<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-23401
3,000,000 SHARES
[LOGO]
800-JR CIGAR, INC.
COMMON STOCK
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. See "Underwriting" for a discussion of the factors which were
considered in determining the initial public offering price.
The Common Stock has been approved for inclusion on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the trading symbol
"JRJR."
SEE "RISK FACTORS" ON PAGES 9 TO 13 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
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.
-------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS (1) COMPANY (2)
------------------ ------------------ ------------------
<S> <C> <C> <C>
Per Share.............................. $17.00 $1.19 $15.81
Total (3).............................. $51,000,000 $3,570,000 $47,430,000
</TABLE>
- ---------------
(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 $1,100,000.
(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
$58,650,000, the total Underwriting Discounts and Commissions will be
$4,106,000 and the total Proceeds to Company will be $54,544,000. See
"Underwriting."
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
certain conditions. Delivery of the shares to the Underwriters is expected
against payment to be made at the office of Wheat, First Securities, Inc.,
Richmond, Virginia, on or about July 1, 1997.
WHEAT FIRST BUTCHER SINGER J.C. BRADFORD & CO.
The date of this Prospectus is June 26, 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
<PAGE>
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) 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., J.R. STATESVILLE, INC. AND J R CIGAR (DC), INC.
(COLLECTIVELY, THE "CONSTITUENT ENTITIES") IN EXCHANGE FOR 9,300,000 SHARES OF
COMMON STOCK OF 800-JR CIGAR. SEE "REORGANIZATION OF THE COMPANY" AND THE
PREDECESSOR COMBINED FINANCIAL STATEMENTS AND NOTES THERETO. 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 the largest distributor and retailer of brand name premium
cigars in the United States. The Company's primary products consist of premium
cigars, mass market cigars and cigarettes which are distributed to retail and
wholesale customers. The Company's highest gross margins are generated from the
sale of premium cigars (imported, hand-made and hand-rolled cigars made with
long filler and all natural tobacco leaf) and, as such, it has targeted premium
cigars as its primary growth vehicle. The Company's premium cigars consist of
approximately 150 brands, of which 43 are the Company's proprietary brands.
Among the Company's proprietary products are nationally recognized brands such
as Belinda-Registered Trademark-, Casa Blanca-Registered Trademark-, El Rey del
Mundo-Registered Trademark-, 5 Star Seconds-Registered Trademark-, Jose
Marti-TM-, J-R Alternative-Registered Trademark-, J-R
Ultimate-Registered Trademark-, La Finca-Registered Trademark-, Rosa Cuba-TM-
and Santa Clara-Registered Trademark-.
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 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's strong relationship with these manufacturers allows
for advantageous supplies of desirable brand name cigars and for significant
purchasing power. The Company's net sales have increased at a compound annual
growth rate of 37.1%, from $54.3 million in 1992 to $192.0 million in 1996. For
the year ended December 31, 1996, sales of cigars and tobacco products, other
than cigarettes, totaled $93.7 million, or 48.8% of net sales, and represented
77.6% 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 $78.4 million, or 40.8% of net sales,
during the year ended December 31, 1996. The Company also offers a variety of
discounted general merchandise, including fragrances and apparel, through its
stores. During the year ended December 31, 1996, sales of such non-tobacco
products totaled $19.9 million, or 10.4% of net sales. No assurance can be
given, however, that the Company's growth in sales volume will continue.
The Company markets tobacco products on a retail basis throughout the United
States by direct mail and through six 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 six 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 8,200 square foot, award-winning, upscale specialty cigar store in
Whippany, New Jersey, which
3
<PAGE>
achieved over $6.6 million in sales in its first full year 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
$111.4 million in total retail sales for the year ended December 31, 1996,
representing 58.0% of net sales.
The Company's wholesale activities consist predominantly of catalog sales of
premium cigars 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 8,000 smoke shops,
restaurants, taverns, liquor stores and other retail outlets and wholesale
distributors throughout the United States. The Company achieved $80.6 million in
wholesale sales for the year ended December 31, 1996, representing 42.0% 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 4.5 billion units in 1996. Unit sales of premium cigars
increased from 110.0 million units in 1993 to 274.3 million units in 1996,
increasing at a compound annual growth rate of 35.6%. Unit sales of mass market
large cigars increased from 2.1 billion units in 1993 to an estimated 2.9
billion units in 1996, increasing at a compound annual growth rate of 11.3%.
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's principal objective is to enhance its position as the leading
distributor and retailer of a full line of premium and mass market large 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/or expanding existing specialty
cigar stores and adding an additional store 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
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 increase its presence in mass market large cigars.
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.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered hereby........ 3,000,000 shares
Common Stock to be Outstanding
after the Offering............... 12,300,000 shares(1)
Use of Proceeds.................... To (i) finance development, construction, and related
inventory costs of a new warehouse, new stores and
store renovations, (ii) finance expansion of direct
mail operations by upgrading the Company's information
systems and graphics capability, (iii) repay long-term
indebtedness, (iv) pay the current portion of the
Distribution Notes (as defined herein) previously
issued to the Existing Stockholders, plus interest
related to the Distribution Notes, which notes
represent estimated cumulative undistributed
Subchapter S corporation ("S Corporation") earnings
through the date of the Offering and (v) pay signing
bonuses to an officer and to MC Management, Inc. ("MC
Management") in connection with the execution of
long-term service agreements. 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."
Nasdaq National Market Symbol...... "JRJR"
</TABLE>
- ------------------------
(1) Excludes 450,000 shares of Common Stock subject to the 30-day over-allotment
option granted to the Underwriters. See "Management" and "Shares Eligible
for Future Sale."
------------------------
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. An increase
in regulatory restrictions and other anti-smoking initiatives, for example,
could have an adverse effect on the tobacco industry generally and on the
Company's operations. See "Risk Factors."
------------------------
CASA BLANCA-REGISTERED TRADEMARK-, CLEMENCEAU-REGISTERED TRADEMARK-,
CONSUEGRA-REGISTERED TRADEMARK-, FARACH-REGISTERED TRADEMARK-, 5 STAR
SECONDS-REGISTERED TRADEMARK-, GARCIA Y GARCIA-REGISTERED TRADEMARK-,
JEROBOAM-REGISTERED TRADEMARK-, J-R ALTERNATIVE-REGISTERED TRADEMARK-, J-R
ULTIMATE-REGISTERED TRADEMARK-, LA FINCA-REGISTERED TRADEMARK-, MARIA
MANCINI-REGISTERED TRADEMARK-, MOCAMBO-REGISTERED TRADEMARK-,
MOCHA-REGISTERED TRADEMARK-, PERFECTO GARCIA-REGISTERED TRADEMARK-, PERFECTO
GARCIA CROWN ROYALS-REGISTERED TRADEMARK-, PRINCIPALES-REGISTERED TRADEMARK-,
QUORUM-REGISTERED TRADEMARK-, REMEDIOS-REGISTERED TRADEMARK-, REY DEL
REY-REGISTERED TRADEMARK-, REYNITAS-REGISTERED TRADEMARK-, ROBUSTOS DE MANUEL
ZAVALLA-REGISTERED TRADEMARK-, SANTA CLARA-REGISTERED TRADEMARK- AND
WHITEHALL-REGISTERED TRADEMARK- 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-REGISTERED TRADEMARK- AND EL REY DEL MUNDO-REGISTERED TRADEMARK- BRANDS
REFERENCED IN THIS PROSPECTUS ARE EXCLUSIVELY LICENSED TO THE COMPANY BY
VILLAZON & COMPANY, INC.
5
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
(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, 1996 and the three-month period
ended March 31, 1997 which give effect to the Reorganization, the Offering, and
certain other adjustments as if they had occurred on January 1, 1996. 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 March 31, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
----------- --------- ---------- ---------- ---------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Net sales........................... $ 54,258 $ 74,581 $ 109,297 $ 152,695 $ 191,982 $ 39,896 $ 49,683
Cost of goods sold.................. 44,958 62,660 91,588 130,645 158,007 32,887 40,631
----------- --------- ---------- ---------- ---------- --------- ---------
Gross profit........................ 9,300 11,921 17,709 22,050 33,975 7,009 9,052
Selling, general and administrative
expenses.......................... 7,147 9,714 14,450 18,768(2) 20,954 4,425 4,810
Depreciation and amortization....... 263 361 447 493 674 167 187
----------- --------- ---------- ---------- ---------- --------- ---------
Income from operations.............. 1,890 1,846 2,812 2,789 12,347 2,417 4,055
Other income (expense):
Interest expense.................. (353) (481) (710) (785) (789) (154) (173)
Other(3).......................... 488 404 454 308 767 492 143
----------- --------- ---------- ---------- ---------- --------- ---------
Income before income taxes and
cumulative effect of change in
accounting method................. 2,025 1,769 2,556 2,312 12,325 2,755 4,025
Provision (credit) for income
taxes............................. 168 160 257 (74) 144 34 141
----------- --------- ---------- ---------- ---------- --------- ---------
Income before cumulative effect of
change in accounting method....... 1,857 1,609 2,299 2,386 12,181 2,721 3,884
Cumulative effect of change in
accounting for income taxes....... -- 58 -- -- -- -- --
----------- --------- ---------- ---------- ---------- --------- ---------
Net income.......................... $ 1,857 $ 1,667 $ 2,299 $ 2,386 $ 12,181 $ 2,721 $ 3,884
----------- --------- ---------- ---------- ---------- --------- ---------
----------- --------- ---------- ---------- ---------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
PRO FORMA INFORMATION DECEMBER 31, ENDED
(UNAUDITED)(4): 1996 MARCH 31, 1997
--------------- -----------------
<S> <C> <C>
Historical income before income taxes...................... $ 12,325 $ 4,025
Pro forma adjustments other than income taxes.............. 580 (274)
------- ------
Pro forma income before provision for income taxes......... 12,905 3,751
Pro forma provision for income taxes....................... 5,262 1,530
------- ------
Pro forma net income....................................... $ 7,643 $ 2,221
------- ------
------- ------
Pro forma earnings per share(5)............................ $ .73 $ .22
------- ------
------- ------
Pro forma common shares outstanding........................ 9,812 9,812
------- ------
------- ------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
----------- --------- ---------- --------- ---------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Revenues:
Retail sales.......................... 65.4% 65.6% 65.8% 58.3% 58.0% 51.5% 58.2%
Wholesale sales....................... 34.6 34.4 34.2 41.7 42.0 48.5 41.8
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
(UNAUDITED)
---------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA(6) ADJUSTED(7)
--------- ------------- -------------
BALANCE SHEET DATA:
Working capital.......................................................... $ 21,295 $ 3,920 $ 43,805
Total assets............................................................. 46,610 45,119 82,192
Total long-term debt, including current portion.......................... 7,825 31,625 23,868
Total stockholders' equity (deficit)..................................... 27,360 (5,915) 39,527
</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 the respective stockholders. Accordingly, the
Predecessor Combined Financial Statements do not include the 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 $1,000,000.
(3) Relates principally to rental income and interest income and $373,000 in
payment of a business interruption insurance settlement in 1996.
