,
except to the extent that such Hazardous Materials are present as the result of
the negligence, wilful misconduct or any act or omission of Landlord, its
officers, employees or agents, (ii) any failure by Tenant to comply with the
terms of any Environmental Law or (iii) any breach by Tenant of the provisions
of this Paragraph 38. Tenant's indemnification obligation under this Paragraph
38 shall survive the expiration or earlier termination of this Lease.
(e) Landlord and Tenant each agree to provide the other with copies of any
notice pertaining to any violation or alleged violation of any Environmental Law
with respect to the Shopping Center or the Demised Premises, any release or
suspected release of any Hazardous Material in, on, under or about the Demised
Premises or the Shopping Center or any governmental proceedings or actions under
any Environmental Law (including request or demand for entry onto the Demised
Premises and/or Shopping Center for purposes of inspection regarding the
handling, disposal or clean-up of Hazardous Materials) within ten (10) business
days after receipt thereof. Landlord and Tenant shall fully comply with all
applicable Environmental Laws, shall timely file all reports required to be
filed, shall acquire all necessary certificates, approvals and permits and will
generate and maintain all required data and records under all applicable
Environmental Laws. Landlord and Tenant agree to cooperate with each other and
provide such documents, affidavits and information as may be reasonably
necessary for each of the parties to comply with all Environmental Laws.
(f) As used herein, "Environmental Law" shall mean any federal, state or
local law, statute, ordinance, rule, regulation, permit, directive, license,
approval, guidance, interpretation, order, or other legal requirement relating
to the protection of human health or the environment, including, but not limited
to, any requirement pertaining to the manufacture, processing, distribution,
use, treatment, storage, disposal, transportation, handling, reporting,
licensing, permitting, investigation or remediation of materials that are or may
constitute a threat to the environment. Without limiting the foregoing, each of
the following is an Environmental Law: the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. ss. 9601 et seq.) ("CERCLA"),
30
<PAGE>
the Hazardous Material Transportation Act (49 U.S.C. ss. 1801 et seq.), the
Resource Conservation and Recovery Act (42 U.S.C. ss. 6901 et seq.) ("RCRA"),
the Federal Water Pollution Control Act (33 U.S.C. ss. 1251 et seq.), the Clean
Air Act (42 U.S.C. ss. 7401 et seq.), the Toxic Substances Control Act (15
U.S.C. ss. 2601 et seq.), the Safe Drinking Water Act (42 U.S.C. ss. 300, et
seq.), the Environmental Protection Agency's regulations relating to underground
storage tanks (40 C.F.R. Parts 280 and 281), and the Occupational Safety and
Health Act (29 U.S.C. ss. 651 et seq.) ("OSHA"), as such laws and regulations
have been amended or supplemented, and each similar state or local statute, and
each rule and regulation promulgated under such federal, state and local laws.
As used herein, "Hazardous Material" means any substance or material that is (i)
a petroleum product, (ii) is defined as a hazardous waste, hazardous substance,
pollutant, contaminant or toxic substance under any Environmental Law, or (iii)
is otherwise toxic, explosive, corrosive, flammable, mutagenic, carcinogenic,
dangerous or otherwise hazardous.
39. Consent. Where the consent of Landlord or Tenant is required under the
Lease, such consent shall not be unreasonably withheld. In the event either
party fails to respond to a written request for consent within thirty (30) days
of receipt of such request, such party shall be deemed to have consented to such
request.
40. Attorneys' Fees. In the event of any dispute between the parties hereto
arising out of or in connection with this Lease, the prevailing party shall be
entitled to recover from the other its reasonable attorneys' fees incurred in
connection therewith.
41. Waiver of Distraint. Landlord hereby expressly subordinates in favor of
Tenant's equipment lessor or owner/secured party any and all rights granted by
or under any present or future laws to levy to distrain for rent, in arrears, in
advance or both, upon any pylon signs, other signs, movable trade fixtures,
equipment, furniture or other personal property installed by Tenant, leased or
financed by Tenant from the equipment lessor or owner/secured party and
delivered or to be delivered to the Demised Premises.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease Agreement
under seal as of the day and year first above written.
LANDLORD:
INTERSTATE DEVELOPMENT COMPANY
[CORPORATE SEAL]
Attest: By: /s/ Robert A. Collier, Jr.
-------------------------------------
President
/s/ James B. Collier
- --------------------------------
Secretary
TENANT:
JR TOBACCO OF AMERICA, INC.
