<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1997
REGISTRATION NO. 333-23401
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
800-JR CIGAR, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5194 52-2022117
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
301 ROUTE 10 EAST
WHIPPANY, NEW JERSEY 07981
(201) 884-9555
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
LEW ROTHMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
301 ROUTE 10 EAST
WHIPPANY, NEW JERSEY 07981
(201) 884-9555
(Name and address, including zip code, and telephone
number, including area code, of agent for service)
------------------------------
Copies to:
<TABLE>
<S> <C>
SAMUEL B. FORTENBAUGH III, ESQ. JAMES R. TANENBAUM, ESQ.
Morgan, Lewis & Bockius LLP Stroock & Stroock & Lavan LLP
101 Park Avenue 180 Maiden Lane
New York, New York 10178 New York, New York 10038
(212) 309-6000 (212) 806-5400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are to be offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only pursuant to dividend or
interest reinvestment plans, please check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
800-JR CIGAR, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K.
SHOWING LOCATION IN THE PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS 1 THROUGH 12, PART I, OF FORM S-1
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary; Risk Factors; Selected Combined
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations
4. Use of Proceeds...................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover of Prospectus; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to Be Registered........... Outside Front Cover Page of Prospectus; Dividend
Policy; Shares Eligible for Future Sale;
Description of Capital Stock
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Reorganization of the
Company; Dividend Policy; Capitalization; Selected
Combined Financial Data; Management's Discussion
and Analysis of Financial Condition and Results of
Operations; Business; Management; Principal
Stockholders; Certain Related Transactions; Shares
Eligible for Future Sale; Predecessor Combined
Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
i
<PAGE>
SUBJECT TO COMPLETION--DATED JUNE 4, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
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. It is currently anticipated that the initial public offering price
will be between $14.00 and $16.00 per share. See "Underwriting" for a discussion
of the factors to be 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," subject to notice of issuance.
SEE "RISK FACTORS" ON PAGES 9 TO 14 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.............................. $ $ $
Total (3).............................. $ $ $
</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 $ ,
the total Underwriting Discounts and Commissions will be $ and the
total Proceeds to Company will be $ . 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 , 1997.
WHEAT FIRST BUTCHER SINGER J.C. BRADFORD & CO.
The date of this Prospectus is , 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.
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
3
<PAGE>
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 to be 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. Consequently, no assurance can be given that the Company's
growth in sales volume will continue. 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 $ .21
------- ------
------- ------
Pro forma common shares outstanding........................ 9,882 9,882
------- ------
------- ------
</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 $ 38,225
Total assets............................................................. 46,610 45,119 76,612
Total long-term debt, including current portion.......................... 7,825 31,625 23,868
Total stockholders' equity (deficit)..................................... 27,360 (5,915) 33,947
</TABLE>
- ------------------------
(1) Prior to the Reorganization, each of the Constituent Entities was treated as
an S Corporation and therefore was not subject to federal and, in some
cases, state income tax at the corporate level; as a result, income or
losses were passed through to respective stockholders. Accordingly, 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 581,738 shares
of Common Stock assuming an initial public offering price of $15.00 per
share ($13.58, 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
7
<PAGE>
($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 $.73 and $.21,
respectively, based on 9,300,000 shares of Common Stock outstanding prior to
the Offering, increased by (a) the sale of 581,738 shares of Common Stock
assuming an initial public offering price of $15.00 per share ($13.58, 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 571,208
shares of Common Stock assuming an initial public offering price of $15.00
per share ($13.58, 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 anticipated additional
distributions of $7,984,000 to be 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 $15.00 per share ($13.58 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."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to other information set forth in this Prospectus, in
connection with an investment in the Common Stock offered hereby.
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.
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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
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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, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies also have increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Although similar
legislation has been introduced in other states, no action has been taken. There
can be no assurance that such legislation introduced in other states will not be
passed in the future or that other states will not enact similar legislation.
Consideration at both the federal and state level also has been given to
consequences of tobacco smoke on others who are not currently smoking (so called
"second hand" smoke). There can be no assurance that regulation relating to
second hand smoke will not be adopted or that such regulation or related
litigation would not have a material adverse effect on the Company's business
and results of operations.
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation of cigars and/or cigar products. The
National Cancer Institute has announced that it will issue a report in 1997
describing research into cigars and health. There can be no assurance as to the
ultimate content, timing or effect of this report or any additional regulation
of cigars by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business and results of operations. See
"Business--The Tobacco Industry--Regulation."
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation involving tobacco and health
issues. Plaintiffs in such litigation have sought and are seeking compensatory
and, in some cases, punitive damages, for various injuries resulting from the
use
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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 will be
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 to be considered in
determining the initial public offering price. The market price of the Common
Stock could be subject to wide fluctuations in response to quarter-to-quarter
variations in operating results of the Company or its competitors, changes in
earnings estimates by analysts, developments in the tobacco industry or changes
in general economic conditions.
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Certificate
of Incorporation (the "Certificate of Incorporation") and By-laws (the
"By-laws") and the Delaware General Corporation Law could delay or frustrate the
removal of incumbent directors and could make difficult a merger, tender offer
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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 $12.24 in net tangible book value per share of Common
Stock from the assumed initial public offering price of $15.00. 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 will grant to the Existing Stockholders
"piggyback" registration rights exercisable on or after one year following the
date of the Offering to require the Company to register their shares under the
Securities Act at such time as the Company registers any additional shares on
its own behalf. The Company also will grant under its 1997 Long-Term Incentive
Plan options to purchase an aggregate of 450,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. An
additional 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 will agree with the Underwriters that they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, pledge, grant of any option to
purchase or other sale or disposition) any shares of Common Stock or other
capital stock or any securities convertible into or exercisable or exchangeable
for, or any rights to purchase or acquire any shares of Common Stock or other
capital stock of the Company for a period of 180 days after the date of this
Prospectus without the prior written consent of 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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REORGANIZATION OF THE COMPANY
REORGANIZATION OF THE COMPANY
800-JR CIGAR was formed in March 1997 in the State of Delaware as the
holding company for the Constituent Entities. Simultaneously with the
consummation of the Offering, the Existing Stockholders will, pursuant to a
contribution agreement (the "Contribution Agreement"), contribute to the Company
100% of the capital stock of each of (i) J.R. Tobacco of America, Inc., a North
Carolina corporation, (ii) Cigars by Santa Clara, N.A., Inc., a North Carolina
corporation, (iii) J.N.R. Grocery Corp., a New York corporation, (iv) J.R.
Tobacco NC, Inc., a North Carolina corporation, (v) J&R Tobacco (New Jersey)
Corp., a New Jersey corporation, (vi) J.R. Tobacco Company of Michigan, Inc., a
Michigan corporation, (vii) J.R.-46th Street, Inc., a New York corporation,
(viii) J.R. Tobacco Outlet, Inc., a New Jersey corporation, (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
simultaneously with, and is a condition precedent to, the Offering. For further
information regarding the Reorganization, see Notes 1 and 8 to the Predecessor
Combined Financial Statements. See "Principal Stockholders."
TERMINATION OF S CORPORATION STATUS
Prior to the Reorganization, each of the Constituent Entities has been
treated as an S Corporation for federal income tax purposes under Subchapter S
of the Internal Revenue Code of 1986 (the "Code"), and in some cases, for state
corporate income tax purposes under comparable state laws. As a result, each of
the Constituent Entities' historical earnings have been taxed directly to their
respective stockholders and each of the Constituent Entities has not been
subject to income tax on such earnings. Following the Reorganization, the
Constituent Entities will no longer qualify as S Corporations and the Company
will be fully subject to federal and state income taxes as a C corporation under
the Code. Pursuant to a tax agreement among the Company and the Existing
Stockholders (the "Tax Agreement"), the Company will agree to cause the
Constituent Entities to file all income tax returns for periods during which the
Constituent Entities were S Corporations for U.S. federal income tax purposes or
under comparable state and local tax provisions, and the Existing Stockholders
will agree to pay any taxes with respect to such returns. The Existing
Stockholders will also severally (according to the relative percentage of the
outstanding shares of the Constituent Entity stock owned by each Existing
Stockholder on the last day of any applicable period to which a liability
described below relates) and not jointly, agree to indemnify and hold harmless
the Company for all and any federal, state or local income tax liabilities of
the Constituent Entities (including interest and penalties imposed thereon)
which are attributable to a taxable year beginning on or after the effective
date of an election to be treated as an S Corporation for federal, state or
local income tax purposes, as the case may be, and ending on the date preceding
the Reorganization. The determination of income allocable to the portion of the
year in which the Constituent Entities were S Corporations and in which they are
C corporations will be made using the "closing of the books" method. On the
effective date of the Reorganization, the Company will record a deferred tax
asset on its balance sheet. The amount of the deferred tax asset to be recorded
as of the date of termination of S Corporation status will depend upon temporary
differences between tax and book accounting methods relating principally to the
deduction of certain expenses for tax purposes. If the S Corporation status of
the Constituent Entities had been terminated as of December 31, 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.
Prior to the Reorganization, the Constituent Entities will pay a dividend in
the form of notes payable (the "Notes") to the Existing Stockholders in the
aggregate principal amount of $23.8 million. The principal amounts of the Notes
represent the estimated cumulative undistributed S Corporation earnings
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of the Constituent Entities through June 30, 1997 on which income taxes are
payable by the Existing Stockholders. The Notes will be promissory notes bearing
interest at the rate of 7.0% per annum. Principal on the Notes will be paid in
equal quarterly installments over a three year period, and interest will be
payable quarterly as it accrues. The estimate used to determine the principal of
the Notes was net of loans receivable from the Existing Stockholders of $2.6
million and anticipated additional distributions to be 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. Prior to
the Reorganization, the Constituent Entities will also pay a dividend in the
form of additional notes payable (the "Additional Notes," and together with the
Notes, the "Distribution Notes") to the Existing Stockholders with an aggregate
initial principal amount of $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 will mature three years from the date of the Offering and will bear
interest at the rate of 7.0% per annum.
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USE OF PROCEEDS
The net proceeds to the Company from the Offering are expected to be
approximately $40.8 million, based on an assumed initial public offering price
of $15.00 per share, after deducting underwriting discounts and commissions and
estimated offering expenses (approximately $47.0 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 anticipated 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 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.
16
<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 anticipated additional distributions
of $7.9 million to be made prior to the Offering to enable the Existing
Stockholders to pay income taxes on their allocable portions of the Constituent
Entities' 1996 and 1997 estimated undistributed S Corporation earnings through
the date of the Offering, and (iii) on a pro forma combined basis as adjusted to
reflect the non-recurring pre-tax charge of $1.5 million (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 offering price of $15.00
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) 33,824
Retained earnings........................................................... 27,729 -- --
--------- ----------- -----------
27,778 (5,497) 33,947
Treasury stock, at cost..................................................... (418) (418) --
--------- ----------- -----------
Total stockholders' equity (deficit).................................... 27,360 (5,915) 33,947
--------- ----------- -----------
Total capitalization.................................................... $ 32,917 $ 15,542 $ 49,847
--------- ----------- -----------
--------- ----------- -----------
</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 an assumed initial public offering
price of $15.00 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 $33.9 million or $2.76 per share.
This represents an immediate increase in net tangible book value of $3.40 per
share to the Existing Stockholders and an immediate reduction in net tangible
book value of $12.24 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>
Assumed initial public offering price.......................... $ 15.00
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.............................................. 3.40
Pro forma combined net tangible book value after the
Offering..................................................... 2.76
---------
Dilution in net tangible book value to new investors........... $ 12.24
---------
---------
</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 assumed initial public offering
price of $15.00 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 45,000,000 99.9 15.00
------------ ----- ------------- ---------
Total....................................... 12,300,000 100.0% $ 45,049,000 100.0%
------------ ----- ------------- ---------
------------ ----- ------------- ---------
</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 $ .21
------- ------
------- ------
Pro forma common shares outstanding...................................... 9,882 9,882
------- ------
------- ------
</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 581,738 shares
of Common Stock assuming an initial public offering price of $15.00 per
share ($13.58, 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 $.73 and $.21,
respectively, based on 9,300,000 shares of Common Stock outstanding prior to
the Offering, increased by (a) the sale of 581,738 shares of Common Stock
assuming an initial public offering price of $15.00 per share ($13.58, 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 571,208
shares of Common Stock assuming an initial public offering price of $15.00
per share ($13.58, 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 anticipated
additional distributions of $7,984,000 to be 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 statements that constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the 1934 Act. Those statements appear in a number of places in this
Prospectus and include statements regarding the intent, belief or current
expectations of the Company, its directors or its officers with respect to,
among other things: (i) trends affecting the Company's financial condition or
results of operations; (ii) the Company's financing plans; (iii) the Company's
business and growth strategies; (iv) the use of the proceeds to the Company of
the Offering; and (v) the declaration and payment of dividends. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the forward-looking
statements as a result of various factors. The accompanying information
contained in this Prospectus, including without limitation the information set
forth under the headings "Risk Factors," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business," identifies
important factors that would cause such differences.
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.
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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.
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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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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.
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<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.
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 sell its tobacco products. The
Company's wholesale customers include approximately 8,000 smoke shops,
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<PAGE>
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.
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.
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
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<PAGE>
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
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.
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<PAGE>
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.
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
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<PAGE>
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.
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
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<PAGE>
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, 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.
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<PAGE>
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
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.
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<PAGE>
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.
35
<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 a
37
<PAGE>
material adverse effect on the operations of the Company. Although these
regulations are not currently applicable to cigars, there can be no assurance
that these regulations will not be extended to include cigars in the future.
In addition, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas, regulating point of sale placement and promotion and
requiring warning labels.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although there is no federal law currently
requiring that cigars or pipe tobacco carry such warnings, California has
enacted legislation requiring that "clear and reasonable" warnings be given to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. In addition,
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. Although similar legislation has been introduced
in other states, no action has been taken. There can be no assurance that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation. Consideration at both the
federal and state level also has been given to consequences of tobacco smoke on
others who are not presently smoking (so called "second hand" smoke). There can
be no assurance that regulations relating to second hand smoke will not be
adopted or that such regulations or related litigation would not have a material
adverse effect on the Company's results of operations or financial condition.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of second hand
smoke, which concluded that widespread exposure to environmental tobacco smoke
presents a serious and substantial public health concern. Issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal SCIENCE reported that a chemical found in
cigarette smoke has been found to cause genetic damage in lung cells that is
identical to damage observed in many malignant tumors of the lung and, thereby,
directly links lung cancer to smoking. The National Cancer Institute also has
announced that it will issue a report in 1997 describing research into cigars
and health. The study and these reports could affect pending and future tobacco
regulation and litigation. See "--Litigation."