(4) The unaudited pro forma net income for the year ended December 31, 1996 and
the three-month period ended March 31, 1997 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 $1,818,000 to
$400,000 for the year ended December 31, 1996 and from $126,000 to $100,000
for the three-month period ended March 31, 1997 for two of the Company's
executives pursuant to new employment agreements; (b) an increase in
interest expense of $1,458,000 for the year ended December 31, 1996 and
$417,000 for the three-month period ended March 31, 1997, assuming the
issuance of the Distribution Notes; (c) a reduction in interest expense of
$789,000 for the year ended December 31, 1996 and $173,000 for the
three-month period ended March 31, 1997 assuming the application of proceeds
from the Offering to repay all the Company's indebtedness other than the
Distribution Notes and capital lease obligations; (d) a reduction in
interest income of $169,000 for the year ended December 31, 1996 and $56,000
for the three-month period ended March 31, 1997, assuming the repayment to
the Company of loans receivable from stockholders; and (e) an increase in
income taxes of $5,118,000 for the year ended December 31, 1996 and
$1,389,000 for the three-month period ended March 31, 1997 based upon pro
forma pre-tax income and as if the Company had been subject to federal and
additional state income taxes. See "Reorganization of the Company" and
"Management--Employment Agreements."
(5) Pro forma earnings per share is based on 9,300,000 shares of Common Stock
outstanding prior to the Offering, increased by the sale of 511,658 shares
of Common Stock at an initial public offering price of $17.00 per share
($15.44, net of underwriting discounts and commissions and estimated
offering expenses), the proceeds of which would be necessary to pay
approximately $7,900,000, the current portion of the Distribution Notes. The
net income used in the calculation of pro forma earnings per share
represents pro forma net income decreased by the interest on debt of
$789,000 ($467,000 on an
7
<PAGE>
after-tax basis) for the year ended December 31, 1996, and $173,000
($102,000 on an after-tax basis) for the three-month period ended March 31,
1997.
Supplementary pro forma earnings per share for the year ended December 31,
1996, and the three-month period ended March 31, 1997 are $.74 and $.22,
respectively, based on 9,300,000 shares of Common Stock outstanding prior to
the Offering, increased by (a) the sale of 511,658 shares of Common Stock at
an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to pay approximately $7,900,000, the
current portion of the Distribution Notes, and (b) the sale of 502,396
shares of Common Stock at an initial public offering price of $17.00 per
share ($15.44, net of underwriting discounts and commissions and estimated
offering expenses), the proceeds of which would be necessary to repay
approximately $7,800,000 in outstanding debt other than capital lease
obligations. The net income used in the calculation of supplementary pro
forma earnings per share is the pro forma net income of $7,643,000 and
$2,221,000 for the year ended December 31, 1996 and the three-month period
ended March 31, 1997, respectively.
(6) Pro forma to reflect (i) the Reorganization; (ii) the issuance of the
Distribution Notes in the aggregate amount of $23,800,000 (such amount
estimated through the date of the Offering) which amount is net of loans
receivable from stockholders of $2,625,000 and additional distributions of
$7,984,000 made prior to the Offering; and (iii) a deferred tax asset of
$1,134,000 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 $17.00 per share ($15.44 per share,
after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and the application of the
estimated net proceeds therefrom; (ii) a non-recurring pre-tax charge of
$1,000,000 ($592,000 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 ($296,000 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
payment of approximately $7,800,000 in long-term indebtedness other than
capital lease obligations. See "Reorganization of the Company," "Use of
Proceeds" and "Capitalization."
8
<PAGE>
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.
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 business, 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 has relied
and intends in the future to rely upon the strength of its relationships with
cigar manufacturers, which it has cultivated over a 25-year period, to meet its
supply requirements. See "Business--Sources of Supply; Production" and "Certain
Related Transactions--Manufacturing Facility Arrangements." No assurance can be
given that the Company will be able to continue to maintain these relationships
or that such relationships 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. 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.
9
<PAGE>
RELIANCE ON KEY PERSONNEL. The Company's operations will continue to depend
upon the efforts of 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. In addition, telemarketing services and various
administrative and other services are performed for the Company by MC
Management, a management services company owned by Ms. Maureen Colleton. See
"Business--Employees" and "Certain Related Transactions--Management Services."
The loss of the services of Mr. Rothman, MC Management or any other senior
personnel may have a material adverse effect on the Company's business and
results of operations. 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 (31.1% for the year ended December 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 become a licensed
cigarette distributor in those 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 identify acceptable locations for new 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 year ended December 31, 1996 were $78.4 million (or
40.8% of total net sales), of which $33.9 million were derived from retail sales
and $44.5 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
10
<PAGE>
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. On April 25, 1997, the Federal District Court for
the Middle District of North Carolina upheld the FDA's jurisdiction to regulate
cigarettes and smokeless tobacco as medical devices and to impose restrictions
on their sale and distribution to minors, but rejected the agency's restrictions
on advertising and promotion. Pending appeal, however, the court ordered that
all restrictions which had gone into effect on February 28, 1997 would remain in
full force (i.e., a prohibition on retailers from selling cigarettes, cigarette
tobacco or smokeless tobacco to persons under the age of 18 and a requirement
that retailers check the photographic identification of every person under the
age of 27). The court ordered that the agency may not implement any of the
additional regulations that were scheduled to go into effect August 28, 1997.
This decision is subject to an immediate appeal and there can be no assurance as
to the outcome of the appeal or the ultimate effect on the consumption of
tobacco or on the Company's business, financial results or results of
operations. In addition, in June 1997, five of the major U.S. cigarette
manufacturing companies entered into a preliminary agreement with a group of
state attorneys general and private attorneys to settle various pending state
lawsuits. The settlement requires legislative enactment by Congress. By its
initial terms, the proposal covers cigarettes and smokeless tobacco products,
and its restrictions extend beyond those contained in the FDA regulations. The
Company is unable to predict whether or when the proposed settlement will be
enacted by Congress, whether its provisions will be subject to significant
alteration or whether they will have a material adverse effect on the Company's
results of operations.
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,
11
<PAGE>
local or regulatory body, and there can be no assurance that any such
legislation or regulation would not have an 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. A number of cigarette distributors have been named as defendants 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. 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 face 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
9,300,000 shares of Common Stock, constituting approximately 75.6% of the
Company's outstanding Common Stock (approximately 72.9% 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 was determined
through negotiations between the Company and the Representatives (as defined
herein) of the Underwriters, and may not be indicative of future market prices.
See "Underwriting" for a discussion of the factors that were considered in
determining the initial public offering price. The market price of the Common
Stock could
12
<PAGE>
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 the 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 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 $13.79 in net tangible book value per share of Common
Stock from the initial public offering price of $17.00. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL FLUCTUATIONS IN MARKET
PRICE. Upon completion of the Offering, the Company will have a total of
12,300,000 shares of Common Stock outstanding (12,750,000 shares if the
Underwriters' over-allotment option is exercised in full), of which 9,300,000
shares will be restricted securities within the meaning of Rule 144 under the
Securities Act of 1933. The Company has granted 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 750,000 shares will be available for issuance upon the exercise of
options which may be granted in the future under the 1997 Long-Term Incentive
Plan and other benefit plans. 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 shares of Common Stock and options to purchase an aggregate of 235,000
shares of Common Stock have agreed 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 Wheat, First Securities, Inc.,
on behalf of the Underwriters (the "180 Day Lockup"). Wheat, First Securities,
Inc. 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 9,300,000 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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<PAGE>
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. Contemporaneously 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, (ix) J.R.
Statesville, Inc., a North Carolina corporation and (x) J R Cigar (DC), Inc., a
District of Columbia corporation (collectively, the "Constituent Entities") in
exchange for 9,300,000 shares (approximately 75.6% of the outstanding Common
Stock of the Company after the Offering or 72.9% if the Underwriters'
overallotment option is exercised in full). The foregoing transactions are
referred to herein as the "Reorganization." The Reorganization will close
contemporaneously 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 a tax agreement among the Company and the Existing
Stockholders (the "Tax Agreement"), the Company has agreed 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
have agreed to pay any taxes with respect to such returns. The Existing
Stockholders have 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, agreed 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, 1996, the amount
of the deferred tax asset as of December 31, 1996 would have been approximately
$0.9 million. See "Capitalization," "Selected Combined Financial Data" and Note
8 to the Predecessor Combined Financial Statements.
On June 6, 1997, the Constituent Entities paid a dividend in the form of
notes payable (the "Notes") to the Existing Stockholders in the aggregate
principal amount of $23.8 million. The principal amounts of the Notes represent
the estimated cumulative undistributed S Corporation earnings of the Constituent
14
<PAGE>
Entities through June 30, 1997 on which income taxes are payable by the Existing
Stockholders. The Notes are promissory notes bearing interest at the rate of
7.0% per annum. Principal on the Notes is payable in equal quarterly
installments over a three-year period, and interest is 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 $2.6 million and additional
distributions made prior to the Offering in the amount of $7.9 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. On June 6, 1997, the Constituent Entities also paid 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 $250, which amount shall be
increased by an amount equal to the S Corporation earnings of the Constituent
Entities in excess of the principal amount of the Notes for the taxable period
of 1997 that such Constituent Entity was an S Corporation (including the period
through June 30, 1997) based upon such Constituent Entity's 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,
provided that in no event shall such amount exceed $1.0 million in the
aggregate. The Additional Notes mature on June 1, 2000 and bear interest at the
rate of 7.0% per annum.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately $46.3 million, based on the initial public offering price of
$17.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses (approximately $53.4 million if the Underwriters'
over-allotment option is exercised in full). Of such net proceeds, the Company
intends to use (i) approximately $10.0 million to finance a new discount outlet
store and warehouse facility, including inventory costs, (ii) approximately $5.0
million to finance the expansion of retail selling space at existing discount
outlet stores, including inventory costs, (iii) approximately $4.5 million to
finance the relocation, redesign and expansion of four existing specialty cigar
stores and the opening of an entirely new cigar store, (iv) approximately $2.0
million to upgrade information systems and graphics capabilities in connection
with the expansion of direct mail operations, (v) approximately $7.8 million to
repay outstanding indebtedness, of which approximately $5.3 million had been
incurred under notes issued pursuant to the Credit Agreement (as defined
herein), $2.4 million had been incurred under mortgages and $0.1 million had
been incurred under a note issued to a former stockholder, (vi) approximately
$7.9 million to pay the current portion of the Distribution Notes previously
issued, plus $1.5 million of interest related to the Distribution Notes during
the twelve months following the Offering, which Distribution Notes represent
estimated cumulative undistributed S Corporation earnings, net of loans
receivable from such stockholders of $2.6 million and additional distributions
made prior to the Offering in the amount of $7.9 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, and (vii) $1.5 million (approximately $0.9 million net
of tax effect) to pay signing bonuses to an officer and to MC Management in
connection with long-term services agreements. The notes to be repaid under the
Credit Agreement had outstanding principal balances at March 31, 1997 of $1.4
million, $1.2 million and $2.7 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 had
outstanding principal balances at March 31, 1997 of $2.0 million, with annual
interest at 8.25%, and $0.4 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 working capital and
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 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.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1997 (i) on a historical combined basis, (ii) on a pro forma combined basis
assuming consummation of the Reorganization, issuance of the Distribution Notes,
recording of a deferred tax asset concurrent with the Constituent Entities
becoming C corporations, and recording of additional distributions of $7.9
million 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 (approximately $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 with MC Management, the sale of the 3,000,000 shares of Common
Stock offered hereby at the initial public offering price of $17.00 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>
MARCH 31, 1997
(UNAUDITED)
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<S> <C> <C> <C>
(IN THOUSANDS)
Debt:
Current debt:
Current portion of long-term debt and capital lease obligations............. $ 2,268 $ 2,268 $ 68
Current portion of Distribution Notes....................................... 7,900 7,900
Distributions payable....................................................... 7,984 7,984
--------- ----------- -----------
Total current debt...................................................... $ 2,268 $ 18,152 $ 15,952
--------- ----------- -----------
--------- ----------- -----------
Long-term debt:
Long-term debt and capital lease obligations less current portion........... $ 5,557 $ 5,557 $ --
Distribution Notes, less current portion.................................... 15,900 15,900
--------- ----------- -----------
Total long-term debt.................................................... 5,557 21,457 15,900
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)...................................... 123
Common stock of Constituent Entities........................................ 21 21 --
Additional paid-in capital.................................................. 28 (5,518) 39,404
Retained earnings........................................................... 27,729 -- --
--------- ----------- -----------
27,778 (5,497) 39,527
Treasury stock, at cost..................................................... (418) (418) --
--------- ----------- -----------
Total stockholders' equity (deficit).................................... 27,360 (5,915) 39,527
--------- ----------- -----------
Total capitalization.................................................... $ 32,917 $ 15,542 $ 55,427
--------- ----------- -----------
--------- ----------- -----------
</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."