[CORPORATE SEAL]
Atest: By: /s/ Lewis Rothman
-------------------------------------
President
/s/ LaVonda Rothman
- --------------------------------
Secretary
32
<PAGE>
EXHIBIT A
SITE PLAN
<PAGE>
EXHIBIT B
LEGAL DESCRIPTION
Lying and being in Statesville (Inside) Township, Iredell County, North
Carolina, and more particularly described as follows:
BEGINNING at an iron stake in the north margin of the right
of way of East Broad Street where it intersects with the
west margin of the entrance-exit to Newtowne Plaza Shopping
Center, and said iron stake being in the line of Corco
Realty Corp. (See Deed Book 618, page 48), and running
thence North 07 deg. 21 min. East 205.95 feet to an iron
stake, corner of C. H. Kutteh, II, et al. (See Deed Book
684, page 782); thence North 79 deg. 30 min. West 350.66
feet to an iron stake in the east margin of the right of way
of I-77; thence with the east margin of the right of way of
I-77, North 07 deg. 21 min. 50 sec. East 1,206.70 feet to an
iron stake in the east margin of the right of way of I-77;
thence South 87 deg. 32 min. 32 sec. East 860.57 feet to a
concrete monument; thence South 09 deg. 49 min. 34 sec. West
657.58 feet to a concrete monument; thence South 04 deg. 11
min. 25 sec. West 869.37 feet to a concrete monument in the
north margin of the right of way of East Broad Street;
thence South 04 deg. 11 min. 25 sec. West 10.04 feet to a
nail in East Broad Street; thence with East Broad Street,
North 80 deg. 56 min. 53 sec. West 527.90 feet to a nail in
East Broad Street; thence North 07 deg. 21 min. East 14.05
feet to the point of BEGINNING, containing 27.1341 acres,
more or less, and being described according to a plat and
survey prepared by Wesley E. Sprinkle, Registered Surveyor,
dated November 7, 1984.
<PAGE>
EXHIBIT C
STATE OF NORTH CAROLINA
MEMORANDUM OF LEASE
COUNTY OF IREDELL
INTERSTATE DEVELOPMENT COMPANY, a North Carolina corporation with an
address at Post Office Box 366, Statesville, North Carolina 28677-0366
(hereinafter called "Landlord"), hereby leases to JR TOBACCO OF AMERICA, INC., a
New Jersey corporation with an address at Post Office Box 656, Selma, North
Carolina 27576-0656, (hereinafter called "Tenant") and Tenant hereby rents from
Landlord for a period of eleven (11) lease years beginning July 19, 1993, and
ending December 31, 2004, with a ten (10) year renewal period, store premises in
Newtowne Plaza Shopping Center, located on property situated in the City of
Statesville, County of Iredell, State of North Carolina, and more particularly
described on Exhibit A attached hereto and made a part hereof by reference.
All of the provisions set forth in that certain Lease Agreement dated July
19, 1993, by and between Landlord and Tenant are hereby incorporated into and
made a part of this Memorandum.
IN WITNESS WHEREOF, the parties hereto have executed this Memorandum of
Lease under seal this 19th day of July, 1993.
LANDLORD:
INTERSTATE DEVELOPMENT COMPANY
[CORPORATE SEAL]
Attest: By: /s/ Robert A. Collier, Jr.
------------------------------------
President
/s/ James B. Collier
- ----------------------------------
Secretary
TENANT:
JR TOBACCO OF AMERICA, INC.
[CORPORATE SEAL]
Attest: By: /s/ Lewis Rothman
------------------------------------
President
/s/ LaVonda Rothman
- ----------------------------------
Secretary
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF IREDELL
This 19th day of July, 1993, personally came before me Robert H. Collier, who,
being by me duly sworn, says that he is the President of INTERSTATE DEVELOPMENT
COMPANY and that the seal affixed to the foregoing instrument in writing is the
corporate seal of the company, and that the said writing was signed and sealed
by him, in behalf of said corporation, by its authority duly given. And the said
Robert H. Collier, Jr., President, acknowledged the said writing to be the act
and deed of said corporation.