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation. There can be no assurance as to the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
LITIGATION. Historically, the cigar industry has experienced less
health-related litigation than the cigarette and smokeless tobacco industries
have experienced.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. In 1992, the United States Supreme Court in
Cippollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts claims based on failure to warn
consumers about the health hazards of cigarette smoking, but does not preempt
claims based on express warranty, misrepresentation, fraud, or conspiracy. To
date, individual cigarette smokers' claims against the cigarette industry have
been generally unsuccessful. A jury in Florida, however, recently determined
that a cigarette manufacturer was negligent in the production and sale of its
cigarettes and sold a product that was unreasonably dangerous and defective,
awarding the plaintiffs a total of $750,000 in damages.
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<PAGE>
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.
There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against the cigar
industry. The costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any material health-related litigation
against sellers of cigars, cigarettes or smokeless tobacco or suppliers to the
tobacco industry could have a material adverse effect on the Company's business.
EXCISE TAXES. Cigars and pipe tobacco long have been subject to federal,
state and local excise taxes, and such taxes have frequently been increased or
proposed to be increased, in some cases significantly, to fund various
legislative initiatives. The federal excise tax rate on large cigars (weighing
more than three pounds per thousand cigars) is 12.75% of the manufacturer's
selling price, net of the federal excise tax and certain other exclusions,
capped at $30 per thousand cigars.
In the past, there have been various proposals by the federal government to
fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund the Clinton Administration's health care reform program. The
Company believes that the volume of cigars and pipe tobacco sold would have been
dramatically reduced if excise taxes were enacted as originally proposed as part
of the Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company. The
Company is unable to predict the likelihood of the passage or the enactment of
future increases in tobacco excise taxes.
Tobacco products are also subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. The number of states that impose excise taxes on cigars is 42. State
cigar excise taxes generally range from 2% to 75% of the wholesale purchase
price and are not subject to caps similar to the federal cigar excise tax.
EMPLOYEES
As of 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
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<PAGE>
telemarketers involved in retail and wholesale direct mail operations. In
anticipation of the Offering, the Company and MC Management will enter 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 sq. ft. building owned by the Company, which includes an
8,200 sq. ft. upscale cigar store of which 1,200 square feet are leased to an
affiliate of the Company for operation of the El Rey del Mundo Cigar Bar. See
"Certain Related Transactions--Other." The Company owns a 50,000 square foot
discount outlet store and a 6,000 square foot specialty cigar store located on
nine acres in Selma, North Carolina. The Company plans to expand its Selma
facility during 1997 by connecting the specialty cigar store to the main
facility, thereby adding 22,000 square feet of retail selling space. The Company
also leases the following retail properties:
<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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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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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
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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,
will enter into a five-year contract effective upon consummation of the
Offering, with MC Management for the performance on behalf of the Company of
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 will agree to pay a signing bonus to MC Management in the
amount of $1.0 million. In addition, Jane Vargas, Vice President of MC
Management, will enter into an employment agreement with the Company and will
receive a signing bonus of $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 December 31, 1996, the Company's total outstanding
liability to Bernard Rothman was $119,000. 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 * 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 will enter into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individuals
may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will
continue to be, provided to them.
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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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.
51
<PAGE>
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 will agree with the Underwriters that
they will not, directly or indirectly, offer, sell, offer to sell, pledge,
contract to sell or grant any option to purchase or otherwise sell or dispose of
(or announce any offer, sale, offer of sale, pledge, contract for sale or grant
of any option to purchase or other sale or disposition of) any shares of Common
Stock or of equity securities of the Company substantially similar thereto or
any other securities convertible into, or exchangeable or exercisable for, any
shares of Common Stock or such similar securities for a period of 180 days after
the date of this Prospectus, without the prior written consent of 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 will grant to the Existing Stockholders "piggyback" registration
rights exercisable on or after one year following the date of the Offering to
require the Company to register their shares of Common Stock under the
Securities Act, at such time as the Company registers any additional shares on
its own behalf. Under such "piggyback" registration rights, with certain
exceptions, the Company is required to notify each holder of such shares each
time the Company proposes to file a registration statement under the Securities
Act and to use its best efforts to include, to the maximum extent possible, any
shares of Common Stock requested to be registered by such holders in connection
with such registration statement. Holders of shares of Common Stock who request
such registration pursuant to "piggyback" rights are required to pay their pro
rata share of all underwriting discounts and selling commissions applicable to
the sale of the shares so registered. The Company and each of the holders on
whose behalf registration is effected severally agree to indemnify each other
and each underwriter of the shares being registered against certain liabilities,
including liabilities under the Securities Act.
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.....................................................
J.C. Bradford & Co...............................................................
----------
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 $ per share; and that such dealers
may reallow a concession of $ per share to certain other dealers. After
the initial public offering, the offering price and the concessions may be
changed by the Representatives.
The Company will grant to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 450,000 additional
shares of Common Stock at the initial public offering price, less underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of the shares of Common Stock offered
hereby. To the extent such option is exercised, each Underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number set forth next to such
Underwriter's name in the preceding table bears to 3,000,000 shares.
All of the directors and executive officers of the Company and the former
stockholders of the Constituent Entities will agree that they will not, directly
or indirectly, offer, sell, offer to sell, pledge contract to sell or grant any
option to purchase or otherwise sell or dispose of (or announce any offer, sale,
offer of sale, pledge contract for sale or grant of any option to purchase or
other sale or disposition of) any shares of Common Stock or of equity securities
of the Company substantially similar thereto or any other securities convertible
into, or exchangeable or exercisable for, any shares of Common Stock or such
similar securities for a period of 180 days after the date of this Prospectus,
without the prior written consent of 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.
54
<PAGE>
The Company and the Existing Stockholders will agree to indemnify the
several Underwriters against or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering made hereby, there has been no public market for the
Common Stock. Consequently, the initial public offering price will be determined
through negotiations between the Company and the Representatives. Among the
factors to be considered in making such determination will be prevailing market
conditions, the Company's financial and operating history and condition, its
prospects and prospects for the industry in general, the management of the
Company and the market prices of securities for companies in businesses similar
to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering then
they are committed to purchase from the Company, and in such case may purchase
Common Stock in the open market following completion of the Offering to cover
all or a portion of such short position. The Underwriters may also cover all or
a portion of such short position, up to 450,000 shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, 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.
/s/ J. H. Cohn LLP
---------------------------------------------------------------
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 $ .21
------- ------
------- ------
Pro forma common shares outstanding.................................... 9,882 9,882
------- ------
------- ------
</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. Because
800-JR CIGAR, Inc. will conduct no business operations prior to its acquisition
of the Predecessor Entities, the financial statements for 800-JR CIGAR, Inc. are
not included herewith.
The 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 will issue 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
anticipated additional distributions of $7,984 to be made prior to the
consummation of the Offering to enable the stockholders to pay income taxes on
their allocable portions of the 1996 and 1997 undistributed S Corporation
estimated earnings through the date of the Offering. These notes, which will
bear interest at the rate of 7.0% per annum, will be payable on a quarterly
basis over the three-year period following the Offering.
The following table sets forth the capitalization of the Company at 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 581,738 shares of
common stock assuming an initial public offering price of $15.00 per share
($13.58, 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
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)
pro forma net income decreased by the interest expense on debt of $789 ($467 on
an after-tax basis) for the 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 $.73 and $.21,
respectively, based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by (a) the sale of 581,738 shares of common stock assuming
an initial public offering price of $15.00 per share ($13.58, 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 571,208 shares of common
stock assuming an initial public offering price of $15.00 per share ($13.58, 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
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)
number of customers comprising the Company's customer base, their dispersion
across different geographic areas and generally short payment terms.
MERCHANDISE INVENTORY
Merchandise inventory is stated at the lower of cost (determined by the
first-in, first-out method) or market; market represents the lower of
replacement cost or estimated net realizable value. Merchandise inventory
consists of goods held for re-sale.
PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements are stated at cost. Depreciation and
amortization of assets, including those under capital lease, is computed using
the straight-line and accelerated methods over the lesser of the estimated
useful lives of the related assets or the lease term. These lives range from 3
to 31 years.
ADVERTISING
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotion costs amounted to $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.
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)
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 , 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.
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred by the
Registrant in connection with the offering described in this Registration
Statement, other than the underwriting discount. All of such amounts are
estimated except for the SEC Registration Fee, the National Association of
Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 16,728
NASD Filing Fee................................................. 6,020
Nasdaq National Market Listing Fee.............................. 49,375
Printing and Engraving Costs.................................... 250,000
Blue Sky Fees and Expenses...................................... 7,500
Legal Fees and Expenses......................................... 400,000
Transfer Agent Fee.............................................. 3,500
Accounting Fees and Expenses.................................... 300,000
Miscellaneous................................................... 66,877
---------
Total........................................................... $1,100,000
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that the Company shall,
to the fullest extent permitted by Section 145 of the General Corporation Law of
the State of Delaware, as amended from time to time, indemnify all persons whom
it may indemnify pursuant thereto.
Section 145 of the General Corporation Law of the State of Delaware permits
a corporation, under specified circumstances, to indemnify its directors,
officers, employees or agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlements actually and reasonably
incurred by them in connection with any action, suit or proceeding brought by
third parties by reason of the fact that they were or are directors, officers,
employees or agents of the corporation, if such directors, officers, employees
or agents acted in good faith and in a manner they reasonably believed to be in
or not opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reason to believe their conduct was
unlawful. In a derivative action, i.e., one by or in the right of the
corporation, indemnification may be made only for expenses actually and
reasonably incurred by directors, officers, employees or agents in connection
with the defense or settlement of an action or suit, and only with respect to a
matter as to which they shall have acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification shall be made if such person shall
have been adjudged liable to the corporation, unless and only to the extent that
the court in which the action or suit was brought shall determine upon
application that the defendant directors, officers, employees or agents are
fairly and reasonably entitled to indemnity for such expenses despite such
adjudication of liability.
Article Ten of the Company's Certificate of Incorporation provides that the
Company's directors will not be personally liable to the Company or its
shareholders for monetary damages resulting from breaches of their fiduciary
duty as directors except (a) for any breach of the duty of loyalty to the
Company or its shareholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a
II-1
<PAGE>
knowing violation of law, (c) under Section 174 of the General Corporation Law
of the State of Delaware, which makes directors liable for unlawful dividends or
unlawful stock repurchases or redemptions or (d) for transactions from which
directors derive improper personal benefit.
The Company's directors and officers will be covered by insurance policies
indemnifying them against certain civil liabilities, including liabilities under
the federal securities laws, which might be incurred by them in such capacity.
In addition, such directors and officers will enter into indemnification
agreements with the Company, pursuant to which the Company will agree to
indemnify such persons for all losses or expenses not otherwise insured against
incurred by reason of any breach of duty, neglect, error, misstatement,
misleading statement, omission or other act done, wrongfully attempted or
alleged to have been done or wrongfully attempted by such officer or director
solely by reason of him or her being an officer of director or both.
The Underwriting Agreement to be filed as Exhibit 1.1 will provide that the
Underwriters named therein will indemnify and hold harmless the Company and each
director, officer or controlling person of the Company from and against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), and the Underwriting Agreement will provide that such
Underwriters will contribute to certain liabilities of such persons under the
Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None. Upon the closings of the transactions contemplated to occur pursuant
to the Contribution Agreement, to be dated prior to the Offering, by and among
800-JR CIGAR, Inc., and the stockholders of each of J.R. Tobacco of America,
Inc., Cigars by Santa Clara, N.A., Inc., J.N.R. Grocery Corp., J.R. Tobacco NC,
Inc., J&R Tobacco (New Jersey) Corp., J.R. Tobacco Company of Michigan, Inc.,
J.R.-46th Street, Inc., J.R. Tobacco Outlet, Inc., J.R. Statesville, Inc. and JR
Cigar (DC), Inc. the Company will issue 9,300,000 shares in a private placement
as described in the Prospectus under the caption "Reorganization of the
Company."
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-Laws of the Company.
4.1 Form of Certificate for Common Stock of the Company.
5.1 Opinion of Morgan, Lewis & Bockius LLP.
10.1 The Company's 1997 Long-Term Incentive Plan.
10.2 The Company's 1997 Non-Employee Directors' Stock Plan.
10.3 The Company's Employee Stock Purchase Plan.
10.4 1997 Employee Bonus Pool Plan.
*10.5 Employment Agreement, dated March 13, 1997 between the Company and Lewis I. Rothman.
*10.6 Employment Agreement, dated March 13, 1997 between the Company and LaVonda M. Rothman.
*10.7 Employment Agreement, dated March 13, 1997 between the Company and Jane Vargas.
10.8 Management Agreement dated , 1997 by and between MC Management and the Company.
10.9 Form of Indemnification Agreement.
10.10 Form of Contribution Agreement by and among Lewis I. Rothman, LaVonda M. Rothman, the Shane Rothman
Trust, the Luke Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
10.11 Form of Tax Agreement by and among Lewis I. Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the
Luke Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
*10.12 Agreement dated March 13, 1997 by and between Cigars by Santa Clara, N.A., Inc. and
Nicaraguan-American Tobacco Company, Inc. ("Natco").
*10.13 Agreement dated March 13, 1997 by and between Natco and Nicaraguan-American Tobacco Sociedad Anonima,
S.A.
*10.14 Agreement dated March 13, 1997 by and between Cigars by Santa Clara, N.A., Inc. and Tabacalera
Nacional Dominicana, S.A.
*10.15 Lease Agreement, dated July 19, 1993 by and between J.R. Tobacco of America, Inc. and Interstate
Development Company, as amended by First Amendment to Lease, dated November 2, 1993, by and between
J.R. Tobacco of America, Inc. and Interstate Development Company.
10.16 Lease Agreement, dated March 1, 1996 by and between J.R. Outlet, Inc. and Casa Blanca, Inc.
10.17 Form of Note.
10.18 Form of Additional Note.
16.1 Letter regarding change in certifying accountant.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of J.H. Cohn LLP.
*23.3 Consent of John Oliva.
23.4 Consent of Stephen J. Bloom
23.6 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule
99.1 Consent of Cigar Aficionado
</TABLE>
- ------------------------
* Previously filed.
(b) Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For the purposes of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Whippany, State of New
Jersey, on the 4th day of June, 1997.
800-JR CIGAR, INC.