17
<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 net tangible book value of the
Company as of March 31, 1997 was approximately ($5.9) million, or $(.64) per
share. "Pro forma 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 3,000,000
shares of Common Stock offered hereby (at the initial public offering price of
$17.00 per share, less the underwriting discounts and commissions and estimated
offering expenses) the pro forma combined net tangible book value of the Company
at March 31, 1997 would have been $39.5 million or $3.21 per share. This
represents an immediate increase in net tangible book value of $3.85 per share
to the Existing Stockholders and an immediate reduction in net tangible book
value of $13.79 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:
<TABLE>
<S> <C> <C>
Initial public offering price.................................. $ 17.00
Net tangible book value at March 31, 1997.................... $ 2.94
---------
---------
Pro forma net tangible book value at March 31, 1997 after
giving effect to the issuance of the Distribution Notes,
the recording of a deferred tax asset, and the recording of
additional distributions................................... $ (.64)
Increase in pro forma net tangible book value attributable to
new investors.............................................. 3.85
---------
Pro forma combined net tangible book value after the
Offering..................................................... 3.21
---------
Dilution in net tangible book value to new investors........... $ 13.79
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1997,
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 initial public offering price of
$17.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- --------- ------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 9,300,000 75.6% $ 49,000 .1% $ .005
New investors..................................... 3,000,000 24.4 51,000,000 99.9 17.00
------------ ----- ------------- ---------
Total....................................... 12,300,000 100.0% $ 51,049,000 100.0%
------------ ----- ------------- ---------
------------ ----- ------------- ---------
</TABLE>
18
<PAGE>
SELECTED COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The following table sets forth 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, 1995 and
1996 have been derived from audited Predecessor Combined Financial Statements of
the Company. The selected combined financial data as of and for the year ended
December 31, 1992 and as of and for the three-month periods ended March 31, 1996
and 1997 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 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, 1996 and the three-month period ended March
31, 1997 which give effect to the Reorganization, the Offering, and certain
other adjustments as if they had occurred on January 1, 1996. 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 1996 1997
----------- --------- ---------- ---------- ---------- --------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA(1):
Net sales........................... $ 54,258 $ 74,581 $ 109,297 $ 152,695 $ 191,982 $ $39,896 $ 49,683
Cost of goods sold.................. 44,958 62,660 91,588 130,645 158,007 32,887 40,631
----------- --------- ---------- ---------- ---------- --------- -----------
Gross profit........................ 9,300 11,921 17,709 22,050 33,975 7,009 9,052
Selling, general and administrative
expenses.......................... 7,147 9,714 14,450 18,768(2) 20,954 4,425 4,810
Depreciation and amortization....... 263 361 447 493 674 167 187
----------- --------- ---------- ---------- ---------- --------- -----------
Income from operations.............. 1,890 1,846 2,812 2,789 12,347 2,417 4,055
Other income (expense):
Interest expense.................. (353) (481) (710) (785) (789) (154) (173)
Other(3).......................... 488 404 454 308 767 492 143
----------- --------- ---------- ---------- ---------- --------- -----------
Income before income taxes and
cumulative effect of change in
accounting method................. 2,025 1,769 2,556 2,312 12,325 2,755 4,025
Provision (credit) for income
taxes............................. 168 160 257 (74) 144 34 141
----------- --------- ---------- ---------- ---------- --------- -----------
Income before cumulative effect of
change in accounting method....... 1,857 1,609 2,299 2,386 12,181 2,721 3,884
Cumulative effect of change in
accounting for income taxes....... -- 58 -- -- -- -- --
----------- --------- ---------- ---------- ---------- --------- -----------
Net income.......................... $ 1,857 $ 1,667 $ 2,299 $ 2,386 $ 12,181 $ 2,721 $ 3,884
----------- --------- ---------- ---------- ---------- --------- -----------
----------- --------- ---------- ---------- ---------- --------- -----------
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- -------------------
<S> <C> <C>
Pro Forma Information
(unaudited)(4):
Historical income before income taxes.................................... $ 12,325 $ 4,025
Pro forma adjustments other than income taxes............................ 580 (274)
------- ------
Pro forma income before provision for income taxes....................... 12,905 3,751
Pro forma provision for income taxes..................................... 5,262 1,530
------- ------
Pro forma net income..................................................... $ 7,643 $ 2,221
------- ------
------- ------
Pro forma earnings per share(5).......................................... $ .73 $ .22
------- ------
------- ------
Pro forma common shares outstanding...................................... 9,812 9,812
------- ------
------- ------
</TABLE>
<TABLE>
<CAPTION>
AT MARCH 31, 1997
AT DECEMBER 31, (UNAUDITED)
------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996 ACTUAL PRO FORMA(6)
----------- --------- --------- --------- --------- --------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 5,921 $ 9,014 $ 10,845 $ 8,914 $ 18,522 $ 21,295 $ 3,920
Total assets............................. 16,108 22,692 29,951 32,670 42,682 46,610 45,119
Total long-term debt, including current
portion................................ 2,345 6,153 8,955 7,302 8,368 7,825 31,625
Total stockholders' equity (deficit)..... 5,738 7,405 9,704 12,090 23,476 27,360 (5,915)
</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 the respective stockholders. Accordingly,
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 $1,000,000.
(3) Relates principally to rental income and interest income and $373,000 in
payment of a business interruption insurance claim settlement in 1996.
(4) The unaudited pro forma net income for the year ended December 31, 1996 and
the three-month period ended March 31, 1997 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 $1,818,000 to
$400,000 for the year ended December 31, 1996 and from $126,000 to $100,000
for the three-month period ended March 31, 1997 for two of the Company's
executives pursuant to new employment agreements; (b) an increase in
interest expense of $1,458,000 for the year ended December 31, 1996 and
$417,000 for the three-month period ended March 31, 1997, assuming the
issuance of the Distribution Notes; (c) a reduction in interest expense of
$789,000 for the year ended December 31, 1996 and $173,000 for the
three-month period ended March 31, 1997 assuming the application of proceeds
from the Offering to repay all the Company's indebtedness other than the
Distribution Notes and capital lease obligations; (d) a reduction in
interest income of $169,000 for the year ended December 31, 1996 and $56,000
for the three-month period ended March 31, 1997, assuming the repayment to
the Company of loans receivable from stockholders; and (e) an increase in
income taxes of $5,118,000 for the year ended December 31, 1996 and
$1,389,000 for the three-month period ended March 31, 1997 based upon pro
forma pre-tax income as if the Company had been
20
<PAGE>
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 earnings per share is based on 9,300,000 shares of Common Stock
outstanding prior to the Offering, increased by the sale of 511,658 shares
of Common Stock at an initial public offering price of $17.00 per share
($15.44, net of underwriting discounts and commissions and estimated
offering expenses), the proceeds of which would be necessary to pay
approximately $7,900,000, the current portion of the Distribution Notes. The
net income used in the calculation of pro forma earnings per share
represents pro forma net income decreased by the interest on debt of
$789,000 ($467,000 on an after-tax basis) for the year ended December 31,
1996, and $173,000 ($102,000 on an after-tax basis) for the three-month
period ended March 31, 1997.
Supplementary pro forma earnings per share for the year ended December 31,
1996, and the three-month period ended March 31, 1997 are $.74 and $.22,
respectively, based on 9,300,000 shares of Common Stock outstanding prior to
the Offering, increased by (a) the sale of 511,658 shares of Common Stock at
an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to pay approximately $7,900,000, the
current portion of the Distribution Notes, and (b) the sale of 502,396
shares of Common Stock at an initial public offering price of $17.00 per
share ($15.44, net of underwriting discounts and commissions and estimated
offering expenses), the proceeds of which would be necessary to repay
approximately $7,800,000 in outstanding debt. The net income used in the
calculation of supplementary pro forma earnings per share is the pro forma
net income of $7,643,000 and $2,221,000 for the year ended December 31, 1996
and the three-month period ended March 31, 1997, respectively.
(6) Pro forma to reflect (i) the Reorganization; (ii) the issuance of the
Distribution Notes in the aggregate amount of $23,800,000 (such amount
estimated through the date of the Offering) which amount is net of loans
receivable from Existing Stockholders of $2,625,000 and additional
distributions of $7,984,000 made prior to the Offering; and (iii) a deferred
tax asset of approximately $1,134,000 which the Company will record
concurrently with the Constituent Entities becoming C corporations. See
"Reorganization of the Company" and "Certain Related Transactions."
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain "forward-looking statements." 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.
GENERAL
The Company is the largest distributor and retailer of brand name premium
cigars in the United States. 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 $54.3 million in the year
ended December 31, 1992 to $192.0 million in the year ended December 31, 1996
and increased from $39.9 million in the first quarter of 1996 to $49.7 million
in the first quarter of 1997.
The Company markets its products through two principal channels of
distribution: retail, consisting of the Company's premium cigar direct mail
business, six specialty cigar stores (one of which was acquired from a licensee
of the Company in April 1997), 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,
---------------------------------------------------------------- THREE MONTHS
ENDED
1994 1995 1996 MARCH 31, 1997
-------------------- -------------------- -------------------- --------------------
$ % $ % $ % $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS) (UNAUDITED)
Retail operations:
Direct mail cigars............ $ 17.8 16.3% $ 26.4 17.3% $ 35.5 18.5% $ 10.1 20.3%
Cigar stores.................. 9.1 8.3 10.5 6.9 16.2 8.4 4.4 8.9
Discount outlet stores........ 45.0 41.2 52.1 34.1 59.7 31.1 14.4 29.0
--------- --------- --------- --------- --------- --------- --------- ---------
Total retail sales........ 71.9 65.8 89.0 58.3 111.4 58.0 28.9 58.2
--------- --------- --------- --------- --------- --------- --------- ---------
Wholesale operations:
Direct mail cigars............ 18.4 16.8 25.2 16.5 32.6 17.0 9.3 18.7
Cash-and-carry cigarettes*.... 19.0 17.4 38.5 25.2 48.0 25.0 11.5 23.1
--------- --------- --------- --------- --------- --------- --------- ---------
Total wholesale sales..... 37.4 34.2 63.7 41.7 80.6 42.0 20.8 41.8
--------- --------- --------- --------- --------- --------- --------- ---------
Total net sales................. $ 109.3 100.0% $ 152.7 100.0% $ 192.0 100.0% $ 49.7 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* Also includes tobacco and other tobacco related products.