/s/ Joanna W. Sears
------------------------------------
Notary Public
My commission expires:
5-18-98
- ---------------------
[NOTARIAL SEAL]
STATE OF NEW JERSEY
COUNTY OF ESSEX
This 16th day of July, 1993, personally came before me Lewis Rothman, who,
being by me duly sworn, says that he is the President of JR TOBACCO OF AMERICA,
INC. and that the seal affixed to the foregoing instrument in writing is the
corporate seal of the company, and that the said writing was signed and sealed
by him, in behalf of said corporation, by its authority duly given. And the said
Secretary acknowledged the said writing to be the act and deed of said
corporation.
/s/ Patricia L. Smith
------------------------------------
Notary Public
My commission expires:
May 22, 1994
- --------------------
[NOTARIAL SEAL]
<PAGE>
STATE OF NORTH CAROLINA
COUNTY OF IREDELL
This 19th day of July, 1993, personally came before me Robert H. Collier, who,
being by me duly sworn, says that he is the President of INTERSTATE DEVELOPMENT
COMPANY and that the seal affixed to the foregoing instrument in writing is the
corporate seal of the company, and that the said writing was signed and sealed
by him, in behalf of said corporation, by its authority duly given. And the said
Robert H. Collier, Jr., President, acknowledged the said writing to be the act
and deed of said corporation.
/s/ Joanna W. Sears
------------------------------------
Notary Public
My commission expires:
May 18, 1998
- ---------------------
[NOTARIAL SEAL]
STATE OF NEW JERSEY
COUNTY OF ESSEX
This 16th day of July, 1993, personally came before me Lewis Rothman, who,
being by me duly sworn, says that he is the President of JR TOBACCO OF AMERICA,
INC. and that the seal affixed to the foregoing instrument in writing is the
corporate seal of the company, and that the said writing was signed and sealed
by him, in behalf of said corporation, by its authority duly given. And the said
Secretary acknowledged the said writing to be the act and deed of said
corporation.
/s/ Patricia L. Smith
------------------------------------
Notary Public
My commission expires:
May 22, 1994
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[NOTARIAL SEAL]
<PAGE>
EXHIBIT D
PROHIBITED USES
1. Bowling alley;
2. Skating rink;
3. Massage parlor;
4. Amusement park;
5. Carnival;
6. Billiard parlor or pool hall;
7. Video or other game parlor;
8. Health spa;
9. Funeral parlor;
10. Off-track betting facility;
11. Flea market;
12. Car wash;
13. Any establishment for the sale and/or repair of new or used automobiles,
boats, trailers or mobile homes;
14. Any establishment selling or displaying pornographic materials;
15. Cafeteria or restaurant;
16. Movie theater;
17. Toy store;
18. Office supply and equipment store;
19. Hotel or motel;
20. Supermarket or grocery store;
21. Prescription drug store; or
22. Discount health and beauty aid store.
<PAGE>
EXHIBIT E
PUNCH LIST
1. Replace both roof-top air cooled condensers and air handlers with new
units;
2. Replace administrative area roof-top gas-fired air conditioner with new
unit;
3. Replace toilet exhaust fan and lounge exhaust fan;
4. Check and make repairs necessary to bring electrical system up to code
requirements including checking panels to insure that connections are tight
and circuit breakers are functional, determining what each breaker feeds
and labeling the panels correctly;
5. Check and make repairs necessary to bring plumbing system up to code
requirements including checking each fixture for proper operation and
checking the faucets, flush valves, sanitary waste piping and vent lines;
6. Install two (2) new bathrooms containing one toilet each which bathrooms
shall comply with the requirements of the ADA;
7. Remove the incinerator located behind the Demised Premises; and
8. Replace any ballasts that are not working, provided however that Tenant
agrees to reimburse Landlord for one-half the cost of any such ballasts
within fifteen (15) days of its receipt from Landlord of an invoice
evidencing the cost of such ballasts.
<PAGE>
EXHIBIT F
SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
THIS AGREEMENT is made this ____ day of ____________, 1993 between JR
TOBACCO OF AMERICA, INC., a New Jersey corporation (hereinafter referred to as
"Lessee") and WACHOVIA BANK OF NORTH CAROLINA, N.A. (hereinafter referred to as
"Mortgagee").
WHEREAS:
1. Mortgagee is now the owner and holder of a first Deed of Trust, dated
August 25, 1986 in the principal amount of Two Million Nine Hundred Fifty
Thousand and No/100 Dollars ($2,950,000.00) (hereinafter referred to as the
"Mortgage") on the real estate more particularly described in the Mortgage. The
Mortgage is recorded in the Office of the Register of Deeds of Iredell County,
State of North Carolina.