BY: /S/ LEW ROTHMAN
-----------------------------------------
Lew Rothman
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
Chief Executive Officer and
/s/ LEW ROTHMAN Chairman of the Board of
- ------------------------------ Directors (Chief June 4, 1997
Lew Rothman Operating Officer)
/s/ TIMOTHY P. SHANNON Chief Financial Officer
- ------------------------------ (Chief Accounting June 4, 1997
Timothy P. Shannon Officer)
*
- ------------------------------ Director June 4, 1997
Lavonda M. Rothman
*
- ------------------------------ Director June 4, 1997
Maureen A. Colleton
*
- ------------------------------ Director June 4, 1997
Jane Vargas
* Signed by Lew Rothman, Attorney-in-Fact.
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
800-JR CIGAR, Inc.
We have audited the predecessor combined financial statements of 800-JR
CIGAR, Inc. as of December 31, 1996, and for the year then ended, and have
issued our report thereon dated April 15, 1997 (included elsewhere in this
Registration Statement). Our audit also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audit.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
MetroPark, New Jersey
April 15, 1997
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED CHARGED
BEGINNING TO COST & TO OTHER ENDING
DESCRIPTION BALANCE EXPENSE ACCOUNTS DEDUCTIONS BALANCE
- ----------------------------------------------------------- ------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts............................ $ 83 $ 191 -- $ 156 $ 118
--- ----- ----- ----- -----
--- ----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts............................ $ 50 $ 33 -- -- $ 83
--- ----- ----- ----- -----
--- ----- ----- ----- -----
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts............................ $ 20 $ 51 -- $ 21 $ 50
--- ----- ----- ----- -----
--- ----- ----- ----- -----
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF DOCUMENT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Company.
*3.2 By-Laws of the Company.
4.1 Form of Certificate for Common Stock of the Company.
5.1 Opinion of Morgan, Lewis & Bockius LLP.
10.1 The Company's 1997 Long-Term Incentive Plan.
10.2 The Company's 1997 Non-Employee Directors' Stock Plan.
10.3 The Company's Employee Stock Purchase Plan.
10.4 1997 Employee Bonus Pool Plan.
*10.5 Employment Agreement, dated March 13, 1997 between the Company and Lewis I. Rothman.
*10.6 Employment Agreement, dated March 13, 1997 between the Company and LaVonda M. Rothman.
*10.7 Employment Agreement, dated March 13, 1997 between the Company and Jane Vargas.
10.8 Management Agreement dated , 1997 by and between MC Management and the Company.
10.9 Form of Indemnification Agreement.
10.10 Form of Contribution Agreement by and among Lewis I. Rothman, LaVonda M. Rothman, the Shane Rothman
Trust, the Luke Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
10.11 Form of Tax Agreement by and among Lewis I. Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the
Luke Rothman Trust, the Marni Rothman Trust, the Samantha Rothman Trust and the Company.
*10.12 Agreement dated March 13, 1997 by and between Cigars by Santa Clara, N.A., Inc. and
Nicaraguan-American Tobacco Company, Inc. ("Natco").
*10.13 Agreement dated March 13, 1997 by and between Natco and Nicaraguan-American Tobacco Sociedad Anonima,
S.A.
*10.14 Agreement dated March 13, 1997 by and between Cigars by Santa Clara, N.A., Inc. and Tabacalera
Nacional Dominicana, S.A.
*10.15 Lease Agreement, dated July 19, 1993 by and between J.R. Tobacco of America, Inc. and Interstate
Development Company, as amended by First Amendment to Lease, dated November 2, 1993, by and between
J.R. Tobacco of America, Inc. and Interstate Development Company.
10.16 Lease Agreement, dated March 1, 1996 by and between J.R. Outlet, Inc. and Casa Blanca, Inc.
10.17 Form of Note.
10.18 Form of Additional Note.
16.1 Letter regarding change in certifying accountant.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of J.H. Cohn LLP.
*23.3 Consent of John Oliva
23.4 Consent of Stephen J. Bloom
23.6 Consent of Morgan, Lewis & Bockius LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule
99.1 Consent of Cigar Aficionado
</TABLE>
- ------------------------
* Previously filed.
<PAGE>
Exhibit 1.1
800-JR CIGAR, INC.
3,000,000 Shares(1)
Common Stock
UNDERWRITING AGREEMENT
________ ___, 1997
WHEAT, FIRST SECURITIES, INC.
J.C. BRADFORD & CO.
As Representatives of the several Underwriters
c/o Wheat, First Securities, Inc.
Riverfront Plaza
901 East Byrd Street
Richmond, Virginia 23219
Ladies and Gentlemen:
800-JR Cigar, Inc., a Delaware corporation (the "Company"), and the
persons or trusts (the "Trusts") named in Schedule 1 hereto (individually, an
"Existing Stockholder" and collectively, the "Existing Stockholders") hereby
confirm their respective agreements with the several underwriters named in
Schedule 2 hereto (the "Underwriters"), for whom you have been duly authorized
to act as representatives (in such capacities, the "Representatives"), as set
forth below. If you are the only Underwriters, all references herein to the
Representatives shall be deemed to be to the Underwriters.
1. Securities. Subject to the terms and conditions herein contained, the
Company proposes to issue and sell to the several Underwriters an aggregate of
3,000,000 shares (the "Firm Securities") of the Company's Common Stock, par
value $.01 per share ("Common Stock"). The Company also proposes to issue and
sell to the several Underwriters not more than 450,000 additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities."
- ----------
(1) Plus an option to purchase from 800-JR Cigars, Inc. up to 450,000
additional shares to cover over-allotments.
<PAGE>
2. Representations and Warranties of the Company and the Existing
Stockholders. (i) The Company and the Existing Stockholders jointly and
severally represent and warrant to, and agree with, each of the several
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-23401) with respect
to the Securities, including a prospectus subject to completion, has been filed
by the Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Act"), and one or more
amendments to such registration statement may have been so filed and such
registration statement has been delivered to you and each of the Underwriters.
After the execution of this Agreement, the Company will file with the Commission
either (i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (A) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (B) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (i)(A) or (i)(B) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by the Representatives prior to the execution of this Agreement. The
Company may also file a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering certain
additional Securities, which registration shall be effective upon filing with
the Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule 424(b)(7)
under the Act, together with the Preliminary Prospectus identified therein
that such Term Sheet supplements;
2
<PAGE>
(B) if the Company does not rely on Rule 434 under the Act, the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference herein to the "date"
of a Prospectus that includes a Term Sheet shall mean the date of such
Term Sheet.
(b) The Commission has not issued any order preventing or suspending use
of the Registration Statement or any Preliminary Prospectus. When any
Preliminary Prospectus was filed with the Commission it (i) contained all
statements required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (ii) did not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective, it
(i) contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading. When the Prospectus
or any Term Sheet that is a part thereof or any amendment or supplement to the
Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or part thereof or such amendment or supplement is not required to be
so filed, when the Registration Statement or the amendment thereto containing
such amendment or supplement to the Prospectus was or is declared effective) and
on the Firm Closing Date and any Option Closing Date (both as hereinafter
defined), the Prospectus, as amended or supplemented at any such time, (i)
contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (b) do not apply to statements or omissions made in
any Preliminary Prospectus, the Registration Statement or any amendment thereto
or the Prospectus or any amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, which information
consists only of the information identified in Section 12.
(c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration Statement has not been declared effective (i) the Company has filed
a Rule 462(b) Registration Statement in compliance with, and that is effective
upon filing pursuant, to Rule 462(b) and has received confirmation of its
receipt and (ii) the Company has given irrevocable instructions for
3
<PAGE>
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(d) J.R. Tobacco of America, Inc., a North Carolina corporation, Cigars by
Santa Clara, N.A., Inc., a North Carolina corporation, J.N.R. Grocery Corp., a
New York corporation, J.R. Tobacco NC, Inc., a North Carolina corporation, J&R
Tobacco (New Jersey) Corp., a New Jersey corporation, J.R. Tobacco Company of
Michigan, Inc., a Michigan corporation, J.R-46th Street, Inc., a New York
corporation, J.R. Tobacco Outlet Inc., a New Jersey corporation, J.R.
Statesville, Inc., a North Carolina corporation, and JR Cigar (DC), Inc., a
District of Columbia corporation, which upon consummation of the transactions
(the "Reorganization Transactions") described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) under
the caption "Reorganization of the Company" will become the only subsidiaries of
the Company (each a "Subsidiary" and collectively the "Subsidiaries"). At or
prior to the Firm Closing Date (as hereinafter defined) the Reorganization
Transactions will have occurred in the manner described in the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
under the caption "Reorganization of the Company" and (i) the Existing
Stockholders and the Subsidiaries shall have entered into a tax agreement with
the Company in a form reasonably acceptable to the Representatives (the "Tax
Agreement"); (ii) the Existing Stockholders and the Company shall have entered
into a contribution agreement (the "Contribution Agreement") pursuant to which
the Existing Stockholders will contribute to the Company all of the outstanding
capital stock of each of the Subsidiaries; (iii) the Subsidiaries shall have
declared a dividend payable to the Existing Stockholders in the form of notes
payable (the "Notes"); and (iv) the Company, the Subsidiaries and the Existing
Stockholders shall have entered into all other agreements (the "Ancillary
Agreements" and together with the Tax Agreement, the Contribution Agreement and
the Notes, the "Reorganization Agreements"), if any, necessary to consummate the
Reorganization Transactions.
(e) The Company and each of the Subsidiaries have been duly organized and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the consolidated financial position of the Company
and the Subsidiaries.
(f) The Company and each of the Subsidiaries have full power (corporate
and other) to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(g) The issued and outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except as otherwise set forth in the Prospectus or, if the
Prospectus is not in existence, the most recent Preliminary
4
<PAGE>
Prospectus, are, or upon consummation of the Reorganization Transactions, will
be owned of record by the Company free and clear of any security interests,
liens, encumbrances, equities or claims.
(h) Upon consummation of the Reorganization Transactions, the Company will
have an authorized, issued and outstanding capitalization as set forth in the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus. All of the shares of capital stock of the Company to be
issued to the Existing Stockholders will have been duly and validly authorized
and, after payment therefor in accordance with the terms of the Contribution
Agreement, at the Firm Closing Date will be duly and validly issued, fully paid
and nonassessable. The Firm Securities and the Option Securities will have been
duly and validly authorized and at the Firm Closing Date or the related Option
Closing Date (as hereinafter defined), as the case may be, after payment
therefor in accordance herewith, will be duly and validly issued, fully paid and
nonassessable. No holders of outstanding shares of capital stock of the Company
are or will be entitled as such to any preemptive or other rights to subscribe
for or to purchase any of the Securities, and no holder of securities of the
Company has or will have any right which has not been fully exercised or waived
to require the Company to register the offer or sale of any securities owned by
such holder under the Act in the public offering contemplated by this Agreement.
(i) The capital stock of the Company and the Securities to be sold by the
Company conform to the description thereof contained in the Prospectus or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus.
(j) Except as disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no outstanding (A)
securities or obligations of the Company or any of the Subsidiaries convertible
into or exchangeable for any capital stock of the Company or any such
Subsidiary, (B) warrants, rights or options to subscribe for or purchase from
the Company or any such Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any such Subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(k) The combined financial statements and related notes and schedules
included in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) fairly present the
combined financial position of the Subsidiaries and the combined results of
operations and changes in financial condition of the Subsidiaries as of the
dates and for the periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (except as
otherwise noted therein) and all adjustments necessary for a fair presentation
of results for such periods have been made. The summary and selected financial
data set forth under the captions "Summary Combined Financial Data" and
"Selected Combined Financial Data," respectively, in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) fairly
present, on the basis stated in the Prospectus (or such Preliminary Prospectus),
the information included therein.
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(l) Each of (i) Ernst & Young LLP, who have certified certain combined
financial statements of the Subsidiaries and delivered their report with respect
to such audited combined financial statements and schedules included in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder; and (ii) J.H. Cohn LLP, who have certified certain combined
financial statements of the Subsidiaries and delivered their report with respect
to such audited combined financial statements and schedules included in the
Registration Statement and the Prospectus (or if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(m) The execution and delivery of this Agreement have been duly authorized
by the Company and this Agreement has been duly executed and delivered by the
Company, and is the valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms; except (i) as enforceability
hereof may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles and (ii) that enforcement
of rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy.
(n) The execution and delivery of each of the Reorganization Agreements
have been duly authorized by each Subsidiary or the Company party thereto and
each of the Reorganization Agreements has been duly executed and delivered by
each Subsidiary and/or the Company party thereto, and is the valid and
binding agreement of each Subsidiary and/or the Company party thereto,
enforceable against such Subsidiary and/or the Company in accordance with its
terms; except (i) as enforceability thereof may be limited by bankruptcy,
fraudulent conveyance, insolvency, reorganization, moratorium and other laws
relating to or affecting creditors' rights generally and by general equitable
principles and (ii) that enforcement of rights to indemnity and contribution
hereunder may be limited by federal or state securities laws or principles of
public policy.
(o) No legal or governmental proceedings are pending to which the Company
or any of the Subsidiaries is a party or to which the property of the Company or
any of the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus),
and, to the knowledge of the Company and the Existing Stockholders, no such
proceedings have been threatened or are contemplated against the Company or any
of the Subsidiaries or with respect to any of their respective properties; and
no contract or other document to which the Company or any Subsidiary is a party
or to which the property of the Company or any of the Subsidiaries is subject is
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement that is not described
therein (or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) or filed as required under the Act. Assuming due authorization,
execution and delivery by each other party thereto, all such contracts to which
the Company or a Subsidiary is a party constitute valid and binding agreements
of the Company or such Subsidiary, as the case may be.
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<PAGE>
(p) The issuance, offering and sale of the Securities to the Underwriters
by the Company pursuant to this Agreement, the compliance by the Company or the
Subsidiaries, as the case may be, with the other provisions of this Agreement or
the Reorganization Agreements and the consummation of the other transactions
contemplated hereby or thereby do not and will not (i) require the consent,
approval, authorization, registration or qualification of or with any
governmental authority, except such as have been obtained, such as may be
required under state securities or blue sky laws and, if the registration
statement filed with respect to the Securities (as amended) is not effective
under the Act as of the time of execution hereof, such as may be required (and
shall be obtained as provided in this Agreement) under the Act, or (ii) conflict
with or result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any indenture, mortgage, deed of trust,
guarantee, loan agreement, material lease or other agreement or instrument to
which the Company or any of the Subsidiaries is a party or by which the Company
or any of the Subsidiaries or any of their respective properties or assets are
bound, or the charter documents or by-laws of the Company or any of the
Subsidiaries, or any statute or any judgment, decree, order, rule or regulation
of any court or other governmental authority or any arbitrator applicable to the
Company or any of the Subsidiaries or any of their properties, other than as
described in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus).