22
<PAGE>
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 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,
---------------------------------------------------------------- THREE MONTHS
ENDED
1994 1995 1996 MARCH 31, 1997
-------------------- -------------------- -------------------- --------------------
$ % $ % $ % $ %
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN MILLIONS) (UNAUDITED)
Cigars/Tobacco*................ $ 46.9 42.9% $ 65.5 42.9% $ 93.7 48.8% $ 27.7 55.7%
Cigarettes..................... 46.0 42.1 67.1 43.9 78.4 40.8 18.3 36.8
Fragrances..................... 7.8 7.1 8.1 5.3 7.2 3.8 1.3 2.6
Other merchandise.............. 8.6 7.9 12.0 7.9 12.7 6.6 2.4 4.9
--------- --------- --------- --------- --------- --------- --------- ---------
Total net sales............ $ 109.3 100.0% $ 152.7 100.0% $ 192.0 100.0% $ 49.7 100%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* Excludes cigarettes.
The tobacco industry has been subject to extensive regulation and has
recently been subject to numerous proposals seeking to increase such regulation
at the federal, state and local levels. In addition, the industry has
experienced and is experiencing significant health-related litigation involving
tobacco. The content, timing or effect of any such regulation or the amount or
resolution of any such litigation cannot be predicted. Any increase in
regulatory restrictions and other anti-smoking initiatives could have an adverse
effect on the tobacco industry generally and on the Company's operations;
consequently, no assurance can be given that the Company's growth in sales
volume will continue.
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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
Revenues:
Retail sales.............................................. 65.8% 58.3% 58.0% 51.5% 58.2%
Wholesale sales........................................... 34.2 41.7 42.0 48.5 41.8
--------- --------- --------- --------- ---------
Net sales............................................. 100.0 100.0 100.0 100.0 100.0
Cost of goods sold.......................................... 83.8 85.6 82.3 82.4 81.8
--------- --------- --------- --------- ---------
Gross profit................................................ 16.2 14.4 17.7 17.6 18.2
Selling, general and administrative expenses................ 13.2 12.3 10.9 11.1 9.7
Depreciation and amortization............................... 0.4 0.3 0.4 0.4 0.4
--------- --------- --------- --------- ---------
Income from operations...................................... 2.6 1.8 6.4 6.1 8.1
Other income (expense):
Interest expense.......................................... (0.7) (0.5) (0.4) (0.4) (0.3)
Other..................................................... 0.4 0.2 0.4 1.2 0.3
--------- --------- --------- --------- ---------
Income before income taxes.................................. 2.3 1.5 6.4 6.9 8.1
Provision (credit) for income taxes......................... 0.2 (0.1) 0.1 0.1 0.3
--------- --------- --------- --------- ---------
Net income.................................................. 2.1% 1.6% 6.3% 6.8% 7.8%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
23
<PAGE>
THREE-MONTH PERIOD ENDED MARCH 31, 1997 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 1996 (UNAUDITED).
Net sales were $49.7 million and $39.9 million for the first quarters of
1997 and 1996, respectively, an increase of $9.8 million or 24.5%. Retail sales
increased 40.3% to $28.9 million for the first quarter of 1997 from $20.6
million for the first quarter of 1996. The increase in retail sales was due
primarily to a $3.7 million, or 58.6%, increase in direct mail cigar sales; a
$2.4 million, or 120.0% increase in cigar store sales; and a $2.2 million or
28.4% increase in discount outlet store sales. Wholesale sales increased 7.8% to
$20.8 million for the first quarter of 1997 from $19.3 million over the same
period in the prior year. The increase in wholesale sales was due primarily to a
$2.6 million, or 39.7%, increase in direct mail cigar sales offset by $1.1
million, or 8.9%, decrease in cash-and-carry cigarette sales. The total increase
in net sales was attributable to increases in both unit volume and prices,
particularly for premium cigars and cigar related products.
Gross profit was $9.1 million and $7.0 million for the first quarters of
1997 and 1996, respectively, an increase of $2.1 million or 29.1%. The increase
in gross profit was due primarily to the increase in premium cigar sales, which
have higher profit margins relative to the Company's other products. As a
percentage of net sales, gross profit increased to 18.2% for the first quarter
of 1997 from 17.6% for the first quarter of 1996, primarily due to an increase
in unit volume and prices of higher margin, premium cigars.
Selling, general and administrative ("SG&A") expenses were $4.8 million and
$4.4 million for the first quarters of 1997 and 1996, respectively, an increase
of $0.4 million or 8.7%, primarily due to increased staffing and other costs. As
a percentage of net sales, SG&A expenses decreased to 9.7% for the first quarter
of 1997 from 11.1% for the first quarter of 1996, due primarily to net sales
increasing at a greater rate than SG&A expenses.
Income from operations was $4.1 million and $2.4 million for the first
quarters of 1997 and 1996, respectively, an increase of $1.7 million or 67.8%.
As a percentage of net sales, income from operations increased to 8.2% for the
first quarter of 1997 from 6.1% for the first quarter of 1996, primarily due to
the increase in sales of higher margin, premium cigars.
Interest expense was unchanged at $0.2 million for the first quarters of
1997 and 1996. Other income was $0.1 million and $0.5 million for the first
quarters of 1997 and 1996, respectively. Other income for 1996 included $0.4
million from a business interruption insurance claim settlement related to
damages suffered at the Company's Whippany location from severe weather
conditions.
As a result of the foregoing, the Company had net income of $3.9 million in
the first quarter of 1997, compared to $2.7 million in the first quarter of
1996, an increase of $1.2 million or 42.7%.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995.
Net sales were $192.0 million and $152.7 million in 1996 and 1995,
respectively, an increase of $39.3 million or 25.7%. Retail sales increased
25.2% to $111.4 million in 1996 from $89.0 million in 1995. The increase in
retail sales was due primarily to a $9.1 million, or 34.5% increase in direct
mail cigar sales; a $5.7 million, or 54.3% increase in cigar store sales; and a
$7.6 million or 14.6% increase in discount outlet store sales. Wholesale sales
increased 26.5% to $80.6 million in 1996 from $63.7 million the prior year. The
increase in wholesale sales was due primarily to a $7.4 million, or 29.4%
increase in direct mail cigar sales and a $9.5 million, or 24.7% increase in
cash-and-carry cigarette sales. The overall increase in net sales was primarily
attributable to an increase in the sale of premium cigars and cigar related
products. Sales increases were attributable primarily to an increase in unit
volume, however 23.8% of such sales growth was attributable to increased prices.
The opening of the Company's Whippany specialty cigar store accounted for 5.4%
of the sale increase.
24
<PAGE>
Gross profit was $34.0 million and $22.1 million in 1996 and 1995,
respectively, an increase of $11.9 million or 54.1%. The increase in gross
profit was due primarily to the increase in cigar sales, which have higher
profit margins relative to the Company's other products. As a percentage of net
sales, gross profit increased to 17.7% in 1996 from 14.4% in 1995, primarily due
to an increase in unit volume and prices of higher margin, premium cigars.
SG&A expenses were $21.0 million and $18.8 million for 1996 and 1995,
respectively, an increase of $2.2 million or 11.6%, primarily due to increased
staffing and other costs, including costs related to the relocation and opening
of the Company's specialty cigar store and administrative offices in Whippany,
New Jersey. SG&A expenses in 1995 included a charge of $1.0 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%
in 1996 from 12.3% in 1995, due primarily to net sales increasing at a greater
rate than SG&A expenses.
Income from operations was $12.3 million and $2.8 million in 1996 and 1995,
respectively, an increase of $9.5 million. As a percentage of net sales, income
from operations increased to 6.4% in 1996 from 1.8% in 1995, primarily due to
the increase in sales of high margin, premium cigars.
Interest expense was unchanged at $0.8 million for 1996 and 1995, as the
Company maintained the same level of funded indebtedness. Other income was $0.8
million and $0.3 million in 1996 and 1995, respectively. Other income in 1996
included $0.4 million from a business interruption insurance claim settlement
for weather related damage suffered at the Company's Whippany location.
As a result of the foregoing, the Company had net income of $12.2 million in
1996, compared to $2.4 million in 1995, an increase of $9.8 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
23.1% to $89.0 million in 1995 from $71.9 million in 1994. The increase in
retail sales was due primarily to an $8.6 million, or 48.3%, 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 70.3% to $63.7 million from $37.4 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 $19.5 million, or 102.6%, increase in
cash-and-carry cigarette sales. The total increase in net sales was a result of
increases in unit volume and prices of premium cigars and related products,
cigarettes 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.
25
<PAGE>
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.
QUARTERLY RESULTS OF OPERATIONS; SEASONALITY
The following table sets forth unaudited combined financial data for each of
the preceding nine quarters.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1996
------------------------------------------ ------------------------------------------ THREE MONTHS
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH ENDED
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER MARCH 31, 1997
--------- --------- --------- --------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net sales............. $ 28,902 $ 36,518 $ 41,531 $ 45,744 $ 39,896 $ 46,530 $ 50,856 $ 54,700 $ 49,683
Gross profit.......... 4,145 5,207 6,003 6,695 7,009 8,150 8,890 9,926 9,052
Income (loss) from
operations.......... (696) 824 1,223 1,438 2,417 3,045 2,935 3,950 4,055
Net income (loss)..... (651) 684 1,077 1,276 2,721 2,845 2,839 3,776 3,884
</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 $2.9 million for the
three-month period ended March 31, 1997. Net cash used in investing activities
during such period was $0.7 million, and net cash used in financing activities
was $0.5 million, primarily for repayment of debt.
The Company's net cash provided by operating activities was $9.2 million for
fiscal 1996. Net cash used in investing activities was $4.1 million during such
period of which $2.9 million was related to construction of the Company's
Whippany headquarters, warehouse facilities and retail store. Net cash used in
financing activities was $2.2 million in fiscal 1996, primarily for repayment of
debt.
At March 31, 1997, the Company had working capital of $21.3 million compared
to $18.5 million at December 31, 1996. Working capital at March 31, 1997
includes cash of $7.7 million, accounts receivable of $1.7 million, $20.3
million of inventory and $11.4 million of accounts payable and accrued expenses.