2. Lessee is the holder of a lease (hereinafter referred to as the
"Lease"), dated ___________ between Interstate Development Company (hereinafter
referred to as "Lessor"), as Lessor, and J.R. Tobacco of America, Inc., as
Lessee.
3. Lessee and Mortgagee desire to confirm their understanding with respect
to the Lease and the Mortgage.
NOW, THEREFORE, in consideration of mutual covenants and agreements herein
contained, Mortgagee and Lessee hereby agree and covenant as follows:
FIRST: The Lease shall be subject and subordinate to the Mortgage and to
all renewals, modifications or extensions thereof.
SECOND: So long as Lessee is not in default (beyond any period given Lessee
to cure such default) in the payment of rent or additional rent or in the
performance of any of the terms, covenants or conditions of the Lease on
Lessee's part to be performed, Lessee's possession of the premises described in
the Lease and Lessee's rights and privileges under the Lease, or any extensions
or renewals thereof which may be effected in accordance with any option therefor
in the Lease, shall not be diminished or interfered with by Mortgagee and
Lessee's occupancy of said premises shall not be disturbed by Mortgagee for any
reason whatsoever during the term of the lease or any extensions or renewals
thereof.
THIRD: If the interests of Lessor shall be transferred to and owned by
Mortgagee by reason of foreclosure or other proceedings brought by it or by any
other manner, and Mortgagee succeeds to the interest of the Lessor under the
Lease, Lessee shall be bound to Mortgagee under all of the terms, covenants and
conditions of the Lease for the balance of the term thereof remaining and
<PAGE>
any extensions or renewals thereof which may be effected in accordance with any
option thereof in the Lease, with the same force and effect as if Mortgagee were
the Lessor under the Lease, and Lessee does hereby attorn to Mortgagee as its
Lessor, said attornment to be effective and self-operative without the execution
of any further instruments on the part of either of the parties hereto
immediately upon Mortgagee succeeding to the interest of the Lessor under the
Lease; provided, however, that Lessee shall be under no obligation to pay rent
to Mortgagee, as Lessor, pursuant to this Agreement until Lessee receives
written notice from Mortgagee that it has succeeded to the interest of Lessor
under the Lease. The respective rights and obligations of Lessee and Mortgagee
upon said attornment, to the extent of the then remaining balance of the term of
the Lease and any such extensions and renewals, shall be and are the same as now
set forth therein; it being the intention of the parties hereto for this purpose
to incorporate the Lease in this Agreement by reference with the same force and
effect as if set forth at length herein.
FOURTH: Lessee certifies that the Lease is presently in full force and
effect; that no rent under the Lease has been paid more than thirty (30) days in
advance of its due date, and that Lessee, as of this date, has no charge, lien
or claim of offset under the Lease, or otherwise, against the rents or other
amounts due or to become due thereunder.
FIFTH: If Mortgagee shall succeed to the interest of Lessor under the
Lease, Mortgagee shall be bound to Lessee under all terms, covenants and
conditions of the Lease, and Lessee shall, from and after Mortgagee's succession
to the interest of Lessor under the Lease, have the same remedies against
Mortgagee for the breach of an agreement contained in the Lease that Lessee
might have had under the Lease against Lessor if Mortgagee had not succeeded to
the interest of Lessor; provided further, however, that Mortgagee shall not be:
(a) liable for any act or omission of any prior landlord (including
the Lessor); or
(b) subject to any offsets or defenses which the Lessee might have
against any prior landlord (including the Lessor); or
(c) liable for the return of any security deposits not delivered to
Mortgagee; or
(d) bound by any rent or additional rent which Lessee might have paid
for more than the current month to any prior landlord (including Lessor);
or
(e) bound by any amendment or modification of the Lease made without
Mortgagee's consent; or
(f) obligated to construct or finish the construction of the premises
described in the Lease, unless it expressly assumes such obligation after
it succeeds to the interest of the Lessor under the Lease.
<PAGE>
SIXTH: The Lease now is, and shall at all times continue to be, subject and
subordinate, in each and every respect, to the Mortgagee and to any and all
renewals, modifications and extensions thereof, but any and all such renewals,
modifications and extensions shall nevertheless be subject to and entitled to
the benefits of the terms of this Agreement.
SEVENTH: Lessee shall not be named or joined as a party defendant or
otherwise in any suit, action or proceeding for the foreclosure of the Mortgage
or to enforce any rights under the Mortgage or the bond or note or other
obligation secured thereby.