(q) Other than pursuant to this Agreement, the Company has not, directly
or indirectly, (i) taken any action designed to cause or to result in, or that
has constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (B) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(r) The Company has not distributed and, prior to the later of (i) the
Firm Closing Date and (ii) the completion of the distribution of the Securities,
will not distribute any offering material in connection with the offering and
sale of the Securities other than the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or other materials, if any permitted by the Act.
(s) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) and, except for the
Reorganization Transactions, (i) the Company and the Subsidiaries have not
incurred any material liability or obligation, direct or contingent, nor entered
into any material transaction, not in the ordinary course of business; (ii) the
Company and the Subsidiaries have not sustained any material loss or
interference with their businesses or properties from fire, flood, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding, order or decree; (iii) there has not
been any material adverse change, or any development involving a prospective
material adverse change, in the condition (financial or otherwise),
shareholders' equity, management, business prospects, net worth, or results of
operations of the Company and the Subsidiaries, taken as a whole; (iv) the
Company and the Subsidiaries have not purchased any of their outstanding capital
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<PAGE>
stock, nor declared, paid or otherwise made any dividend or distribution of any
kind on their capital stock; and (v) there has not been any material change in
the capital stock, short-term debt or long-term debt of the Company and the
Subsidiaries; in the case of each of clauses (i) through (v) except as described
in or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(t) The Company and each of the Subsidiaries have valid title in fee
simple to all items of real property and valid title to all personal property
owned by each of them, in each case free and clear of any security interests,
liens, encumbrances, claims and other defects, except such as do not materially
and adversely affect the value of such property as reflected by the financial
statements included in the Prospectus and do not materially interfere with the
use made or proposed to be made of such property by the Company or such
Subsidiary, and any real property and buildings held under lease by the Company
or any such Subsidiary are held under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not materially interfere with
the use made or proposed to be made of such property and buildings by the
Company or such Subsidiary, in each case except as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(u) No labor dispute with the employees of the Company or any of the
Subsidiaries exists or, to the knowledge of the Company or the Existing
Stockholders, is threatened or imminent that could reasonably be expected to
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and the
Subsidiaries, taken as a whole, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(v) The Company and each Subsidiary owns, possesses, has currently
subsisting licenses to use or can acquire on reasonable terms, all material
patents, patent applications, trademarks, service marks, trade names, licenses,
copyrights and proprietary or other confidential information necessary to carry
on its business as presently operated by it, and neither the Company nor any
such Subsidiary has received any notice of infringement of or conflict with
asserted rights of any third party with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company and the Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(w) The Company and each of the Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net
8
<PAGE>
worth or results of operations of the Company and the Subsidiaries, taken as a
whole, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(x) No Subsidiary of the Company is currently, or upon consummation of the
Reorganization Transactions will be, prohibited, directly or indirectly, from
paying any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or advances
to such Subsidiary from the Company or from transferring any of such
Subsidiary's property or assets to the Company or any other Subsidiary of the
Company, except as described in or contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(y) The Company and each of the Subsidiaries possess all certificates,
consents, authorizations and permits ("Licenses") issued by the appropriate
international, federal, state or foreign regulatory and self-regulatory
authorities necessary to conduct their respective businesses, except for those
of which the failure to obtain would not result in a material adverse change in
the condition (financial or otherwise), business prospects, net worth or results
of operations of the Company and the Subsidiaries, taken as a whole, and except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). All Licenses are valid
and in full force and effect and the Company and each of the Subsidiaries are in
compliance with all laws, regulations, orders and decrees applicable to them,
except as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), and except for
those, the absence of which, would not cause a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results of
operations of the Company and the Subsidiaries, taken as a whole. Neither the
Company nor any Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and the Subsidiaries, taken as a whole, except as described in or
contemplated by the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(z) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act of 1940, as amended, and this transaction will not cause the Company to
become an investment company subject to registration under such Act.
(aa) Each of the Company, the Subsidiaries and the Existing Stockholders
have filed all foreign, federal, state and local tax returns that are required
to be filed or has requested extensions thereof (except in any case in which
the failure so to file would not have a material adverse effect on the Company
and the Subsidiaries) and have paid all taxes as shown on said returns required
to be paid and any other assessment, fine or penalty levied, to the extent that
any of the foregoing is due and payable, except for any such assessment, fine
or penalty that is currently being contested in good faith or as described in
or contemplated by the
9
<PAGE>
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). To the knowledge of the Company there is no tax
deficiency that has been or might be asserted against the Company and that could
have a material adverse effect on the business, properties, business prospects,
condition, earnings or results of operations of the Companies or the
Subsidiaries, taken as a whole, except as described in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) or reserved against in the combined
financial statements of the Company. Effective as of the dates set forth
opposite each Subsidiary on Schedule 3 hereto, each Subsidiary validly elected
to be treated as an S Corporation (as defined in Section 1361 of the Internal
Revenue Code of 1986, as amended (the "Code") and the corresponding provision of
any prior version of the Code) for Federal and state income tax purposes and
each Subsidiary has continued and will continue to so qualify as an S
Corporation in each such jurisdiction since that date until the day preceding
consummation of the Reorganization Transactions, at which time each Subsidiary
will validly terminate its S Corporation status.
(bb) Neither the Company nor any of the Subsidiaries is in violation of
any federal or state law or regulation relating to occupational safety and
health or to the storage, handling, transportation, treatment or disposal of
hazardous or toxic materials and the Company and the Subsidiaries have received
all permits, licenses or other approvals required of them under applicable
federal and state occupational safety and health and environmental laws and
regulations to conduct their respective businesses, and the Company and each
such Subsidiary is in compliance with all terms and conditions of any such
permit, license or approval, except any such violation of law or regulation,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
which would not, singly or in the aggregate, result in a material adverse change
in the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and the Subsidiaries, taken as a whole,
except as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). Neither the
Company nor any of the Subsidiaries has received any notices or claims that it
is a responsible party or a potentially responsible party in connection with any
claim or notice asserted pursuant to 42 U.S.C. Section 9601 et seq. or any state
superfund law or any similar foreign law; and the disposal by the Company or any
Subsidiary of any of the Company's and each Subsidiary's hazardous substances,
hazardous materials and other waste products has been lawful in all material
respects.
(cc) Any certificate signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty jointly and severally made by the Company and each
of the Existing Stockholders to each Underwriter as to the matters covered
thereby and shall be deemed incorporated herein in its entirety and shall be
effective as if such representation and warranty were made herein; and any
certificate signed by the Existing Stockholders and delivered to the
Representatives or to counsel for the Underwriters shall also be deemed a
representation and warranty jointly and severally made by the Company and each
of the Existing Stockholders to each Underwriter as to the matters covered
thereby and shall also be deemed incorporated herein in its entirety and shall
be effective as if such representation and warranty were made herein.
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(dd) Except for the shares of capital stock of each of the Subsidiaries
owned, or to be owned, by the Company, neither the Company nor any Subsidiary
owns any shares of stock or any other equity securities of any corporation or
has any equity interest in any firm, partnership, association or other entity,
except as described in or contemplated by the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(ee) The Company and each of the Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(ff) No default by the Company or the Subsidiaries exists, and no event
has occurred which, with notice or lapse of time or both, would constitute a
default in the due performance and observance of any term, covenant or condition
of any indenture, mortgage, deed of trust, material lease or other agreement or
instrument to which the Company or any of the Subsidiaries is a party or by
which the Company or any of the Subsidiaries or any of their respective
properties is bound or may be affected in any material adverse respect with
regard to the property, business or operations of the Company and the
Subsidiaries, taken as a whole, except for any such default that would be cured
upon application of the proceeds from the sale of the Securities in the manner
described under the caption "Use of Proceeds" in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(gg) All employee benefit plans (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
established, maintained or contributed to by the Company comply in all material
respects with the requirements of ERISA and no employee pension benefit plan (as
defined in Section 3(2) of ERISA) has incurred or assumed an "accumulated
funding deficiency" within the meaning of Section 302 of ERISA or has incurred
or assumed any material liability (other than for the payment of premiums) to
the Pension Benefit Guaranty Corporation, except where such non-compliance,
deficiency or liability will not have a material adverse effect on the Company
and the Subsidiaries, taken as a whole.
(hh) No relationship, direct or indirect, exists between or among the
Company or any of the Subsidiaries, on the one hand, and the directors,
officers, Existing Stockholders, customers or suppliers of the Company or any of
the Subsidiaries on the other hand, that is required by the Act or the Exchange
Act, or by the rules and regulations under either of such Acts to be described
in the Registration Statement and the Prospectus that is not so described.
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(ii) In addition to the foregoing, the Existing Stockholders severally and
not jointly represent and warrant to, and agree with, each of the several
Underwriters that:
(a) The execution and delivery of this Agreement has been duly
authorized by each of the Trusts and this Agreement has been duly executed and
delivered by each of the Existing Stockholders, and is the valid, binding
agreement of each of the Existing Stockholders, enforceable against such
Existing Stockholder in accordance with its terms; except (i) as enforceability
hereof may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting creditors'
rights generally and by general equitable principles and (ii) that enforcement
of rights to indemnity and contribution hereunder may be limited by federal or
state securities laws or principles of public policy.
(b) Each Existing Stockholder has full legal right, and each Trust
has the power and authority, to enter into this Agreement and each
Reorganization Agreement to which such Existing Stockholder is a party. The
execution, delivery and performance by each Existing Stockholder of this
Agreement and of each Reorganization Agreement to which such Existing
Stockholder is a party, and the consummation by each Existing Stockholder of the
transactions contemplated hereby and thereby will not conflict with or result in
a breach of any of the terms or provisions, or constitute a default or cause an
acceleration of any obligation under any material license, indenture, lease,
mortgage, deed of trust, bank loan, credit agreement, or other material
agreement or instrument to which such Existing Stockholder is a party or by
which such Existing Stockholder is bound, or to which any of the property or
assets of such Existing Stockholder is subject, or any order of any court or
governmental agency or authority entered into in any proceeding to which such
Existing Stockholder was or is a party or by which such Existing Stockholder is
bound, or violate or conflict with any applicable foreign, federal, state or
local law, rule, administrative regulation or ordinance or administrative or
court decree applicable to such Existing Stockholder or such Existing
Stockholder's property.
(c) Other than as permitted by the Act, no Existing Stockholder has
distributed, nor will any Existing Stockholder distribute, any prospectus or
other offering material in connection with the offering and sale of the
Securities.
(d) None of the Existing Stockholders nor any trustee or beneficiary
of the Existing Stockholders is affiliated as a director, officer, partner,
stockholder, or otherwise with any securities broker or dealer which is a member
of the NASD or any other organization that owns or controls any member of the
NASD.
(e) No statement, representation, warranty or covenant made by the
Existing Stockholders in this Agreement or made in any certificate or document
required by this Agreement to be delivered to the Representatives was or will
be, when made, inaccurate, untrue or incorrect.
(f) Other than pursuant to this Agreement, no Existing Stockholder
has, directly or indirectly, (i) taken any action designed to cause or to result
in, or that has constituted or which might reasonably be expected to constitute,
the stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting
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<PAGE>
purchases of, the Securities or (B) paid or agreed to pay to any person any
compensation for soliciting another to purchase any other securities of the
Company.
3. Purchase, Sale and Delivery of the Securities.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each of the Underwriters, and
each of the Underwriters, severally and not jointly, agrees to purchase from the
Company, at a purchase price of $________ per share, the number of Firm
Securities set forth opposite the name of such Underwriter in Schedule 2 hereto.
One or more certificates in definitive form for the Firm Securities that the
several Underwriters have agreed to purchase hereunder, and in such denomination
or denominations and registered in such name or names as the Representatives may
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the purchase price therefor by certified or official bank
check in immediately available funds or, at the option of the Representatives by
wire transfer in same-day funds (the "Wired Funds") to the account of the
Company. Such delivery of and payment for the Firm Securities shall be made at
the offices of Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New
York 10038 at 9:30 A.M., New York time, on __________, 1997, or at such other
place, time or date as the Representatives and the Company may agree upon or as
the Representatives may determine pursuant to Section 9 hereof, such time and
date of delivery against payment being herein referred to as the "Firm Closing
Date". The Company will make such certificate or certificates for the Firm
Securities available for checking and packaging by the Representatives at the
offices in New York, New York of the Company's transfer agent or registrar or
such other location designated by the Underwriters to the Company at least 24
hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Securities as contemplated by the Prospectus,
the Company hereby grants to the several Underwriters an option to purchase,
severally and not jointly, the Option Securities. The purchase price to be paid
for any Option Securities shall be the same price per share as the price per
share for the Firm Securities set forth above in paragraph (a) of this Section
3, plus if the purchase and sale of any Option Securities takes place after the
Firm Closing Date and after the Firm Securities are trading "ex-dividend", an
amount equal to the dividends payable on such Option Securities. The option
granted hereby may be exercised as to all or any part of the Option Securities
from time to time within 30 days after the date of the Prospectus (or, if such
30th day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Securities prior to the exercise of such option. The Representatives may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Company setting forth the aggregate
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Securities. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm
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Closing Date. The time and date set forth in such notice, or such other time on
such other date as the Representatives and Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, is herein called the
"Option Closing Date" with respect to such Option Securities. Upon exercise of
the option as provided herein, the Company shall become obligated to sell to
each of the several Underwriters, and, subject to the terms and conditions
herein set forth, each of the Underwriters (severally and not jointly) shall
become obligated to purchase from the Company, the same percentage of the total
number of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) The Company hereby acknowledges that the wire transfer by or on behalf
of the Underwriters of the purchase price for any Securities does not constitute
closing of a purchase and sale of the Securities. Only execution and delivery of
a receipt for Securities by the Underwriters indicates completion of the closing
of a purchase of the Securities from the Company. Furthermore, in the event that
the Underwriters wire funds to the Company prior to the completion of the
closing of a purchase of Securities, the Company hereby acknowledges that until
the Underwriters execute and deliver a receipt for the Securities, by facsimile
or otherwise, the Company will not be entitled to the wired funds and shall
return the wired funds to the Underwriters as soon as practicable (by wire
transfer of same-day funds) upon demand. In the event that the closing of a
purchase of Securities is not completed and the wired funds are not returned by
the Company to the Underwriters within one business day of their receipt by the
Company, the Company agrees to pay to the Underwriters in respect of each day
the wired funds are not returned by it, in same-day funds, interest on the
amount of such wired funds in an amount representing the Underwriters' cost of
financing as reasonably determined by Prudential Securities Incorporated.