At March 31, 1997, the Company had three long-term notes payable to a bank
totaling $5.3 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 March 31, 1997 of $1.4 million, $1.2 million and $2.7 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, which expires on June 30, 1997, 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 March 31, 1997, 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
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<PAGE>
certain limitations, against (i) capital expenditures in excess of $0.3 million
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 and has obtained a
commitment letter from Summit Bank to fund, subject to the consummation of the
Offering, a $15.0 million short-term unsecured line of credit at either the
bank's base rate minus 50 basis points or 150 basis points over LIBOR, at the
Company's option.
At March 31, 1997, the Company had a mortgage in the amount of $2.0 million,
with a fixed interest rate of 8.25%, secured by certain property, equipment and
improvements at the Whippany location. The Company also had a mortgage in the
amount of $0.4 million at March 31, 1997, with interest floating at the bank's
prime rate (8.25% at March 31, 1997), 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 March 31, 1997, the Company had outstanding notes issued to a former
stockholder of the Company in the aggregate amount of $97,000, of which $67,000
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 next 18 months, the Company intends
to relocate, remodel and/ or enlarge five existing specialty cigar stores and
open a 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.
27
<PAGE>
BUSINESS
GENERAL
800-JR CIGAR is the largest distributor and retailer of brand name premium
cigars in the United States. The Company's primary products consist of premium
cigars, mass market cigars and cigarettes which are distributed to retail and
wholesale customers. The Company's highest gross margins are generated from the
sale of premium cigars (imported, hand-made and hand-rolled cigars made with
long filler and all natural tobacco leaf) and, as such, it has targeted premium
cigars as its primary growth vehicle. The Company's premium cigars consist of
approximately 150 brands, of which 43 are the Company's proprietary brands.
Among the Company's proprietary products are nationally recognized brands such
as Belinda-Registered Trademark-, Casa Blanca-Registered Trademark-, El Rey del
Mundo-Registered Trademark-, 5 Star Seconds-Registered Trademark-, Jose
Marti-TM-, J-R Alternative-Registered Trademark-, J-R Ultimate-Registered
Trademark-, La Finca-Registered Trademark-, Rosa Cuba-TM- and Santa
Clara-Registered Trademark-.
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 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's strong relationship with these manufacturers allows for
advantageous supplies of desirable brand name cigars and for significant
purchasing power. The Company's net sales have increased at a compound annual
growth rate of 37.1%, from $54.3 million in 1992 to $192.0 million in 1996. For
the year ended December 31, 1996, sales of cigars and tobacco products, other
than cigarettes, totaled $93.7 million, or 48.8% of net sales, and represented
77.6% 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 $78.4 million, or 40.8% of net sales,
during the year ended December 31, 1996. The Company also offers a variety of
discounted general merchandise, including fragrances and apparel, through its
stores. For the year ended December 31, 1996, sales of such non-tobacco products
totaled $19.9 million, or 10.4% of net sales. No assurance can be given that the
Company's growth in sales volume will continue.
The Company markets tobacco products on a retail basis throughout the United
States by direct mail and through six 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 six 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 8,200 square foot award-winning upscale specialty cigar store in
Whippany, New Jersey, which achieved over $6.6 million in sales in its first
full year 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 $111.4 million in total
retail sales for the year ended December 31, 1996, representing 58.0% of net
sales.
The Company's wholesale activities consist predominantly of catalog sales of
premium cigars 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
28
<PAGE>
sell its tobacco products. The Company's wholesale customers include
approximately 8,000 smoke shops, restaurants, taverns, liquor stores and other
retail outlets and wholesale distributors throughout the United States. The
Company achieved $80.6 million in wholesale sales for the year ended December
31, 1996, representing 42.0% 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 4.5 billion units in 1996. Unit sales of premium cigars, which had remained
essentially flat from 1981 to 1993, increased from 110.0 million units in 1993
to an estimated 274.3 million units in 1996, increasing at a compound annual
growth rate of 35.6%. Unit sales of mass market large cigars increased from 2.1
billion units in 1993 to an estimated 2.9 billion units in 1996, increasing at a
compound annual growth rate of 11.3%. 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) the emergence of cigars as an affordable
"luxury good" and status symbol, (ii) 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), (iii) the appeal to an expanding base of
younger, highly educated, professional adults with a growing interest in luxury
goods, (iv) the proliferation of bars, clubs and other establishments in which
premium cigar smoking is encouraged and (v) 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.
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 comparatively low price of cigarettes in the tobacco-friendly
states in which its discount outlet stores are and will be located will remain a
popular draw for travelers on the interstate highways. An increase in regulatory
restrictions and other anti-smoking initiatives may have an adverse effect on
the tobacco industry generally and on the Company's operations; however, there
can be no assurance as to the ultimate content, timing or effect of any such
restrictions or initiatives, if any.
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 large 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.
29
<PAGE>
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-Registered Trademark- 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 brand name premium cigars in the United
States. 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-Registered Trademark-,
Casa Blanca-Registered Trademark-, El Rey del Mundo-Registered Trademark-, 5
Star Seconds-Registered Trademark-, Jose Marti-TM-, J-R Alternative-Registered
Trademark-, J-R Ultimate-Registered Trademark-, La Finca-Registered Trademark-,
Rosa Cuba-TM- and Santa Clara-Registered Trademark-, 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 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.
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
30
<PAGE>
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 specialty 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, remodel and/or expand two of its existing
specialty cigar stores during the second 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, remodel 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 in 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.
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 a leading source of
cigar products. In addition to the Company's strong relationship with major
manufacturers of branded premium cigars, the Company has directly or indirectly
entered into 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 MASS MARKET LARGE CIGARS. The Company believes the
cigar market is characterized by shortages of name brand premium cigars. As a
response to this shortage, the Company intends to increase its presence in the
growing mass market large cigar segment, which includes machine-made cigars,
such as White Owl-Registered Trademark- and Dutch Masters-Registered Trademark-.
While the Company's competitors seek to purchase only premium cigars from the
major manufacturers such as General Cigar, Consolidated Cigar and Swisher,
management believes increased purchases of mass market large cigars from these
manufacturers will give the Company a relative buying advantage.
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<PAGE>
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,
one outside of Detroit, Michigan, and one in Washington, D.C., and two discount
outlet stores in North Carolina. Sales generated by the Company's retail
business increased 25.2% to $111.4 million for the year ended December 31, 1996,
representing 58.0% of net sales, compared to $89.0 million for the year ended
December 31, 1995, representing 58.3% of net sales.
DIRECT MAIL. For over 25 years, the Company has marketed a wide variety of
premium cigars (including its own brand names) and tobacco related products to
an extensive proprietary mail order list of regular customers. 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 one of 71 knowledgeable telemarketers may direct the
customer to similar products using the Company's sophisticated database. See
"--Employees." The Company's average order size is over $100. 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 34.5% to $35.5 million for the year ended
December 31, 1996, representing 18.5% of net sales, compared to $26.4 million
for the year ended December 31, 1995, representing 17.3% of net sales.
SPECIALTY CIGAR STORES. The Company currently operates six 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 53.1%, 16.4%
and 5.9%, respectively, for the years ended December 31, 1996, 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 year ended December 31,
1996 nor is the Company's Washington, D.C. store which was acquired from a
licensee of the Company in April 1997. Building upon the success of the Whippany
store, the Company plans to relocate, enlarge and/or remodel its other cigar
stores. Sales generated by the Company's specialty cigar stores increased 54.3%
to $16.2 million for the year ended December 31, 1996, representing 8.4% of the
Company's net sales, compared to $10.5 million for the year ended December 31,
1995, representing 6.9% 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 14.6%, 15.8% and 6.1%,
respectively, for the years ended December 31, 1996, 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
14.6% to $59.7 million for the year ended December 31, 1996, representing 31.1%
of net sales, compared to $52.1 million for the year ended December 31, 1995,
representing 34.1% of net sales.
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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 26.5% to $80.6 million for the year ended December 31, 1996,
representing 42.0% of net sales, compared to $63.7 million for the year ended
December 31, 1995, representing 41.7% 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
8,000 smoke shops, restaurants, taverns, liquor stores and other retail outlets
throughout the United States. Wholesale catalog sales increased 29.4% to $32.6
million in the year ended December 31, 1996, representing 17.0% of net sales,
compared to $25.2 million for the year ended December 31, 1995, representing
16.5% 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 24.7%
to $48.0 million in the year ended December 31, 1996, representing 25.0% of net
sales, compared to $38.5 million for the year ended December 31, 1995,
representing 25.2% of net sales.
PRODUCTS
CIGARS AND OTHER TOBACCO PRODUCTS
Sales of premium and mass market cigars and other tobacco products increased
43.1% to $93.7 million for the year ended December 31, 1996, accounting for
48.8% of net sales, compared to $65.5 million for the year ended December 31,
1995, representing 42.9% 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 14.5%, 30.5% and 66.3%
in 1994, 1995 and 1996, respectively. The Dominican Republic, Honduras and
Jamaica collectively accounted for approximately 81.0% of premium cigars
imported into the United States in 1996. 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,
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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, 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:
<TABLE>
<S> <C>
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.
JAMAICA............... J-R Alternative, Whitehall.
PHILIPPINES........... Harrows.
SPAIN................. La Fama.
IRELAND............... Mocambo Cigarillos.
</TABLE>
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-Registered Trademark-, White Owl-Registered Trademark-,
Tiparillo-Registered Trademark- and Dutch Masters-Registered Trademark-, 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
34
<PAGE>
substantial customer traffic at the Company's two discount outlet stores. For
the year ended December 31, 1996, cigarette sales at the discount outlet stores
totaled $33.9 million. Overall cigarette sales increased 16.8% to $78.4 million
in the year ended December 31, 1996, representing 40.8% of net sales, compared
to $67.1 million for the year ended December 31, 1995, representing 43.9% 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 $19.9 million for the year ended
December 31, 1996, representing 10.4% of net sales, compared to $20.1 million
for the year ended December 31, 1995, representing 13.2% of net sales.
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
commenced in May 1997, will be allocated to the Company. The Company expects
that, once fully operational, 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.
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<PAGE>
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.
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 recently introduced its own website 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-Registered Trademark-, Clemenceau-Registered Trademark-,
Consuegra-Registered Trademark-, Farach-Registered Trademark-, 5 Star
Seconds-Registered Trademark-, Garcia y Garcia-Registered Trademark-,
Jeroboam-Registered Trademark-, J-R Ultimate-Registered Trademark-, La
Finca-Registered Trademark-, Maria Mancini-Registered Trademark-,
Mocambo-Registered Trademark-, Mocha-Registered Trademark-, Perfecto
Garcia-Registered Trademark-, Perfecto Garcia Crown Royals-Registered
Trademark-, Principales-Registered Trademark-, Quorum-Registered Trademark-,
Remedios-Registered Trademark-, Rey del Rey-Registered Trademark-,
Reynitas-Registered Trademark-, Robustos de Manuel Zavalla-Registered
Trademark-, Santa Clara-Registered Trademark- and Whitehall-Registered
Trademark-. The Company has also registered the J-R-Registered Trademark- mark
which precedes Company
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<PAGE>
brand names such as J-R Special Caribbean, J-R Special Corona and J-R Special
Jamaica. The J-R Alternative-Registered Trademark- 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-Registered Trademark- and El Rey del Mundo-Registered Trademark- premium
cigars brands.