EIGHTH: Mortgagee hereby acknowledges and agrees that all fixtures and
equipment whether owned by Lessee or any subtenant or leased by Lessee from a
lessor/owner (hereinafter called the "Equipment Lessor") installed in or on the
leased premises, regardless of the manner or mode of attachment, shall be and
remain the property of Lessee or any such Equipment Lessor and may be removed by
Lessee or any such Equipment Lessor at any time. In no event (including a
default under the Lease or the Mortgage) shall Mortgagee have any liens, right
or claims in Lessee's or Equipment Lessor's fixtures and equipment, whether or
not all or any part thereof shall be deemed fixtures; and Mortgagee expressly
waives all rights of levy, distraint, or execution with respect to said fixtures
and equipment. Mortgagee agrees to execute and deliver to Tenant and Equipment
Lessor, within fifteen (15) business days after request therefor, any document
required by Tenant or Equipment Lessor to evidence the foregoing.
NINTH: Lessee will notify Mortgagee, by registered or certified mail,
return receipt requested, of any default of Lessor which would entitle Lessee to
cancel the Lease or abate the rent payable thereunder, and agrees that
notwithstanding any provision of the Lease, no notice of cancellation thereof,
nor any abatement shall be effective unless Mortgagee has received the notice
aforesaid and has failed within 30 days of the date thereof to cure or if the
default cannot be cured within 30 days has failed to commence and to diligently
prosecute the cure of Landlord's default which gave rise to such right of
cancellation or abatement.
TENTH: This Agreement may not be modified orally or in any other manner
than by an agreement in writing signed by the parties hereto.
ELEVENTH: This Agreement may be recorded by either party.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement
to be duly executed as of the day and year first above written.
MORTGAGEE:
WACHOVIA BANK OF NORTH CAROLINA, N.A.
[CORPORATE SEAL]
Attest: By:____________________________________
__________, President
_________________________________
_________ Secretary
TENANT:
JR TOBACCO OF AMERICA, INC.
[CORPORATE SEAL]
By: /s/ Lewis Rothman
------------------------------------
Attest: __________, President
/s/ LaVonda Rothman
- ----------------------------------
_________ Secretary
<PAGE>
EXHIBIT H
PERMITTED ENCUMBRANCES
1. Easement and right-of-way to Duke Power Company, recorded in Book 296, Page
49, as shown on survey by Sprinkle Surveying, dated November 7, 1984.
2. Easements and rights-of-way to Public Service Company of N.C., recorded in
Book 369, Page 316; Book 395, Page 482 and Book 688, Page 653, and as shown
on the aforesaid survey.
3. Easements and rights-of-way to State Highway Commission, recorded in Book
376, Page 405 and Book 544, Page 102, and as shown on the aforesaid survey.
4. Easements and rights-of-way to Corco Realty Corp., recorded in Book 618,
Page 51 and Book 637, Page 259, and as shown on the aforesaid survey.
5. Sanitary sewer easement and right-of-way to the City of Statesville,
recorded in Book 688, Page 850, amended in Book 719, Page 77, and as shown
on the aforesaid survey.
6. Easement and right-of-way to C.H. Kutteh, II, et al, recorded in Book 706,
Page 544, and as shown on the aforesaid survey.
7. Cross parking and common use easement, recorded in Book 640, Page 107, and
as shown on the aforesaid survey.
8. Rights of tenants in possession, holding under recorded and unrecorded
leases.
9. Rights of upper and lower riparian owners in and to the use of the waters
of the creek crossing premises and the natural flow thereof.
10. Utility lines crossing premises, as shown on the aforesaid survey.
11. Encroachment of barbed wire fence onto premises, as shown on the aforesaid
survey.
12. Deed of Trust to Edward L. Marxen, Trustee for Wachovia Bank & Trust
Company, recorded in Book 602, Page 997, as amended by the Modification and
Extension Agreements recorded in Book 678, Page 777; Book 785, Page 371 and
Book 884, Page 377.
<PAGE>
EXHIBIT I
APPROVED SIGNAGE
<PAGE>
STATE OF NORTH CAROLINA FIRST AMENDMENT TO LEASE
COUNTY OF IREDELL
THIS FIRST AMENDMENT TO LEASE ("Amendment") is made and entered into as of
the 2nd day of November, 1993, by and between INTERSTATE DEVELOPMENT COMPANY, a
North Carolina corporation (the "Landlord"); and JR TOBACCO OF AMERICA, INC., a
New Jersey corporation (the "Tenant").