(d) It is understood that any of you, individually and not as one of the
Representatives, may (but shall not be obligated to) make payment on behalf of
any Underwriter or Underwriters for any of the Securities to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such Underwriter
or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release of
the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company and the Existing Stockholders. The Company
covenants and agrees with each of the Underwriters as to the matters set forth
in subparagraphs (a) through (n) below and each of the Existing Stockholders
covenants and agrees with each of the Underwriters as to the matters set forth
in subparagraph (o) below:
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(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required to
be delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) except as required by law,
will not file with the Commission the prospectus, Term Sheet or the amendment
referred to in the second sentence of Section 2(a) hereof, any amendment or
supplement to such Prospectus, Term Sheet or any amendment to the Registration
Statement or any Rule 462(b) Registration Statement of which the Representatives
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Representatives
shall not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Representatives or counsel for the Underwriters,
any amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the several Underwriters, and will use its
best efforts to cause any such amendment to the Registration Statement to be
declared effective by the Commission as promptly as possible. The Company will
advise the Representatives, promptly after receiving notice thereof, of the time
when the Registration Statement or any amendment thereto has been filed or
declared effective or the Prospectus or any amendment or supplement thereto has
been filed and will furnish the Representatives with copies of such documents
and provide evidence satisfactory to the Representatives of each such filing or
effectiveness.
(b) The Company will advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any amendment thereto or
any stop order or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the
suspension of the qualification of the Securities for offering or sale in any
jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such order or stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(c) The Company will cooperate with you and counsel for the Underwriters
and take such actions as you may reasonably request in connection with the
qualification of the Securities for offering and sale under the securities or
blue sky laws of such jurisdictions as the Representatives may designate and
will continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Securities, provided, however, that in
connection
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therewith the Company shall not be required to qualify as a foreign corporation
or to execute a general consent to service of process in any jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (ii) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters a conformed copy of the registration
statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (ii) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (iii) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (iii) of this sentence, the Company, not
later than (A) 6:00 PM, New York City time, on the date of determination of the
initial public offering price, if such determination occurred at or prior to
10:00 A.M., New York City time, on such date or (B) 2:00 PM, New York City time,
on the business day following the date of determination of the initial public
offering price, if such determination occurred after 10:00 A.M., New York City
time, on such date, will deliver to the Underwriters, without charge, as many
copies of the Prospectus and any amendment or supplement thereto as the
Representatives may reasonably request for purposes of confirming orders that
are expected to settle on the Firm Closing Date. The Company will provide or
cause to be provided to each of the Representatives, and to each Underwriter
that so requests in writing, a copy of each report on Form SR filed by the
Company as required by Rule 463 under the Act.
(f) The Company, as soon as practicable, will make generally available to
its securityholders and to the Representatives a combined earnings statement of
the Company and the Subsidiaries that satisfies the provisions of Section 11(a)
of the Act and Rule 158 thereunder, covering a period of at least 12 months
beginning after the effective date of the Registration Statement.
(g) The Company will apply the net proceeds from the sale of the
Securities substantially as set forth under "Use of Proceeds" in the Prospectus.
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(h) The Company will not, directly or indirectly, without the prior
written consent of the Representatives, on behalf of the Underwriters, offer,
sell, offer to sell, pledge or contract to sell or 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, sell or dispose) of
any shares of Common Stock or of any equity securities of the Company
substantially similar thereto or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date hereof, except pursuant to this Agreement and except for
issuances by the Company of employee stock options or warrants which are
exerciseable after the 180th day after the date hereof.
(i) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (ii) (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (B) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(j) The Company has obtained or will obtain the agreements described in
Section 7(f) hereof prior to the Firm Closing Date.
(k) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your reasonable opinion the market price of the Common
Stock has been or is likely to be materially affected (regardless of whether
such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after notice from you advising the Company to
the effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
(l) If the Company elects to rely on Rule 462(b), the Company shall file a
Rule 462(b) Registration Statement with the Commission in compliance with Rule
462(b) and pay the applicable fees in accordance with Rule 111 promulgated under
the Act, each by the earlier of (i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).
(m) The Company will cause the Securities to be duly included for
quotation on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market or listed
on any national securities exchange for a reasonable period of time following
the Firm Closing Date.
(n) The Company will take no action to prevent consummation of the
Reorganization Transactions.
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(o) The Existing Stockholders will not, directly or indirectly, without
the prior written consent of Wheat, First Securities, Inc., on behalf of the
Underwriters, offer, sell, offer to sell, pledge, contract to sell or grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge or grant of any option to purchase, sell
or dispose) of any shares of Common Stock or of any equity securities of the
Company substantially similar thereto or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock for a period of 180 days
after the date hereof, except pursuant to this Agreement (other than transfers
among the Existing Stockholders or by natural persons who are Existing
Stockholders to their children or to trusts to be established for the benefit of
their children).
6. Expenses. The Company will pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the preparation, printing or other production and filing of documents with
respect to the transactions, including any costs of printing the registration
statement originally filed with respect to the Securities and any amendment
thereto, any Rule 462(b) Registration Statement, any Preliminary Prospectus and
the Prospectus and any amendment or supplement thereto, this Agreement and any
blue sky memoranda, (ii) all arrangements relating to the mailing and delivery
to the Underwriters of copies of the foregoing documents, (iii) the fees and
disbursements of the counsel, the accountants and any other experts or advisors
retained by the Company in connection with the registration of the Securities
under the Act, (iv) preparation, issuance and delivery to the Underwriters of
any certificates evidencing the Securities, including transfer agent's and
registrar's fees, (v) the qualification of the Securities under state securities
and blue sky laws, including filing fees and fees and disbursements of counsel
for the Underwriters relating thereto (not to exceed $7,500 in the aggregate),
(vi) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Securities, (vii) any quotation of the
Securities on the Nasdaq National Market, (viii) any meetings with prospective
investors in the Securities (other than as shall have been specifically approved
by the Representatives to be paid for by the Underwriters) and (ix) advertising
relating to the offering of the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). The Underwriters shall pay their own expenses, including the fees
and disbursements of Underwriter's counsel (but excluding those fees and
disbursements covered by clause (v) in the previous sentence); however, if the
sale of the Securities provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth in Section 7 hereof
is not satisfied, because this Agreement is terminated pursuant to Section 11
hereof or because of any failure, refusal or inability on the part of the
Company to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder other than by reason of a default by any of the
Underwriters, the Company will reimburse the Underwriters severally upon demand
for all out-of-pocket expenses (including all counsel fees and disbursements)
that shall have been incurred by them in connection with the proposed purchase
and sale of the Securities. The Company shall not in any event be liable to any
of the Underwriters for the loss of anticipated profits from the transactions
covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives'
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sole discretion, to the accuracy of the representations and warranties of the
Company contained herein as of the date hereof and as of the Firm Closing Date,
as if made on and as of the Firm Closing Date, to the accuracy of the statements
of the Company's officers made in writing pursuant to the provisions hereof, to
the performance by the Company of its covenants and agreements hereunder and to
the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, the Original Registration Statement or such amendment and, if
the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Securities or to the
Registration Statement, as the case may be, containing information regarding the
initial public offering price of the Securities has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto shall have been filed with the Commission in
the manner and within the time period required by Rules 434 and 424(b) under the
Act; no stop order suspending the effectiveness of the Registration Statement or
any amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company or the
Representatives, shall be threatened or contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received opinions, dated the Firm
Closing Date, of Morgan, Lewis & Bockius LLP ("Morgan Lewis"), counsel for the
Company and the Existing Stockholders, to the effect of paragraphs (i) through
(xii) and (xiv) through (xvi), below, and Reid & Priest LLP, special
intellectual property counsel for the Company, to the effect of paragraph (xiii)
below:
(i) the Company and each of the Subsidiaries have been duly
organized and are validly existing as corporations in good standing under
the laws of their respective jurisdictions of incorporation and are duly
qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where, to the knowledge
of such counsel, the ownership or leasing of their respective properties
or the conduct of their respective businesses requires such qualification,
except where the failure to be so qualified would not have a material
adverse effect on the consolidated financial position, shareholders'
equity or results of operations of the Company and the Subsidiaries;
(ii) the Company and each of the Subsidiaries have corporate power
to own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus,
and the Company has corporate power to enter into this Agreement and to
carry out all the terms and provisions hereof to be carried out by it;
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(iii) the issued shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
nonassessable and, except as otherwise set forth in the Prospectus, upon
consummation of the Reorganization Transactions on the terms and in the
manner contemplated by the Reorganization Agreements will be owned of
record by the Company free and clear of any perfected security interests
or, to the knowledge of such counsel, any other security interests,
liens, encumbrances, or claims;
(iv) upon consummation of the Reorganization Transactions, the
Company will have an authorized, issued and outstanding capitalization as
set forth in the Prospectus; upon consummation of the Reorganization
Transactions on the terms and in the manner contemplated by the
Reorganization Agreements, all of the issued shares of capital stock of
the Company will have been duly authorized and validly issued and fully
paid and nonassessable and will conform to the description of capital
stock in the Prospectus, and will not have been issued in violation of
or subject to any statutory preemptive rights or, to the knowledge of
such counsel, other rights to subscribe for or purchase securities; the
Firm Securities have been duly authorized by all necessary corporate
action of the Company and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued,
fully paid and nonassessable and will conform to the description of the
Firm Securities contained in the Prospectus as amended or supplemented
as of the Firm Closing Date; the Securities have been duly included for
trading on the Nasdaq National Market; no holders of outstanding shares
of capital stock of the Company are entitled as such to any statutory
preemptive or, to the knowledge of such counsel, other rights to
subscribe for any of the Securities; and, to the knowledge of such
counsel, no holders of securities of the Company are entitled to have
such securities registered under the Registration Statement which rights
have not been waived; and the form of certificates evidencing the
Securities complies as to form with the requirements of the Delaware
General Corporation Law, the charter and by laws of the Company and the
Nasdaq.
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company, provide
a fair summary of such provisions; and the statements set forth under the
headings "Risk Factors--Extensive and Increasing Regulation of Tobacco
Products," "Risk Factors--Tobacco Industry Litigation,"
"Business--Government Regulation; Tobacco Industry Litigation" and
"Business--Legal Proceedings" in the Prospectus, insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, provide a fair summary of such legal
matters, documents and proceedings;
(vi) the execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Company and this
Agreement has been duly executed and delivered by the Company, and is the
valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except (i) as enforceability hereof
may be limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equitable principles (whether
considered in an action at law or in equity) and (ii) that enforcement
of rights to indemnity and
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contribution hereunder may be limited by federal or state securities laws
or principles of public policy.
(vii) the execution and delivery of each of the Reorganization
Agreements have been duly authorized by the Trusts and the Subsidiaries or
the Company (as the case may be) and each of the Reorganization Agreements
has been duly executed and delivered by each Existing Stockholder, the
Subsidiaries and/or the Company party thereto, and each is
the valid and binding agreement of each Existing Stockholder, the
Subsidiaries or the Company, as the case may be, enforceable against such
Existing Stockholder, the Subsidiaries or the Company, party thereto,
in accordance with its terms; except (i) as enforceability hereof may be
limited by bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights
generally and by general equitable principles (whether considered in an
action at law or in equity) and (ii) that enforcement of rights to
indemnity and contribution hereunder may be limited by federal
or state securities laws or principles of public policy.
(viii) (A) to the knowledge of such counsel, no legal or
governmental proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any of
the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein,
and, to the knowledge of such counsel, no such proceedings have been
threatened against the Company or any of the Subsidiaries or with respect
to any of their respective properties and (B) to the knowledge of such
counsel, no contract or other document or federal statute or regulation
is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that
is not described therein or filed as required;
(ix) the issuance, offering and sale of the Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement or the
Reorganization Agreements to which it is a party, and the consummation of
the other transactions contemplated hereby or thereby do not, to the
knowledge of such counsel (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such as may be required
under state securities or blue sky laws in connection with the purchase
and distribution of the Securities by the Underwriters and the clearance
of such offering with the National Association of Securities Dealers,
Inc., or (B) conflict with or result in a breach or violation of any of
the terms and provisions of, or constitute a default under, any of the
agreements listed on Schedule 4 attached hereto (the "Material
Agreements"), or the charter documents or by-laws of the Company or any of
the Subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
known to such counsel and applicable to the Company or the Subsidiaries
or any of their properties;
(x) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and
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424(b) has been made in the manner and within the time period required by
Rules 434 and 424(b); and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or any
amendment thereto [or any Rule 462(b) Registration Statement] has been
issued, and to the knowledge of such counsel, no proceedings for that
purpose have been instituted or threatened or contemplated by the
Commission;
(xi) the Registration Statement originally filed with respect to the
Securities and each amendment thereto, [any Rule 462(b) Registration
Statement] and the Prospectus and any amendments and supplements
thereto made by the Company (in each case, other than the financial
statements, schedules and other financial and statistical information
contained therein, as to which such counsel need express no opinion),
as of their respective dates, comply as to form in all material respects
with the applicable requirements of the Act and the rules and regulations
of the Commission thereunder; provided, however, that in passing upon
such compliance as to form, such counsel may assume that the statements
made therein are complete and correct;
[(xii) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different," as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule
430A);]
(xiii) the Company and the Subsidiaries own or possess, or can
acquire on reasonable terms, all material patents, patent applications,
trademarks, service marks, trade names, licenses, copyrights and
proprietary or other confidential information currently employed by them
in connection with their respective businesses, and neither the Company
nor any such Subsidiary has received any notice of infringement of or
conflict with asserted rights of any third party with respect to any of
the foregoing which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and the
Subsidiaries;
(xiv) to the knowledge of such counsel, the Company and the
Subsidiaries possess all certificates, authorizations and permits issued
by the appropriate federal, state or foreign regulatory authorities
necessary to conduct their respective businesses, and neither the Company
nor any such Subsidiary has received any notice of proceedings relating to
the revocation or modification of any such certificate, authorization or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse change in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and the Subsidiaries;
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(xv) the Company is not and after giving effect to the offering and
sale of Securities, will not be an "investment company" or a person
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended;
(xvi) each Existing Stockholder has full legal right, and each
Trust has the power and authority, to enter into this Agreement and
each Reorganization Agreement to which it is a party. This Agreement
and each Reorganization Agreement has been duly executed and delivered
by or on behalf of each Existing Stockholder party thereto. The execution,
delivery and performance by each of the Existing Stockholders of this
Agreement and each Reorganization Agreement to which it is a party,
and the consummation of the transactions contemplated hereby and thereby
will not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default or cause an acceleration of
any obligation under any Material Agreement, or any order of any court or
governmental agency or authority known to such counsel and entered into in
any proceeding to which an Existing Stockholder was or is a party or by
which an Existing Stockholder is bound, or violate or conflict with any
applicable foreign, federal, state or local law, rule administrative
regulation or ordinance or administrative or court decree known to such
counsel and applicable to an Existing Stockholder or an Existing
Stockholder's property;
In rendering any such opinion, each such counsel may rely, as to matters
of fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company, the Existing Stockholders and public officials.