With regard to its non-tobacco products, the Company also holds a registered
trademark for Cigarware-Registered Trademark-, which it intends to use to market
a line of clothing, and holds a registered trademark 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) increase
tobacco excise taxes; and (iv) 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. A number of tobacco companies and other
entities have filed legal proceedings challenging the FDA's assertion of
jurisdiction to regulate tobacco products. On April 25, 1997, the Federal
District Court for the Middle District of North Carolina upheld the FDA's
jurisdiction to regulate cigarettes and smokeless tobacco as medical devices and
to impose restrictions on their sale and distribution to minors, but rejected
the agency's restrictions on advertising and promotion. Pending appeal, the
court ordered that all restrictions which had gone into effect on February 28,
1997 would remain in full force but held that the agency may not implement any
of the additional regulations that were scheduled to take effect on August 28,
1997 or thereafter. This decision is subject to an immediate appeal. Although
the Company is unable to predict the outcome of the appeal or its ultimate
effect on the consumption of tobacco or on the Company's business and
profitability, the FDA rules could, if upheld in court, have an
37
<PAGE>
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,
in June 1997, five of the major U.S. cigarette manufacturing companies entered
into a preliminary agreement with a group of state attorneys general and private
attorneys to settle various pending state lawsuits. The settlement requires
legislative enactment by Congress. By its initial terms, the proposal covers
cigarettes and smokeless tobacco products, and its restrictions extend beyond
those contained in the FDA regulations. The Company is unable to predict whether
or when the proposed settlement will be enacted by Congress, whether its
provisions will be subject to significant alteration or whether they will have a
material adverse effect on the Company's results of operations.
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.
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
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<PAGE>
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.
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. In June 1997, five
of the major U.S. cigarette manufacturers entered into a preliminary agreement
with a group of state attorneys general and private attorneys to settle various
pending state lawsuits. By its initial terms, the settlement also places limits
on future lawsuits, including bans on class-action suits, consolidation of
multiple suits, and punitive damages for past conduct. The Company is unable to
predict whether or when the proposed settlement will be enacted by Congress,
whether its provisions will be subject to significant alteration or whether they
will have a material adverse effect on the Company's results of operations.
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.
39
<PAGE>
EMPLOYEES
As of March 31, 1997, the Company had 564 employees, of whom 305 were
engaged in sales, eight in finance and administration, 82 in operations and 169
in various part-time and temporary capacities. 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.
Since 1983, various administrative and other services have been performed
for the Company by MC Management. Services provided by MC Management include
telemarketing, maintenance of banking records, preparation of tax returns,
general ledger accounting, processing of account receivables and payables and
payroll distributions. As of March 31, 1997, MC Management had 81 employees,
including 71 telemarketers involved in retail and wholesale direct mail
operations. In anticipation of the Offering, the Company and MC Management have
entered into a five-year contract for the continued performance of such
services, effective upon consummation of the Offering. See "Certain Related
Transactions--Management Services."
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.
PROPERTIES
The Company's executive and administrative offices are located in Whippany,
New Jersey in a 33,000 square foot building owned by the Company, which includes
an 8,200 square foot 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:
<TABLE>
<CAPTION>
LEASE SQUARE
LOCATION EXPIRATION DATE FOOTAGE
- -------------------------------------------------------------------------------- ---------------------- ---------
<S> <C> <C>
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
Rt. 17N, Paramus, NJ............................................................ July 31, 2004 7,545
Newtowne Plaza, Statesville, NC................................................. December 31, 2004 53,800
Northwestern Highway, Southfield, MI............................................ Month to Month 3,000
1667 K Street, Washington, D.C.................................................. March 31, 1999 850
</TABLE>
The Company expects to relocate, enlarge and/or redesign each of its
existing specialty cigar stores as their respective leases expire. In April
1997, the Company entered into a lease of premises in Paramus, New Jersey to
which it intends to relocate and renovate its Hasbrouck Heights specialty cigar
store. The Company anticipates that this store will open at its new location
during the Summer of 1997.
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<PAGE>
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Lew Rothman (1)............................ 51 Chief Executive Officer, President and
Director
LaVonda M. Rothman (1)..................... 49 Executive Vice President, Secretary and
Director
Timothy P. Shannon......................... 51 Chief Financial Officer
Jane Vargas................................ 39 Vice President and Director
Maureen A. Colleton(1)..................... 57 Director
John Oliva*................................ 55 Director
Stephen J. Bloom*.......................... 61 Director
</TABLE>
- ------------------------
* Election 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. Lew Rothman and LaVonda M. Rothman are married.
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. Lew
Rothman and LaVonda M. Rothman are married.
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 elected 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.
STEPHEN J. BLOOM will be elected a director of the Company effective upon the
consummation of the Offering. He has been an outside consultant to Philip Morris
U.S.A. since April 1993. Mr. Bloom was employed by Philip Morris U.S.A. as Vice
President, Corporate Account Sales from January 1986 to April 1989, as Vice
President of Trade Development from 1989 to 1991 and as Senior Vice President of
Trade Development from 1991 to 1993. From 1958 to 1986, Mr. Bloom was Executive
Vice President and Chief Executive Officer of S. Bloom Inc. in Chicago, a
tobacco distributing company. Mr. Bloom was
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<PAGE>
elected to the National Association of Tobacco Distributors Hall of Fame in
1985. He graduated from the University of Michigan with a BBA in 1958.
The Company intends that an additional independent director will be elected
upon consummation of the Offering or within 90 days thereafter.
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 independent 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
42
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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.
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 800,000 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 800,000,
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
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ISOs. The Incentive Plan also provides that no participant may be granted in 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, 109,500 to various employees of MC Management (including 35,000 to
Maureen A. Colleton), and 170,500 to other employees and consultants of the
Company. Each of the foregoing options will have an exercise price per share
equal to the initial public offering price. 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 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
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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 may also
make 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 and, in anticipation of the Offering,
has entered into a five-year contract effective upon consummation of the
Offering, with MC Management for the performance on behalf of the Company of
telemarketing services and various administrative and other services. As of
March 31, 1997, MC Management had 81 employees, including 71 telemarketers
involved in retail and wholesale direct mail operations. 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, 1996 and the first quarter of 1997
were $2.8 million, $3.1 million and $0.8 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. 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 has agreed to pay a signing bonus to MC Management in the
amount of $1.0 million. In addition, Jane Vargas, Vice President of MC
Management, has entered into an employment agreement with the Company and will
receive a signing bonus of $0.5 million 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. The
Company believes that the terms of the Management Agreement are no less
favorable than would be obtained with unaffiliated third parties. See "Use of
Proceeds," "Business--Employees" 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
commenced 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 March 31, 1997, the Company's total outstanding
liability to Bernard Rothman was $97,000. 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 year ended December 31, 1996, the Company
received net interest income on these advances of $169,000.
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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. The address of each of the persons named below is in care
of the Company, 301 Route 10 East, Whippany, New Jersey 07981.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------------
AFTER GIVING EFFECT AFTER GIVING EFFECT
TO THE REORGANIZATION TO THE OFFERING
----------------------- -----------------------
NUMBER PERCENT NUMBER PERCENT
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Lew Rothman(1)....................................................... 9,300,000 100% 9,300,000 75.6%
LaVonda M. Rothman(1)................................................ 9,300,000 100 9,300,000 75.6
Maureen A. Colleton.................................................. 0 * 0 *
Jane Vargas.......................................................... 0 * 0 *
Timothy P. Shannon................................................... 0 * 0 *
All executive officers and directors as a group (5 persons).......... 9,300,000 100 9,300,000 75.6
</TABLE>
- ------------------------
* Less than one percent
(1) Includes (i) 131,040 shares of Common Stock held by LaVonda M. Rothman and
Lew Rothman, as Trustees, and Samuel Bornstein, as Special Trustee, of a
trust f/b/o Shane Rothman (the "Shane Rothman Trust"), created under a trust
agreement dated November 1, 1994, made by Lewis Irving Rothman, as Grantor
(the "Lewis Irving Rothman Children's Trust Agreement #1"), (ii) 131,040
shares of Common Stock held by LaVonda M. Rothman and Lew Rothman, as
Trustees, and Samuel Bornstein, as Special Trustee, of a trust f/b/o Marni
Rothman created under the Lewis Irving Rothman Children's Trust Agreement
#1, (iii) 131,040 shares of Common Stock held by LaVonda M. Rothman and Lew
Rothman, as Trustees, and Samuel Bornstein, as Special Trustee, of a trust
f/b/o Samantha Rothman (the "Samantha Rothman Trust") created under the
Lewis Irving Rothman Children's Trust Agreement #1 and (iv) 131,040 shares
of Common Stock held by LaVonda M. Rothman and Lew Rothman, as Trustees, and
Samuel Bornstein, as Special Trustee, of a trust f/b/o Luke Rothman (the
"Luke Rothman Trust") created under the Lewis Irving Rothman Children's
Trust Agreement #1, which may be deemed to be beneficially owned by the
named person but as to which the named person disclaims beneficial
ownership.
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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 9,300,000 shares of Common Stock and no shares of Preferred Stock.
Upon completion of the Offering, the Company will have outstanding 12,300,000
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 has entered 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.
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
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<PAGE>
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 consummation of the Reorganization and completion of the Offering,
there will be 12,300,000 shares of Common Stock outstanding. Of these shares,
the 3,000,000 shares (3,450,000 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 9,300,000 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 have agreed 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 Wheat, First
Securities, Inc., 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
Wheat, First Securities, Inc., 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. Wheat, First Securities, Inc. 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 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
52
<PAGE>
issuable upon exercise of options granted under the Incentive Plan shortly after
consummation of the Offering.
The Company has granted 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 have severally agreed to indemnify each
other and each underwriter of the shares being registered against certain
liabilities, including liabilities under the Securities Act.
53
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Wheat, First
Securities, Inc. and J.C. Bradford & Co. are acting as representatives (the
"Representatives"), 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:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Wheat, First Securities, Inc..................................................... 990,000
J.C. Bradford & Co............................................................... 990,000
Bear, Stearns & Co. Inc.......................................................... 60,000
Alex. Brown & Sons Incorporated.................................................. 60,000
Donaldson, Lufkin & Jenrette Securities Corporation.............................. 60,000
A.G. Edwards & Sons, Inc......................................................... 60,000
Goldman, Sachs & Co.............................................................. 60,000
Lazard Freres & Co. LLC.......................................................... 60,000
Lehman Brothers Inc.............................................................. 60,000
Montgomery Securities............................................................ 60,000
Morgan Stanley & Co. Incorporated................................................ 60,000
PaineWebber Incorporated......................................................... 60,000
Robertson, Stephens & Company LLC................................................ 60,000
Salomon Brothers Inc............................................................. 60,000
Smith Barney Inc................................................................. 60,000
William Blair & Company, L.L.C................................................... 30,000
EVEREN Securities, Inc........................................................... 30,000
Interstate/Johnson Lane Corporation.............................................. 30,000
Morgan Keegan & Company, Inc..................................................... 30,000
Piper Jaffray Inc................................................................ 30,000
Raymond James & Associates, Inc.................................................. 30,000
The Robinson-Humphrey Company, Inc............................................... 30,000
Stephens Inc..................................................................... 30,000
----------
Total...................................................................... 3,000,000
----------
----------
</TABLE>
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 Representatives, 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 $0.72 per share; and that such dealers may
reallow a concession of $0.10 per share to certain other dealers. After the
initial public offering, the offering price and the concessions may be changed
by the Representatives.