RECITALS
A. Landlord and Tenant entered into a Lease Agreement (the "Lease") dated
July 19, 1993, pursuant to which Landlord leased to Tenant certain premises
located in Newtowne Plaza Shopping Center, Statesville, Iredell County, North
Carolina on the terms and conditions therein set forth.
B. Landlord and Tenant desire to amend the Lease, as more fully set forth
below.
STATEMENT OF AGREEMENT
NOW THEREFORE, in consideration of the premises and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Landlord and Tenant agree that the Lease is hereby amended in the following
respects:
1. Defined Terms. Any capitalized term used in this Amendment that is not
defined herein shall have the meaning given that term in the Lease.
2. Term. Paragraph 3 on page 4 of the Lease is hereby deleted in its
entirety and the following is hereby substituted in its place:
3. Term. The Lease Term shall begin on the date of delivery of the Demised
Premises, as provided in Paragraph 5, and shall end at midnight on December 31,
2004, the date of expiration of the eleventh (11th) Lease Year after the Rent
Commencement Date.
At the end of the Lease Term provided Tenant is not in default beyond
the expiration of any applicable cure period, Tenant shall have the option
to renew and extend the Lease Term for one (1) period of ten (10) years
("Renewal Period"), upon the same terms and conditions set forth in this
Lease, including Guaranteed Minimum Rent as set forth in Paragraph 1(e).
Tenant shall exercise each renewal option by written notice to Landlord
given on or before twelve (12) months before the expiration of the original
Lease Term. All references to the "Lease Term" or the "Term of this Lease"
<PAGE>
shall, unless the context clearly indicates a different meaning, be deemed
to include any properly exercised Renewal Period.
4. Ratification. Except as expressly amended herein, the Lease is hereby
ratified by the parties and shall continue in full force and effect in
accordance with its terms.
5. Governing Law. This Amendment is entered into under the laws of the
State of North Carolina, and those laws shall govern the construction and
enforcement hereof.
6. Authorization. The persons executing this Amendment on behalf of
Landlord and Tenant are duly authorized to execute this Amendment, and no
consent of any other person to execution of this Amendment is required.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment under
seal as of the day and year first above written.
LANDLORD
INTERSTATE DEVELOPMENT COMPANY
[CORPORATE SEAL]
Attest: By: /s/ Robert A. Collier, Jr.
------------------------------------
President
/s/ James B. Collier
- ----------------------------------
Secretary
TENANT
JR TOBACCO OF AMERICA, INC.
[CORPORATE SEAL]
Attest: By: /s/ Lewis Rothman
------------------------------------
President
/s/ LaVonda Rothman
- -----------------------------------
Secretary
- 2 -
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
(Following the Transactions)
J.R. Tobacco of America, Inc.---North Carolina corporation
Cigars by Santa Clara, N.A., Inc.---North Carolina corporation
J.N.R. Grocery Corp.---New York corporation
J.R. Tobacco NC, Inc.---North Carolina corporation
J&R Tobacco (New Jersey) Corp.---New Jersey corporation
J.R. Tobacco Company of Michigan, Inc.---Michigan corporation
J.R.-46th Street, Inc.---New York corporation
J.R. Tobacco Outlet, Inc.---New Jersey corporation
J.R. Statesville, Inc.---North Carolina corporation
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reported dated December 18, 1996, in the Registration Statement on
Form S-1 and related Prospectus of 800-JR Cigar, Inc., dated March 14, 1997.
/s/ Ernst & Young LLP
MetroPark, New Jersey
March 13, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus of Registration Statement
on Form S-1 of our report dated May 21, 1996 on the financial statements of
800-JR Cigar, Inc. as of December 31, 1994 and 1995 and for the years ended
December 31, 1993, 1994 and 1995. We also consent to the references to our firm
under the caption "Experts" in the Prospectus of the Registration Statement.
/s/ J.H. Cohn LLP
Roseland, New Jersey J.H. COHN LLP
March 13, 1997
CONSENT OF NOMINEE DIRECTOR
I, John Oliva, hereby consent to being named as a person who will become a
director of 800-JR Cigar, Inc. in the Prospectus included in the Registration
Statement to which this consent is an exhibit.
Dated: March 12, 1997
/s/ John E. Oliva
Name: John Oliva
Title: Director