Morgan Lewis shall also state that, in the course of its review and
discussion of the contents of the Registration Statement and the Prospectus with
certain directors, officers and employees of the Company, representatives of the
Underwriters and representatives of counsel for the Underwriters, nothing has
come to such counsel's attention which would lead such counsel to believe that
the Registration Statement, as of its effective date and as of the Firm Closing
Date, and any amendment thereto made by the Company prior to such Firm Closing
Date, as of the date thereof, contained any untrue statement of a material fact
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus and any
amendment thereto made by the Company prior to such Firm Closing Date, as of the
date thereof, and as of the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided that in each
case, such counsel shall not be required to make any statement with respect to
the financial statements or other financial or statistical data.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
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(c) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Stroock & Stroock & Lavan LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Securities, the Registration
Statement and the Prospectus, and such other related matters as the
Representatives may reasonably require, and the Company shall have furnished to
such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(d) The Representatives shall have received from Ernst & Young LLP a
letter or letters dated, respectively, the date hereof and the Firm Closing
Date, in form and substance satisfactory to the Representatives, to the effect
of subparagraphs (i) through (v) below, and the Representatives shall have
received from J.H. Cohn LLP a letter or letters dated, respectively, the date
hereof and the Firm Closing Date, in form and substance satisfactory to the
Representatives, to the effect of subparagraphs (i), (ii) and (iv), below:
(i) they are independent accountants with respect to the Company and
its combined subsidiaries within the meaning of the Act and the applicable
rules and regulations thereunder;
(ii) in their opinion, the audited combined financial statements and
schedules, if any, examined by them and included in the Registration
Statement and the Prospectus comply as to form in all material respects
with the applicable accounting requirements of the Act and the related
published rules and regulations;
(iii) at a specific date not more than five business days prior to
the date of such letter, there were not any changes in the capital stock
or long-term debt of the Company and its combined subsidiaries or any
decreases in net current assets or stockholders' equity of the Company and
its combined subsidiaries, in each case compared with amounts shown on the
December 31, 1996 combined balance sheet included in the Registration
Statement and the Prospectus, or for the period from January 1, 1997 to
such specified date there were not any decreases, as compared with the
comparable period of the preceding year in sales, net income, income
before income taxes or total or per share amounts of net income of the
Subsidiaries, except in all instances for changes, decreases or increases
set forth in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its combined Subsidiaries and are included in the
Registration Statement and the Prospectus under the captions "Summary
Combined Financial Information" and "Selected Combined Financial Data",
and have compared such amounts, percentages and financial information with
such records of the combined Subsidiaries and with information derived
from such records and have found them to be in agreement, excluding any
questions of legal interpretation; and
(v) on the basis of a reading of the unaudited pro forma combined
condensed financial statements included in the Registration Statement and
the Prospectus, carrying out certain specified procedures that would not
necessarily reveal matters of significance with
24
<PAGE>
respect to the comments set forth in this subparagraph (v), inquiries of
certain officials of the Company and its combined subsidiaries who have
responsibility for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma adjustments to the
historical amounts in the unaudited pro forma combined condensed financial
statements, nothing came to their attention that caused them to believe
that the unaudited pro forma combined condensed financial statements do
not comply in form in all material respects with the applicable accounting
requirements of Rule 11-02 of Regulation S-X or that the pro forma
adjustments have not been properly applied to the historical amounts in
the compilation of such statements.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied
by a written explanation of the Company as to the significance thereof,
unless the Representatives deem such explanation unnecessary, and (B) such
changes, decreases or increases do not, in the sole judgment of the
Representatives, make it impractical or inadvisable to proceed with the
purchase and delivery of the Securities as contemplated by the
Registration Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall
include any amendment or supplement thereto at the date of such letter.
In two separate letters, which letters may be based upon
representations of each Subsidiary, in form and substance satisfactory to
the Representatives, dated the Firm Closing Date, each of J.H. Cohn LLP
and Ernst & Young LLP shall also state that each Subsidiary has been an S
corporation under Subchapter S of the Code since the respective date set
forth opposite its name on Schedule 3 until the day preceding the
consummation of the Reorganization Transactions, at which time each
Subsidiary validly shall have terminated its S Corporation status.
(e) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
and the Prospectus, as amended or supplemented as of the Firm Closing
Date, does not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading; the Company has performed all covenants and agreements
contained in this Agreement and satisfied all conditions contained in this
Agreement on its part to be performed or satisfied hereunder at or prior
to the Firm Closing
25
<PAGE>
Date; and no condition precedent to the Reorganization Transactions has
not been waived or satisfied other than the sale of the Securities under
this Agreement;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings for
that purpose have been instituted or, to the knowledge of the Company,
have been threatened or have been contemplated by the Commission; and
subsequent to the respective dates as of which information is given in the
Registration Statement and the Prospectus, neither the Company nor any of
the Subsidiaries has sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane,
accident or other calamity, whether or not covered by insurance, or from
any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development in the
outstanding capital stock or long-term debt of the Company or any of the
Subsidiaries or involving a prospective material adverse change, in the
condition (financial or otherwise), management, business prospects, net
worth, shareholders' equity or results of operations of the Company and
any of the Subsidiaries, taken as a whole, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment
or supplement thereto).
(f) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the Existing Stockholders to the effect that the
representations and warranties of the Existing Stockholders in this Agreement
are true and correct as if made on and as of the Firm Closing Date; the
Registration Statement, as amended as of the Firm Closing Date, does not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading, and the Prospectus, as
amended or supplemented as of the Firm Closing Date, does not include any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; the Existing Stockholders have performed
all covenants and agreements contained in this Agreement and satisfied all
conditions contained in this Agreement on their part to be performed or
satisfied hereunder at or prior to the Firm Closing Date; and no condition
precedent to the Reorganization Transactions has not been waived or satisfied
other than the sale of the Securities under this Agreement.
(g) The Representatives shall have received a certificate, dated the Firm
Closing Date, of each of the Existing Stockholders to the effect that such
Existing Stockholder does not have the right, and that to its knowledge no such
person has the right, contractual or otherwise, to request that the Company
register pursuant to the Act shares of capital stock of the Company held by such
Existing Stockholder or by any such person, upon the issuance and sale of the
Securities to the Underwriters hereunder, except to the extent that (A) such
shares are included in the Registration Statement, (B) such rights were waived
or not exercised or (C) such person was excluded from including any such shares
in the Registration Statement;
(h) The Representatives shall have received from each Existing
Stockholder, each person who is a director or officer of the Company an
agreement to the effect that such person will
26
<PAGE>
not, directly or indirectly, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, pledge, contract to sell or grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, or grant of any option to purchase, sell or dispose) of any shares of
Common Stock or of equity securities of the Company substantially similar
thereto or any securities convertible into, or exchangeable or exercisable for,
shares of Common Stock for a period of 180 days after the date hereof, except
pursuant to this Agreement (other than transfers among the Existing Stockholders
or by natural persons who are Existing Stockholders to their children or to
trusts to be established for the benefit of their children).
(i) The Reorganization Transactions shall have been consummated.
(j) On or before the Firm Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(k) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company or the Existing Stockholders shall
furnish to the Representatives such conformed copies of such opinions,
certificates, letters and documents in such quantities as the Representatives
and counsel for the Underwriters shall reasonably request.
The respective obligations of the several Underwriters to purchase and pay
for any Option Securities shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Securities, except that all references
to the Firm Securities and the Firm Closing Date shall be deemed to refer to
such Option Securities and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
(a) The Company and the Existing Stockholders, jointly and severally,
agree to indemnify and hold harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934 (the "Exchange Act"), against
any losses, claims, damages or liabilities, joint or several, to which such
Underwriter or such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company or the Existing Stockholders in Section 2 of this Agreement,
27
<PAGE>
(ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto,
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, a material fact
required to be stated therein or necessary to make the statements therein
(in the case of the Prospectus, in light of the circumstances under which
they were made) not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with
investigating, defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action;
provided, however, that the Company and the Existing Stockholders will not
be liable in any such case to the extent that any such loss, claim, damage
or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
such audio or visual materials in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through
the Representatives specifically for use therein; and provided, further,
that (ii) the Company and the Existing Stockholders will not be liable to
any Underwriter or any person controlling such Underwriter with respect to
any such untrue statement or omission made in any Preliminary Prospectus
that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the
written confirmation of the sale of such Securities to such person in any
case where such delivery of the Prospectus (as amended or supplemented) is
required by the Act, unless such failure to deliver the Prospectus (as
amended or supplemented) was a result of noncompliance by the Company with
Section 5(d) and (e) of this Agreement. This indemnity agreement will be
in addition to any liability which the Company may otherwise have. Neither
the Company nor the Existing Stockholders will not, without the prior
written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Securities, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not any such
Underwriter or any person who controls any such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.
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<PAGE>
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act and each
Existing Stockholder against any losses, claims, damages or liabilities to which
the Company or any such director, officer, controlling person or Existing
Stockholder may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment thereto,
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or any audio or visual materials, or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any audio or visual
materials or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein: and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer, controlling person or Existing
Stockholder in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof. This indemnity agreement
will be in addition to any liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnified
party from any liability which it may have to any indemnified party otherwise
than under this Section 8. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party and/or
that representation of such indemnified party may be inappropriate under
applicable standards of professional conduct due to actual or potential
differing interests between them, the indemnifying party shall not have the
right to direct the defense of such action on behalf of such indemnified party
or parties and such indemnified party or parties shall have the right to select
separate counsel to defend such action on behalf of such indemnified party or
parties. After notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof and approval by such indemnified
party of counsel appointed to defend such action, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses, other than reasonable costs of investigation, subsequently
incurred by such indemnified
29
<PAGE>
party in connection with the defense thereof, unless (i) the indemnified party
shall have employed separate counsel in accordance with the proviso to the next
preceding sentence (it being understood, however, that in connection with such
action the indemnifying party shall not be liable for the expenses of more than
one separate counsel (in addition to local counsel) in any one action or
separate but substantially similar actions in the same jurisdiction arising out
of the same general allegations or circumstances, designated by the
Representatives in the case of paragraph (a) of this Section 8, representing the
indemnified parties under such paragraph (a) who are parties to such action or
actions) or (ii) the indemnifying party does not promptly retain counsel
satisfactory to the indemnified party or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense of
the indemnifying party, except that if clause (i) or (iii) is applicable, such
liability shall only be in respect of the counsel referred to in such clause (i)
or (iii). After such notice from the indemnifying party to such indemnified
party, the indemnifying party will not be liable for the costs and expenses of
any settlement of such action effected by such indemnified party without the
consent of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the Company and Existing Stockholders on the one hand and the Underwriters on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law or if the
indemnified party failed to give notice required under subsection (c) above, not
only such relative benefits but also the relative fault of the Company and
Existing Stockholders on the one hand and the Underwriters on the other in
connection with the statements or omissions or alleged statements or omissions
that resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Existing Stockholders on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as, (i) with respect to the Company, the total proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters and (ii)
with respect to the Existing Stockholders, the aggregate principal amount of the
Notes received by the Existing Stockholders to the total underwriting discounts
and commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company and the
Existing Stockholders or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company, the Existing Stockholders and the Underwriters agree
that it would not be equitable if the amount of such contribution were
determined by pro rata or per capita allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take into account the equitable considerations referred to above
in this paragraph (d). Notwithstanding any other provision of this paragraph
(d), no Underwriter
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<PAGE>
shall be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by such Underwriter
under this Agreement, less the aggregate amount of any damages that such
Underwriter has otherwise been required to pay in respect of the same or any
substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute hereunder are
several in proportion to their respective underwriting obligations and not
joint, and contributions among Underwriters shall be governed by the provisions
of the Prudential Securities Incorporated Master Agreement Among Underwriters.
For purposes of this paragraph (d), each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, each Existing Stockholder and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, shall have the same rights to contribution as the Company.
(e) The liability of the Existing Stockholders under this Section 8 shall
be limited to the total principal amount of the Notes received by the Existing
Stockholders. Furthermore, no Existing Stockholder shall be required to provide
indemnification hereunder unless the Underwriters or controlling person seeking
indemnification shall have first made a demand for payment on the Company with
respect to any such loss, claim, liability or expense, and the Company shall
have failed to make such requested payment within 90 days after receipt of such
demand.
9. Default of Underwriters. If one or more Underwriters default in their
obligations to purchase Firm Securities or Option Securities hereunder and the
aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives), but if no such arrangements are
made by the Firm Closing Date or the related Option Closing Date, as the case
may be, the other Underwriters shall be obligated severally in proportion to
their respective commitments hereunder to purchase the Firm Securities or Option
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase. If one or more Underwriters so default with respect to an aggregate
number of Securities that is more than ten percent of the aggregate number of
Firm Securities or Option Securities, as the case may be, to be purchased by all
of the Underwriters at such time hereunder, and if arrangements satisfactory to
the Representatives are not made within 36 hours after such default for the
purchase by other persons (who may include one or more of the non-defaulting
Underwriters, including the Representatives) of the Securities with respect to
which such default occurs, this Agreement will terminate without liability on
the part of any non-defaulting Underwriter or the Company other than as provided
in Section 10 hereof. In the event of any default by one or more Underwriters as
described in this Section 9, the Representatives shall have the right to
postpone the Firm Closing Date or the Option Closing Date, as the case may be,
established as provided in Section 3 hereof for not more than seven business
days in order that any necessary changes may be made in the arrangements or
documents for the purchase and
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<PAGE>
delivery of the Firm Securities or Option Securities, as the case may be, and
the Company agrees to file promptly any amendments to the Registration Statement
or the Prospectus which in your opinion, exercised in consultation with Stroock
& Stroock & Lavan LLP, may thereby be made necessary. As used in this Agreement,
the term "Underwriter" includes any person substituted for an Underwriter under
this Section 9. Nothing herein shall relieve any defaulting Underwriter from
liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Existing Stockholders and the several Underwriters set forth in this Agreement
or made by or on behalf of them, respectively, pursuant to this Agreement shall
remain in full force and effect, regardless of (i) any investigation (or any
statement as to the results thereof) made by or on behalf of the Company, any of
its officers or directors, the Existing Stockholders, any Underwriter or any
controlling person referred to in Section 8 hereof and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 6 and 8 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
11. Termination.
(a) This Agreement may be terminated with respect to the Firm Securities
or any Option Securities in the sole discretion of the Representatives by notice
to the Company given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of the Subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company), in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and the Subsidiaries, taken as a
whole, except in each case as described in or contemplated by the
Prospectus (exclusive of any amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by the
Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or Nasdaq National Market shall
have been suspended or minimum or maximum prices shall have been
established on either such exchange or for such market system;
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
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(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or inadvisable
to proceed with the public offering or the delivery of the Securities as
contemplated by the Registration Statement, as amended as of the date
hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in the
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(b) and 8 hereof. The Underwriters confirm that such statements (to
such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if sent
to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Wheat, First Securities,
Inc., Riverfront Plaza, 901 East Byrd Street, Richmond, Virginia 23219,
Attention: Corporate Finance Department (telecopier number (804) 782-3440); and
if sent to the Company or any Existing Stockholder, shall be delivered or sent
by mail, telex or facsimile transmission and confirmed in writing to the Company
or any Existing Stockholder at 301 Route 10 East, Whippany, New Jersey 07981;
provided, however, that any notice to any Underwriter pursuant to Section 8
hereof shall be delivered or sent by reliable courier, first-class mail, telex
or facsimile transmission to such Underwriter at its address set forth in the
Underwriter's Questionnaire, which address will be supplied to the Company or
the Existing Stockholders by you on request. Any such statements, requests,
notices or agreement shall take effect upon receipt thereof.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Existing Stockholders, the Company
and their respective successors and legal representatives, and nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
other person any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of such persons and for the benefit of no other person except
that (i) the indemnities of the Company and the Existing Stockholders contained
in Section 8 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 8 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement, the Existing Stockholders and any person or persons who
control the Company within the meaning of Section 15 of the Act or Section 20 of
the
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Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a
successor or assignee because of such purchase.