The Company has granted 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.
54
<PAGE>
All of the directors and executive officers of the Company and the former
stockholders of the Constituent Entities have agreed 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 Wheat, First
Securities, Inc., 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
Wheat, First Securities, Inc., 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 the Company may issue employee stock options which
are exercisable after the 180th day after the date of this Prospectus. Wheat,
First Securities, Inc. 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 have agreed 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 was determined
through negotiations between the Company and the Representatives. Among the
factors that were considered in making such determination were 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 than
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, Wheat, First Securities, Inc., 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.
55
<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
December 31, 1996 and for the year 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, 1995 and for the years ended
December 31, 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 then ended 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.
56
<PAGE>
INDEX TO
PREDECESSOR COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Auditors....................................................... F-2
Predecessor Combined Balance Sheets as of December 31, 1995 and 1996 and March 31,
1997 (unaudited).................................................................... F-4
Predecessor Combined Statements of Income for the Years Ended December 31, 1994, 1995
and 1996 and for the Three-Month Periods Ended March 31, 1996 and 1997
(unaudited)......................................................................... F-5
Predecessor Combined Statements of Stockholders' Equity for the Years Ended December
31, 1994, 1995 and 1996 and for the Three-Month Period Ended March 31, 1997
(unaudited)......................................................................... F-6
Predecessor Combined Statements of Cash Flows for the Years Ended December 31, 1994,
1995 and 1996 and for the Three-Month Periods Ended March 31, 1996 and 1997
(unaudited)......................................................................... F-7
Notes to Predecessor Combined Financial Statements.................................... F-8
</TABLE>
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 December 31, 1996, and the related predecessor combined
statements of income, stockholders' equity and cash flows for the year 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 December 31, 1996, and the combined results of their
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
MetroPark, New Jersey
April 15, 1997
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 sheet of
800-JR CIGAR, Inc. as of December 31, 1995, and the related combined statements
of income, stockholders' equity and cash flows for the years ended December 31,
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, 1995, and its results of operations and cash
flows for the years ended December 31, 1994 and 1995, in conformity with
generally accepted accounting principles.
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>
MARCH 31,
1997
DECEMBER 31, PRO FORMA
-------------------- MARCH 31, STOCKHOLDERS'
1995 1996 1997 EQUITY
--------- --------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 3,202 $ 6,056 $ 7,720
Accounts receivable, net allowance for doubtful
accounts of $83, $118 and $173 (unaudited) at
December 31, 1995 and 1996 and March 31, 1997.............. 1,345 1,703 1,735
Merchandise inventory........................................ 16,722 19,616 20,312
Prepaid expenses and other current assets.................... 240 700 1,394
Loans receivable--affiliates and other associated
entities................................................... 830 1,070 1,202
Loans receivable--stockholders............................... 1,533 2,471 2,625
--------- --------- -----------
Total current assets........................................... 23,872 31,616 34,988
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization.................... 8,649 10,876 11,066
Other assets................................................... 129 165 507
Deferred tax assets, net....................................... 20 25 49
--------- --------- -----------
Total assets................................................... $ 32,670 $ 42,682 $ 46,610
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Borrowings under revolving line of credit.................... $ 2,500 $ -- $ --
Current portion of long-term debt............................ 1,604 2,167 2,200
Current portion of capital lease obligations................. 84 89 68
Accounts payable............................................. 8,944 8,947 8,024
Accrued expenses............................................. 1,826 1,891 3,401
--------- --------- -----------
Total current liabilities...................................... 14,958 13,094 13,693
Long-term debt, less current portion........................... 5,525 6,112 5,557
Capital lease obligations, less current portion................ 89 -- --
Other.......................................................... 8 -- --
--------- --------- -----------
Total liabilities.............................................. 20,580 19,206 19,250
Commitments and contingencies
Stockholders' equity:
Common stock................................................. 21 21 21 $ 21
Additional paid-in capital................................... 28 28 28 (5,518)
Retained earnings............................................ 12,459 23,845 27,729 --
--------- --------- ----------- -------------
12,508 23,894 27,778 (5,497)
Less treasury stock, at cost................................. (418) (418) (418) (418)
--------- --------- ----------- -------------
Total stockholders' equity..................................... 12,090 23,476 27,360 $ (5,915)
--------- --------- ----------- -------------
-------------
Total liabilities and stockholders' equity..................... $ 32,670 $ 42,682 $ 46,610
--------- --------- -----------
--------- --------- -----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net sales............................................ $ 109,297 $ 152,695 $ 191,982 $ 39,896 $ 49,683
Cost of goods sold................................... 91,588 130,645 158,007 32,887 40,631
---------- ---------- ---------- ----------- ---------
Gross profit......................................... 17,709 22,050 33,975 7,009 9,052
Operating expenses:
Selling............................................ 3,046 3,977 3,946 827 1,129
General and administrative......................... 11,404 14,791 17,008 3,598 3,681
Depreciation and amortization...................... 447 493 674 167 187
---------- ---------- ---------- ----------- ---------
Income from operations............................... 2,812 2,789 12,347 2,417 4,055
Other income (expense):
Interest expense................................... (710) (785) (789) (154) (173)
Interest income.................................... 63 158 207 67 90
Rental income...................................... 240 150 195 52 45
Insurance settlement............................... -- -- 373 373 --
Other, net......................................... 151 -- (8) -- 8
---------- ---------- ---------- ----------- ---------
Income before income taxes........................... 2,556 2,312 12,325 2,755 4,025
Provision (credit) for income taxes.................. 257 (74) 144 34 141
---------- ---------- ---------- ----------- ---------
Net income........................................... $ 2,299 $ 2,386 $ 12,181 $ 2,721 $ 3,884
---------- ---------- ---------- ----------- ---------
---------- ---------- ---------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 MARCH 31, 1997
----------------- -------------------
<S> <C> <C>
Pro forma--unaudited
Historical income before provision for income taxes.................... $ 12,325 $ 4,025
Pro forma adjustments other than income taxes.......................... 580 (274)
------- ------
Pro forma income before income taxes................................... 12,905 3,751
Pro forma provision for income taxes................................... 5,262 1,530
------- ------
Pro forma net income................................................... $ 7,643 $ 2,221
------- ------
------- ------
Pro forma earnings per share........................................... $ .73 $ .22
------- ------
------- ------
Pro forma common shares outstanding.................................... 9,812 9,812
------- ------
------- ------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMBINED
ADDITIONAL COMBINED
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994................................ $ 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
Distribution to stockholders............................ (795) (795)
Net income.............................................. 12,181 12,181
--- --- ----------- ----- ---------
Balance at December 31, 1996.............................. 21 28 23,845 (418) 23,476
Net income (unaudited).................................. 3,884 3,884
--- --- ----------- ----- ---------
Balance at March 31, 1997 (unaudited)..................... $ 21 $ 28 $ 27,729 $ (418) $ 27,360
--- --- ----------- ----- ---------
--- --- ----------- ----- ---------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
800-JR CIGAR, INC.
PREDECESSOR COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.................................................. $ 2,299 $ 2,386 $ 12,181 $ 2,731 $ 3,884
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 447 493 674 167 187
Provision for uncollectible accounts...................... 51 33 191 40 55
Deferred income taxes..................................... 1 57 (5) -- (24)
Other..................................................... (17) (17) (8) (3) --
(Gain) loss on sale of assets............................. (32) (8) 28 --
Changes in operating assets and liabilities:
Accounts receivable..................................... (814) 501 (549) (55) (87)
Merchandise inventory................................... (3,031) 56 (2,894) 1,140 (696)
Prepaid expenses and other current assets............... (160) (3) (460) (539) (694)
Other assets............................................ -- 2 (36) 38 (342)
Accounts payable and accrued expenses................... 2,680 1,053 68 (2,248) 587
--------- --------- --------- --------- ---------
Net cash provided by operating activities................... 1,424 4,553 9,190 1,271 2,870
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment.......................... (1,274) (3,176) (2,929) (939) (377)
Loans (extended to) repaid by affiliates and other
associated entities....................................... (718) 113 (240) (172) (132)
Proceeds from sale of assets................................ -- 75 -- -- --
Loans extended to stockholders.............................. -- -- (938) (17) (154)
--------- --------- --------- --------- ---------
Net cash used in investing activities....................... (1,992) (2,988) (4,107) (1,128) (663)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments) proceeds of borrowings under revolving line of
credit.................................................... (450) 950 500 500 --
Proceeds of long-term debt.................................. 2,000 -- -- -- --
Payments of long-term debt.................................. (1,125) (1,575) (1,850) (392) (522)
Payments of capital lease obligations....................... (74) (78) (84) (20) (21)
Payments of loans payable--stockholders..................... (346) (1,164) -- -- --
Distribution to stockholders................................ -- -- (795) -- --
--------- --------- --------- --------- ---------
Net cash (used in) provided by financing activities......... 5 (1,867) (2,229) 88 (543)
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents........ (563) (302) 2,854 231 1,664
Cash and cash equivalents, beginning of period.............. 4,067 3,504 3,202 3,202 6,056
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.................... $ 3,504 $ 3,202 $ 6,056 $ 3,433 $ 7,720
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Income taxes paid........................................... $ 185 $ 325 $ 37 $ 18 --
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Interest paid............................................... $ 735 $ 874 $ 775 $ 165 $ 200
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES................................................
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)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 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"). The principal stockholders of
the Predecessor Entities are Lewis Rothman and LaVonda Rothman, each of whom own
50% of the Predecessor Entities, except for J.R. Statesville, Inc., which is
owned 26% by Lewis Rothman, 26% by LaVonda Rothman and 12% by each of the Shane
Rothman Trust, the Luke Rothman Trust, the Marni Rothman Trust and the Samantha
Rothman Trust. As consideration for the contribution of their interests in the
Predecessor Entities, each of Lewis Rothman, LaVonda Rothman, the Shane Rothman
Trust, the Luke Rothman Trust, the Marni Rothman Trust and the Samantha Rothman
Trust will receive 4,387,920, 4,387,920, 131,040, 131,040, 131,040 and 131,040
shares of common stock, respectively, of 800-JR CIGAR, Inc., for an aggregate
9,300,000 shares.
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. The
audited financial statements of 800-JR CIGAR, Inc. are not presented because it
is a non-operating entity. After the Reorganization, the Predecessor Entities
will be subsidiaries of 800-JR CIGAR, Inc.
The predecessor combined interim financial statements for the three-month
periods ended March 31, 1996 and 1997 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. The results of operations for the three month periods ended March 31,
1996 and 1997 are not necessarily indicative of the operating results to be
expected for a full year.