15. Time of the Essence. Time shall be of the essence in this Agreement.
16. Business Day. As used herein, the term "business day" shall mean any
day when the Commission's Office in Washington, D.C. is open for business.
17. Captions. The captions in this Agreement are included solely for
convenience of reference and shall not be deemed to be a part of this Agreement.
18. Applicable Law. The validity and interpretation of this Agreement, and
the terms and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to any
provisions relating to conflicts of laws.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters. It is understood that your acceptance of this Agreement on
behalf of each of the Underwriters is pursuant to the authority set forth in a
form of Agreement Among Underwriters, the form of which will be submitted to the
Company for examination, upon request, but without warranty on your part as to
the authority of the signers thereof.
Very truly yours,
800-JR CIGAR, INC.
By:
------------------------------
[Title]
LEWIS I. ROTHMAN
---------------------------------
LAVONDA M. ROTHMAN
---------------------------------
TRUST F/B/O SHANE ROTHMAN
---------------------------------
Lewis I. Rothman, Trustee
---------------------------------
LaVonda M. Rothman, Trustee
---------------------------------
Samuel Bornstein, Special Trustee
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TRUST F/B/O MARNI ROTHMAN
---------------------------------
Lewis I. Rothman, Trustee
---------------------------------
LaVonda M. Rothman, Trustee
---------------------------------
Samuel Bornstein, Special Trustee
TRUST F/B/O SAMANTHA ROTHMAN
---------------------------------
Lewis I. Rothman, Trustee
---------------------------------
LaVonda M. Rothman, Trustee
---------------------------------
Samuel Bornstein, Special Trustee
TRUST F/B/O LUKE ROTHMAN
---------------------------------
Lewis I. Rothman, Trustee
---------------------------------
LaVonda M. Rothman, Trustee
---------------------------------
Samuel Bornstein, Special Trustee
36
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
WHEAT, FIRST SECURITIES, INC.
By: WHEAT, FIRST SECURITIES, INC.
J.C. BRADFORD & CO.
By:
----------------------------
For itself and on behalf of the Representatives.
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SCHEDULE 1
EXISTING STOCKHOLDERS
Lewis I. Rothman
LaVonda M. Rothman
Trust f/b/o Shane Rothman
(LaVonda and Lewis Rothman,
Trustees and Samuel Bornstein,
Special Trustee)
Trust f/b/o Marni Rothman
(LaVonda and Lewis Rothman,
Trustees and Samuel Bornstein,
Special Trustee)
Trust f/b/o Samantha Rothman
(LaVonda and Lewis Rothman,
Trustees and Samuel Bornstein,
Special Trustee)
Trust f/b/o Luke Rothman
(LaVonda and Lewis Rothman,
Trustees and Samuel Bornstein,
Special Trustee)
38
<PAGE>
SCHEDULE 2
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
- ----------- ---------------
Wheat, First Securities, Inc. ...
J.C. Bradford & Co. ...
_______________
Total ..............
39
<PAGE>
SCHEDULE 3
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Date of
Name Incorporation S Corporation Election
- ---- --------------- ----------------------
<S> <C> <C>
J.R. Tobacco of America, Inc. North Carolina
Cigars of Santa Clara, N.A., Inc. North Carolina
J.N.R. Grocery Corp. New York
J.R. Tobacco NC, Inc. North Carolina
J&R Tobacco (New Jersey) Corp. New Jersey
J.R. Tobacco Company of Michigan, Inc. Michigan
J.R-46th Street, Inc. New York
J.R. Tobacco Outlet Inc. New Jersey
J.R. Statesville, Inc. North Carolina
JR Cigar (DC), Inc. District of Columbia
</TABLE>
40
<PAGE>
SCHEDULE 4
MATERIAL AGREEMENTS
The Company's 1997 Long-Term Incentive Plan
The Company's 1997 Non-Employee Directors' Stock Plan
The Company's Employee Stock Purchase Plan
1997 Employee Bonus Pool Plan
Employment Agreement, dated March 13, 1997 between the Company and Lewis I.
Rothman
Employment Agreement, dated March 13, 1997 between the Company and
LaVonda M. Rothman
Employment Agreement, dated March 13, 1997 between the Company and Jane Vargas
Management Agreement dated , 1997 by and between MC Management
and the Company
Indemnification Agreements
Contribution Agreement dated , 1997 by and among Lewis I. Rothman,
LaVonda M. Rothman, the Shane Rothman Trust, the Luke Rothman Trust, the
Marni Rothman Trust, the Samantha Rothman Trust and the Company
Tax Agreement dated , 1997 by and among Lewis I. Rothman, LaVonda M.
Rothman, the Shane Rothman Trust, the Luke Rothman Trust, the Marni Rothman
Trust, the Samantha Rothman Trust and the Company
Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
N.A., Inc. and Nicaraguan-American Tobacco Company, Inc. ("Natco")
Agreement dated March 13, 1997 by and between Natco and Nicaraguan-American
Tobacco Sociedad Anonima, S.A.
Agreement dated March 13, 1997 by and between Cigars by Santa Clara, N.A., Inc.
and Tabacalera Nacional Dominicana, S.A.
Lease Agreement, dated July 19, 1993 by and between J.R. Tobacco of America,
Inc. and Interstate Development Company, as amended by First Amendment to Lease,
dated November 2, 1993, by and between J.R. Tobacco of America, Inc. and
Interstate Development Company
Lease Agreement, dated , 1996 by and between J.R. Outlet, Inc. and Casa
Blanca, Inc.
Note
Additional Note
41
<PAGE>
Exhibit 4.1
800-JR CIGAR, Inc.
JRC
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE FOR
CERTAIN DEFINITIONS
CUSIP 282491 10 97
THIS CERTIFIES THAT
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
800-JR CIGAR, Inc.
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and held
subject to the laws of The State of Delaware, the Certificate of
Incorporation of the Corporation, as amended, and the By-Laws of the
Corporation, as amended.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and sealed
with the facsimile seal of the Corporation.
Dated:
SECRETARY [800-JR CIGAR, Inc. Corporate Seal] PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
800-JR CIGAR, Inc.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ......................... Custodian .........................
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act .........................................................
in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
_____________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: _______________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 5.1
[MORGAN, LEWIS & BOCKIUS LETTERHEAD]
June 4, 1997
800 JR Cigar, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Re: Issuance of 3,450,000 Shares of Common Stock
pursuant to Registration Statement on Form S-1
----------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to 800-JR Cigar, Inc., a Delaware corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act"), of a Registration Statement on Form S-1 (the "Registration Statement")
relating to the public offering by the Company of an aggregate of 3,450,000
shares (including 450,000 shares subject to an over-allotment option) (the
"Shares") of the Company's Common Stock, $.01 par value per share.
In so acting, we have examined originals, or copies certified or otherwise
identified to our satisfaction, of (a) the Certificate of Incorporation of the
Company, (b) the By-laws of the Company and (c) such other documents, records,
certificates and other instruments of the Company as in our judgment are
necessary or appropriate for purposes of this opinion.
Based on the foregoing, we are of the following opinion:
1. The Company is a corporation duly incorporated and validly
existing in good standing under the laws of Delaware.
2. The Shares have been duly authorized by the Company and, when
issued and paid for as contemplated by the Registration
Statement, will be duly and validly issued and fully paid and
non-assessable.
<PAGE>
800 JR Cigar, Inc. [MORGAN, LEWIS & BOCKIUS LETTERHEAD]
June 4, 1997
Page 2
We render the foregoing opinion as members of the Bar of the State of New
York and express no opinion as to any law other than the General Corporation Law
of the State of Delaware.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Registration Statement. In giving this consent, we do not admit that we are
acting within the category of persons whose consent is required under Section 7
of the Act.
Very truly yours,
/s/ Morgan, Lewis & Bockius
<PAGE>
EXHIBIT 10.1
800-JR CIGAR, INC.
1997 LONG-TERM INCENTIVE PLAN
1. Purpose. The purpose of this 1997 Long-Term Incentive Plan (the "Plan")
of 800-JR Cigar, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company and its stockholders by providing a means to attract,
retain and reward officers (including directors who also serve as executive
officers) and other key employees and consultants of and service providers to
the Company and its subsidiaries and to enable such persons to acquire or
increase a proprietary interest in the Company, thereby promoting a closer
identity of interests between such persons and the Company's stockholders.
2. Definitions. The definitions of awards under the Plan, including
Options, SARs (including Limited SARs), Restricted Stock, Deferred Stock, Stock
granted as a bonus or in lieu of other awards, Dividend Equivalents and Other
Stock-Based Awards are set forth in Section 6 of the Plan. Such awards, together
with any other right or interest granted to a Participant under the Plan, are
termed "Awards." For purposes of the Plan, the following additional terms shall
be defined as set forth below:
(a) "Award Agreement" means any written agreement, contract, notice or
other instrument or document evidencing an Award.
(b) "Beneficiary" shall mean the person, persons, trust or trusts which
have been designated by a Participant in his or her most recent written
beneficiary designation filed with the Committee to receive the benefits
specified under the Plan upon such Participant's death or, if there is no
designated Beneficiary or surviving designated Beneficiary, then the person,
persons, trust or trusts entitled by will or the laws of descent and
distribution to receive such benefits.
(c) "Board" means the Board of Directors of the Company.
(d) A "Change in Control" shall be deemed to have occurred if:
(i) the date of the acquisition by any "person" (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
excluding the Company or any of its subsidiaries or affiliates or any
employee benefit plan sponsored by any of the foregoing, of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange Act) of
30% or more of either (x) the then outstanding shares of common stock
of the Company or (y) the then outstanding voting securities entitled
to vote generally in the election of directors; or
<PAGE>
(ii) the date the individuals who constitute the Board as of the
date of the Initial Public Offering (the "Incumbent Board") cease for
any reason to constitute at least a majority of the members of the
Board, provided that any individual becoming a director subsequent to
the effective date of this Agreement whose election, or nomination for
election by the Company=s stockholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
(other than any individual whose nomination for election to Board
membership was not endorsed by the Company=s management prior to, or
at the time of, such individual=s initial nomination for election)
shall be, for purposes of this Agreement, considered as though such
person were a member of the Incumbent Board; or
(iii) the consummation of a merger, consolidation,
recapitalization, reorganization, sale or disposition of all or a
substantial portion of the Company's assets, a reverse stock split of
outstanding voting securities, the issuance of shares of stock of the
Company in connection with the acquisition of the stock or assets of
another entity, provided, however, that a Change in Control shall not
occur under this clause (iii) if consummation of the transaction would
result in at least 70% of the total voting power represented by the
voting securities of the Company (or, if not the Company, the entity
that succeeds to all or substantially all of the Company=s business)
outstanding immediately after such transaction being beneficially
owned (within the meaning of Rule 13d-3 promulgated pursuant to the
Exchange Act) by at least 75% of the holders of outstanding voting
securities of the Company immediately prior to the transaction, with
the voting power of each such continuing holder relative to other such
continuing holders not substantially altered in the transaction.
(e) "Code" means the Internal Revenue Code of 1986, as amended from time
to time. References to any provision of the Code shall be deemed to include
regulations thereunder and successor provisions and regulations thereto.
(f) "Committee" means the committee appointed by the Board to administer
the Plan, or if no committee is appointed, the Board.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time. References to any provision of the Exchange Act shall be
deemed to include rules thereunder and successor provisions and rules thereto.
(h) "Fair Market Value" means, with respect to Stock, Awards, or other
property, the fair market value of such Stock, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee, provided, however, that (i) if the Stock is listed on a
national securities exchange or quoted in an interdealer quotation system, the
Fair Market Value of such Stock on a given date shall be based upon
2
<PAGE>
the last sales price or, if unavailable, the average of the closing bid and
asked prices per share of the Stock on such date (or, if there was no trading or
quotation in the Stock on such date, on the next preceding date on which there
was trading or quotation) as provided by one of such organizations, (ii) the
"fair market value" of Stock on the date on which shares of Stock are first
issued and sold pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission shall be the Initial Public
Offering price of the shares so issued and sold, as set forth in the first final
prospectus used in such offering and (iii) the "fair market value" of Stock
prior to the date of the Initial Public Offering shall be as determined by the
Board.
(i) "Initial Public Offering" shall mean an initial public offering of
shares of Stock in a firm commitment underwriting registered with the Securities
and Exchange Commission in compliance with the provisions of the 1933 Act.
(j) "ISO" means any Option intended to be and designated as an incentive
stock option within the meaning of Section 422 of the Code.
(k) "Participant" means a person who, at a time when eligible under
Section 5 hereof, has been granted an Award under the Plan.
(l) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(m) "Stock" means the Common Stock, par value $.01, of the Company and
such other securities as may be substituted for Stock or such other securities
pursuant to Section 4.