PRO FORMA ADJUSTMENTS (UNAUDITED)
The unaudited pro forma net income for the year ended December 31, 1996 and
the three-month period ended March 31, 1997 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 $1,818 to $400 for the
year ended December 31, 1996 and from $126 to $100 for the three-month period
ended March 31, 1997 for two of the Company's executives pursuant to their new
employment agreements; b) an
F-8
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
1. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
increase in interest expense of $1,458 for the year ended December 31, 1996 and
$417 for the three-month period ended March 31, 1997 assuming the issuance of
the Distribution Notes; c) a reduction in interest expense of $789 for the year
ended December 31, 1996 and $173 for the three-month period ended March 31, 1997
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 $169 for the year ended December 31, 1996 and $56 for the
three-month period ended March 31, 1997 assuming the repayment to the Company of
loans receivable from stockholders; and e) an increase of $5,118 for the year
ended December 31, 1996 and $1,389 for the three-month period ended March 31,
1997 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 issued Distribution Notes to the principal stockholders of the
Predecessor Entities in the amount of $23,800, 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 $2,625 at March 31, 1997, and
additional distributions of $7,984 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 March
31, 1997, 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 and
recording of anticipated additional distributions of $7,984 to be made prior to
the Offering and the recording of a deferred tax asset of approximately $1,134,
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.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA
--------- -----------
<S> <C> <C>
Common stock........................................................... $ 21 $ 21
Additional paid-in capital............................................. 28 (5,518)
Retained earnings...................................................... 27,729 --
Treasury stock......................................................... (418) (418)
--------- -----------
Total stockholders' equity (deficit)................................... $ 27,360 $ (5,915)
--------- -----------
--------- -----------
</TABLE>
PRO FORMA EARNINGS PER SHARE (UNAUDITED)
Pro forma earnings per share is based on 9,300,000 shares of common stock
outstanding prior to the Offering, increased by the sale of 511,658 shares of
common stock at an initial public offering price of $17.00 per share ($15.44,
net of underwriting discounts and commissions and estimated offering expenses),
the proceeds of which would be necessary to pay approximately $7,900, the
current portion of the Distribution Notes. The net income used in the
calculation of pro forma earnings per share represents pro forma net income
decreased by the interest expense on debt of $789 ($467 on an after-tax basis)
for the
F-9
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
1. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
year ended December 31, 1996, and $173 ($102 on an after-tax basis) for the
three-month period ended March 31, 1997.
Supplementary pro forma earnings per share for the year ended December 31,
1996, and the three-month period ended March 31, 1997 are $.74 and $.22,
respectively, based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by (a) the sale of 511,658 shares of common stock at an
initial public offering price of $17.00 per share ($15.44, net of underwriting
discounts and commissions and estimated offering expenses), the proceeds of
which would be necessary to pay approximately $7,900, the current portion of the
Distribution Notes and (b) the sale of 502,396 shares of common stock at an
initial public offering price of $17.00 per share ($15.44, net of underwriting
discounts and commissions and estimated offering expenses), the proceeds of
which would be necessary to repay approximately $7,800, the amount of
outstanding debt at March 31, 1997. The net income used in the calculation of
supplementary pro forma earnings per share is the pro forma net income of $7,643
and $2,221 for the year ended December 31, 1996 and the three-month period ended
March 31, 1997, respectively.
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.
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.
F-10
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
1. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
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 $1,494, $1,892 and $1,129 for the
years ended December 31, 1994, 1995 and 1996, and $306 and $395 for the
three-month periods ended March 31, 1996 and 1997, respectively.
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).
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "ACCOUNTING FOR
INCOME TAXES".
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.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, EARNINGS PER SHARE, which is required to be adopted on December 31,
1997. At that time, the Company will be required
F-11
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
1. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
to change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The Company
hasn't yet determined what the impact of Statement 128 will be on the
calculation of primary or fully diluted earnings per share.
2. PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Land............................................................................ $ 1,593 $ 1,593 $ 1,593
Building and improvements....................................................... 3,571 5,860 6,096
Machinery and equipment......................................................... 1,429 1,453 1,931
Furniture and fixtures.......................................................... 1,183 1,769 1,386
Leasehold improvements.......................................................... 3,507 3,480 3,505
Automobiles..................................................................... 151 135 156
--------- --------- -----------
11,434 14,290 14,667
Less accumulated depreciation and amortization.................................. 2,785 3,414 3,601
--------- --------- -----------
$ 8,649 $ 10,876 $ 11,066
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-12
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
3. LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt is comprised as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
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 $7,384 at December 31, 1996)............................ $ 2,000 $ 2,000 $ 2,000
Mortgage payable--bank, due in monthly installments with interest at the prime
rate (8.25% at December 31, 1996) through December 31, 1998 (secured by certain
property, equipment and improvements with a net book value of approximately
$2,644 at December 31, 1996)................................................... 703 475 418
Note payable--bank, due in monthly installments with interest at 6.6% through
August 25, 1998................................................................ 2,593 1,680 1,441
Note payable--bank, due in monthly installments with interest at 8.25% through
September 18, 1999............................................................. 1,622 1,255 1,158
Note payable--bank, due in monthly installments with interest at 7.5% through May
23, 2003....................................................................... -- 2,750 2,643
Notes payable--former stockholder, due in monthly installments of $7,500 plus
interest at 12% through April 30, 1998......................................... 211 119 97
--------- --------- -----------
7,129 8,279 7,757
Less current portion............................................................. 1,604 2,167 2,200
--------- --------- -----------
Long-term debt................................................................... $ 5,525 $ 6,112 $ 5,557
--------- --------- -----------
--------- --------- -----------
</TABLE>
The Company has a $4,000 line of credit with a bank, which expires on June
30, 1997, borrowings under which bear interest at the bank's base rate less 0.5%
or the London Inter-Bank Offering Rate ("LIBOR") plus 2.0%. The weighted average
interest rate on borrowings under the line of credit is 7.87% at December 31,
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 in the aggregate. Covenants under the line of credit
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-13
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
3. LONG-TERM DEBT AND LINE OF CREDIT (CONTINUED)
Scheduled maturities of long-term debt outstanding at December 31, 1996 and
for the next five years are as follows:
<TABLE>
<CAPTION>
AMOUNT
---------
<S> <C>
1997................................................................................. $ 2,167
1998................................................................................. 1,852
1999................................................................................. 798
2000................................................................................. 430
2001................................................................................. 2,430
Thereafter........................................................................... 602
---------
$ 8,279
---------
---------
</TABLE>
4. INCOME TAXES
The provision (credit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- MARCH 31
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Current..................................... $ 246 $ (129) $ 149 $ 24 $ 165
Deferred.................................... 11 55 (5) -- (24)
--------- --------- --------- --------- ---------
$ 257 $ (74) $ 144 $ 24 $ 141
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The income tax credit in 1995 is due to reversals of income taxes accrued in
prior years which, through a later tax election, became the responsibility of
the principal stockholders.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996 MARCH 31, 1997
--------- ----- -------------------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets........................................... $ 21 $ 25 $ 49
Deferred tax liabilities...................................... (1) -- --
--------- --- ---
Deferred tax assets, net...................................... $ 20 $ 25 $ 49
--------- --- ---
--------- --- ---
</TABLE>
Deferred tax assets result primarily from 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.
F-14
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
5. COMMON STOCK
Common stock at stated and par value consist of the following at December
31, 1996 and March 31, 1997 (unaudited):
<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 -- --
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 (expense) income amounted to ($45), $78 and $169 in 1994,
1995 and 1996, respectively, and $55 (unaudited) and $56 (unaudited) for the
three-month periods ended March 31, 1996 and 1997, 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-15
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments for operating leases as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
-----------
<S> <C>
1997............................................................................... $ 499
1998............................................................................... 397
1999............................................................................... 387
2000............................................................................... 215
2001............................................................................... 215
Thereafter......................................................................... 646
-----------
Total minimum lease payments....................................................... $ 2,359
-----------
-----------
</TABLE>
Rental expense under operating leases amounted to $816, $774, $817, $170
(unaudited) and $172 (unaudited) for 1994, 1995, 1996 and the three-month
periods ended March 31, 1996 and 1997, 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 $158 and $79, net of accumulated depreciation, at December
31, 1995 and 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 1994, 1995 and 1996 and for the three-month periods ended March 31, 1996 and
1997 amounted to $2,060, $2,792, $3,071 and $602 (unaudited) and $829
(unaudited), respectively. In addition, the management company paid rent to the
Company in the amount of $120 in 1994, 1995 and 1996 and $36 (unaudited) for
each of the three-month periods ended March 31, 1996 and 1997.
LITIGATION
Included in general and administrative expense for the year ended December
31, 1995 are legal fees and settlement costs in connection with certain
litigation with a former licensee in the amount of $1,000.
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 or
results of operations.
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
F-16
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED)
insured benefit coverage. Contributions to the Trust, all of which were charged
to operations, amounted to $275, $517 and $619 in 1994, 1995 and 1996,
respectively and $104 and $158 for the three-month periods ended March 31, 1996
and 1997, 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,
1996 and the three-month period ended March 31, 1997.
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.
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, 1996 and March 31, 1997 would have
been $869 and $1,134, respectively.
The pro forma income tax provision consists of the following (in thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------- -----------
<S> <C> <C>
Current income taxes:
Federal taxes.................................................... $ 4,234 $ 1,363
State and local taxes............................................ $ 1,356 437
------ -----------
5,590 1,800
Deferred income tax benefit........................................ (328) (270)
------ -----------
$ 5,262 $ 1,530
------ -----------
------ -----------
</TABLE>
F-17
<PAGE>
800-JR CIGAR, INC.
NOTES TO PREDECESSOR COMBINED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1996
(AMOUNTS AND DISCLOSURES APPLICABLE TO MARCH 31, 1996 AND 1997 ARE UNAUDITED)
8. PRO FORMA INCOME TAXES (UNAUDITED) (CONTINUED)
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:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
--------------- -------------
<S> <C> <C>
Federal statutory rate................................................................. 34.3% 34.3%
State and local taxes, net of federal tax benefits..................................... 6.5 6.5
--- ---
Effective tax rate..................................................................... 40.8% 40.8%
--- ---
--- ---
</TABLE>
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, 1996 and March 31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
--------------- -------------
<S> <C> <C>
Book over tax depreciation...................................... $ 79 $ 70
Allowance for doubtful accounts................................. 56 79
Inventory capitalization and reserves........................... 230 436
Other book accruals............................................. 504 549
----- ------
$ 869 $ 1,134
----- ------
----- ------
</TABLE>
F-18
<PAGE>
NO DEALER, SALESPERSON OR 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.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 9
Reorganization of the Company........................ 14
Use of Proceeds...................................... 16
Dividend Policy...................................... 16
Capitalization....................................... 17
Dilution............................................. 18
Selected Combined Financial Data..................... 19
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 22
Business............................................. 28
Management........................................... 41
Certain Related Transactions......................... 46
Principal Stockholders............................... 48
Description of Capital Stock......................... 49
Shares Eligible for Future Sale...................... 52
Underwriting......................................... 54
Legal Matters........................................ 56
Experts.............................................. 56
Additional Information............................... 56
Index to Predecessor Combined Financial Statements... F-1
</TABLE>
------------------------
UNTIL JULY 21, 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.
3,000,000 SHARES
[LOGO]
800-JR CIGAR, INC.
COMMON STOCK
------------
P R O S P E C T U S
-----------------
WHEAT FIRST BUTCHER SINGER
J.C. BRADFORD & CO.
JUNE 26, 1997