3. Administration.
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(i) to select persons to whom Awards may be granted;
(ii) to determine the type or types of Awards to be granted to
each such person;
3
<PAGE>
(iii) to determine the number of Awards to be granted, the number
of shares of Stock to which an Award will relate, the terms and
conditions of any Award granted under the Plan (including, but not
limited to, any exercise price, grant price or purchase price, any
restriction or condition, any schedule for lapse of restrictions or
conditions relating to transferability or forfeiture, exercisability
or settlement of an Award, and waivers or accelerations thereof,
performance conditions relating to an Award (including performance
conditions relating to Awards not intended to be governed by Section
7(f) and waivers and modifications thereof), based in each case on
such considerations as the Committee shall determine), and all other
matters to be determined in connection with an Award;
(iv) to determine whether, to what extent and under what
circumstances an Award may be settled, or the exercise price of an
Award may be paid, in cash, Stock, other Awards, or other property, or
an Award may be canceled, forfeited, or surrendered;
(v) to determine whether, to what extent and under what
circumstances cash, Stock, other Awards or other property payable with
respect to an Award will be deferred either automatically, at the
election of the Committee or at the election of the Participant;
(vi) to prescribe the form of each Award Agreement, which need
not be identical for each Participant;
(vii) to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem
necessary or advisable to administer the Plan;
(viii) to correct any defect or supply any omission or reconcile
any inconsistency in the Plan and to construe and interpret the Plan
and any Award, rules and regulations, Award Agreement or other
instrument hereunder; and
(ix) to make all other decisions and determinations as may be
required under the terms of the Plan or as the
4
<PAGE>
Committee may deem necessary or advisable for the administration of
the Plan.
Other provisions of the Plan notwithstanding, the Board may perform any function
of the Committee under the Plan, including without limitation for the purpose of
ensuring that transactions under the Plan by Participants who are then subject
to Section 16 of the Exchange Act in respect of the Company are exempt under
Rule 16b-3. In any case in which the Board is performing a function of the
Committee under the Plan, each reference to the Committee herein shall be deemed
to refer to the Board.
(b) Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive and binding on all persons,
including the Company, subsidiaries of the Company, Participants, any person
claiming any rights under the Plan from or through any Participant and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the time at which the Committee must or may make any determination
shall be determined by the Committee, and any such determination may thereafter
by modified by the Committee (subject to Section 8(e)). The express grant of any
specific power to the Committee, and the taking of any action by the Committee,
shall not be construed as limiting any power or authority of the Committee.
Except as provided under Section 7(f), the Committee may delegate to officers or
managers of the Company or any subsidiary of the Company the authority, subject
to such terms as the Committee shall determine, to perform such functions as the
Committee may determine, to the extent permitted under applicable law.
(c) Limitation of Liability. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants or any
executive compensation consultant, legal counsel or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination or
5
<PAGE>
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
its behalf shall, to the extent permitted by law, be fully indemnified and
protected by the Company with respect to any such action, determination or
interpretation.
4. Stock Subject to Plan.
(a) Amount of Stock Reserved. The total amount of Stock that may be
subject to outstanding awards, determined immediately after the grant of any
Award, shall not exceed 875,000 shares of Stock. Notwithstanding the foregoing,
the number of shares that may be delivered upon the exercise of ISOs shall not
exceed 875,000 (subject to adjustment as provided in Section 4(c)), provided,
however, that shares subject to ISOs shall not be deemed delivered if such ISOs
are forfeited, expire or otherwise terminate without delivery of shares to the
Participant. If an Award valued by reference to Stock may only be settled in
cash, the number of shares to which such Award relates shall be deemed to be
Stock subject to such Award for purposes of this Section 4(a). Any shares of
Stock delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued shares, treasury shares or shares acquired in the market
for a Participant's Account.
(b) Annual Per-Participant Limitations. During any calendar year, no
Participant may be granted Awards that may be settled by delivery of more than
500,000 shares of Stock, subject to adjustment as provided in Section 4(c). In
addition, with respect to Awards that may be settled in cash (in whole or in
part), no Participant may be paid during any calendar year cash amounts relating
to such Awards that exceed the greater of the Fair Market Value of the number of
shares of Stock set forth in the preceding sentence at the date of grant or the
date of settlement of Award. This provision sets forth two separate limitations,
so that Awards that may be settled solely by delivery of Stock will not operate
to reduce the amount of cash-only Awards, and vice versa; nevertheless, Awards
that may be settled in Stock or cash must not exceed either limitation.
(c) Adjustments. In the event that the Committee shall determine that any
recapitalization, forward or reverse split,
6
<PAGE>
reorganization, merger, consolidation, spin-off, combination, repurchase or
exchange of Stock or other securities, Stock dividend or other special, large
and non-recurring dividend or distribution (whether in the form of cash,
securities or other property), liquidation, dissolution, or other similar
corporate transaction or event, affects the Stock such that an adjustment is
appropriate in order to prevent dilution or enlargement of the rights of
Participants under the Plan, then the Committee shall, in such manner as it may
deem equitable, adjust any or all of (i) the number and kind of shares of Stock
reserved and available for Awards under Section 4(a), including shares reserved
for ISOs, (ii) the number and kind of shares of Stock specified in the Annual
Per-Participant Limitations under Section 4(b), (iii) the number and kind of
shares of outstanding Restricted Stock or other outstanding Award in connection
with which shares have been issued, (iv) the number and kind of shares that may
be issued in respect of other outstanding Awards and (v) the exercise price,
grant price or purchase price relating to any Award. (or, if deemed appropriate,
the Committee may make provision for a cash payment with respect to any
outstanding Award). In addition, the Committee is authorized to make adjustments
in the terms and conditions of, and the criteria included in, Awards (including,
without limitation, cancellation of unexercised or outstanding Awards, or
substitution of Awards using stock of a successor or other entity) in
recognition of unusual or nonrecurring events (including, without limitation,
events described in the preceding sentence and events constituting a Change in
Control) affecting the Company or any subsidiary or the financial statements of
the Company or any subsidiary, or in response to changes in applicable laws,
regulations, or accounting principles.
5. Eligibility. Executive officers and other key employees of the Company
and its subsidiaries, including any officer or member of the Board who is also
such an employee, and persons who provide consulting or other services to the
Company deemed by the Committee to be of substantial value to the Company, are
eligible to be granted Awards under the Plan. In addition, persons who have been
offered employment by the Company or its subsidiaries, and persons employed by
an entity that the Committee reasonably expects to become a subsidiary of the
Company, are eligible to be granted an Award under the Plan; provided, however,
that such Award shall be canceled if such
7
<PAGE>
person fails to commence such employment, or such entity fails to become a
subsidiary, and no payment of value may be made in connection with such Award
until such person has commenced such employment or until such entity becomes a
subsidiary.
6. Specific Terms of Awards.
(a) General. Awards may be granted on the terms and conditions set forth
in this Section 6. In addition, the Committee may impose on any Award or the
exercise thereof such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall determine, including terms
requiring forfeiture of Awards in the event of termination of employment or
service of the Participant. Except as provided in Section 6(f), 6(h), or 7(a),
or to the extent required to comply with requirements of applicable law, only
services may be required as consideration for the grant (but not the exercise)
of any Award.
(b) Options. The Committee is authorized to grant Options (including
"reload" options automatically granted to offset specified exercises of Options)
on the following terms and conditions ("Options"):
(i) Exercise Price. The exercise price per share of Stock
purchasable under an Option shall be determined by the Committee.
(ii) Time and Method of Exercise. The Committee shall determine
the time or times at which an Option may be exercised in whole or in
part, the methods by which such exercise price may be paid or deemed
to be paid, the form of such payment, including, without limitation,
cash, Stock, other Awards or awards granted under other Company plans
or other property (including notes or other contractual obligations of
Participants to make payment on a deferred basis, such as through
"cashless exercise" arrangements, to the extent permitted by
applicable law), and the methods by which Stock will be delivered or
deemed to be delivered to Participants.
(iii) ISOs. The terms of any ISO granted under the Plan shall
comply in all respects with the provisions
8
<PAGE>
of Section 422 of the Code, including but not limited to the
requirement that no ISO shall be granted with an exercise price less
than 100% (110% for an individual described in Section 422(b)(6) of
the Code) of the Fair Market Value of a share of Stock on the date of
grant and granted no more than ten years after the effective date of
the Plan. Anything in the Plan to the contrary notwithstanding, no
term of the Plan relating to ISOs shall be interpreted, amended, or
altered, nor shall any discretion or authority granted under the Plan
be exercised, so as to disqualify either the Plan or any ISO under
Section 422 of the Code, unless requested by the affected Participant.
(iv) Termination of Employment. Unless otherwise determined by
the Committee, upon termination of a Participant's employment with the
Company and its subsidiaries, such Participant may exercise any
Options during the three-month period following such termination of
employment, but only to the extent such Option was exercisable
immediately prior to such termination of employment. Notwithstanding
the foregoing, if the Committee determines that such termination is
for cause, all Options held by the Participant shall terminate as of
the termination of employment.
(c) Stock Appreciation Rights. The Committee is authorized to grant SARs
on the following terms and conditions ("SARs"):
(i) Right to Payment. An SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof, the
excess of (A) the Fair Market Value of one share of Stock on the date
of exercise (or, if the Committee shall so determine in the case of
any such right other than one related to an ISO, the Fair Market Value
of one share at any time during a specified period before or after the
date of exercise), over (B) the grant price of the SAR as determined
by the Committee as of the date of grant of the SAR, which, except as
provided in Section 7(a), shall be not less than the Fair Market Value
of one share of Stock on the date of grant.
9
<PAGE>
(ii) Other Terms. The Committee shall determine the time or times
at which an SAR may be exercised in whole or in part, the method of
exercise, method of settlement, form of consideration payable in
settlement, method by which Stock will be delivered or deemed to be
delivered to Participants, whether or not an SAR shall be in tandem
with any other Award, and any other terms and conditions of any SAR.
Limited SARs that may only be exercised upon the occurrence of a
Change in Control may be granted on such terms, not inconsistent with
this Section 6(c), as the Committee may determine. Limited SARs may be
either freestanding or in tandem with other Awards.
(d) Restricted Stock. The Committee is authorized to grant Restricted
Stock on the following terms and conditions ("Restricted Stock"):
(i) Grant and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, if any,
as the Committee may impose, which restrictions may lapse separately
or in combination at such times, under such circumstances, in such
installments, or otherwise, as the Committee may determine. Except to
the extent restricted under the terms of the Plan and any Award
Agreement relating to the Restricted Stock, a Participant granted
Restricted Stock shall have all of the rights of a stockholder
including, without limitation, the right to vote Restricted Stock or
the right to receive dividends thereon.
(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable
restriction period, Restricted Stock that is at that time subject to
restrictions shall be forfeited and reacquired by the Company;
provided, however, that the Committee may provide, by rule or
regulation or in any Award Agreement, or may determine in any
individual case, that restrictions or forfeiture conditions relating
to Restricted Stock will be waived in whole or in part in the event of
termination resulting from specified causes.
10
<PAGE>
(iii) Certificates for Stock. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall determine.
If certificates representing Restricted Stock are registered in the
name of the Participant, such certificates may bear an appropriate
legend referring to the terms, conditions, and restrictions applicable
to such Restricted Stock, the Company may retain physical possession
of the certificate, and the Participant shall have delivered a stock
power to the Company, endorsed in blank, relating to the Restricted
Stock.
(iv) Dividends. Dividends paid on Restricted Stock shall be
either paid at the dividend payment date in cash or in shares of
unrestricted Stock having a Fair Market Value equal to the amount of
such dividends, or the payment of such dividends shall be deferred
and/or the amount or value thereof automatically reinvested in
additional Restricted Stock, other Awards, or other investment
vehicles, as the Committee shall determine or permit the Participant
to elect. Stock distributed in connection with a Stock split or Stock
dividend, and other property distributed as a dividend, shall be
subject to restrictions and a risk of forfeiture to the same extent as
the Restricted Stock with respect to which such Stock or other
property has been distributed, unless otherwise determined by the
Committee.
(e) Deferred Stock. The Committee is authorized to grant Deferred Stock
subject to the following terms and conditions ("Deferred Stock"):
(i) Award and Restrictions. Delivery of Stock will occur upon
expiration of the deferral period specified for an Award of Deferred
Stock by the Committee (or, if permitted by the Committee, as elected
by the Participant). In addition, Deferred Stock shall be subject to
such restrictions as the Committee may impose, if any, which
restrictions may lapse at the expiration of the deferral period or at
earlier specified times, separately or in combination, in installments
or otherwise, as the Committee may determine.
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(ii) Forfeiture. Except as otherwise determined by the Committee,
upon termination of employment or service (as determined under
criteria established by the Committee) during the applicable deferral
period or portion thereof to which forfeiture conditions apply (as
provided in the Award Agreement evidencing the Deferred Stock), all
Deferred Stock that is at that time subject to such forfeiture
conditions shall be forfeited; provided, however, that the Committee
may provide, by rule or regulation or in any Award Agreement, or may
determine in any individual case, that restrictions or forfeiture
conditions relating to Deferred Stock will be waived in whole or in
part in the event of termination resulting from specified causes.
(f) Bonus Stock and Awards in Lieu of Cash Obligations. The Committee is
authorized to grant Stock as a bonus, or to grant Stock or other Awards in lieu
of Company obligations to pay cash under other plans or compensatory
arrangements.
(g) Dividend Equivalents. The Committee is authorized to grant Dividend
Equivalents entitling the Participant to receive cash, Stock, other Awards or
other property equal in value to dividends paid with respect to a specified
number of shares of Stock ("Dividend Equivalents"). Dividend Equivalents may be
awarded on a free-standing basis or in connection with another Award. The
Committee may provide that Dividend Equivalents shall be paid or distributed
when accrued or shall be deemed to have been reinvested in additional Stock,
Awards or other investment vehicles, and subject to such restrictions on
transferability and risks of forfeiture, as the Committee may specify.
(h) Other Stock-Based Awards. The Committee is authorized, subject to
limitations under applicable law, to grant such other Awards that may be
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on, or related to, Stock and factors that may influence the
value of Stock, as deemed by the Committee to be consistent with the purposes of
the Plan, including, without limitation, convertible or exchangeable debt
securities, other rights convertible or exchangeable into Stock, purchase rights
for Stock, Awards with value and payment contingent upon performance of the
Company or any other factors designated by the Committee
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and Awards valued by reference to the book value of Stock or the value of
securities of or the performance of specified subsidiaries ("Other Stock Based
Awards"). The Committee shall determine the terms and conditions of such Awards.
Stock issued pursuant to an Award in the nature of a purchase right granted
under this Section 6(h) shall be purchased for such consideration, paid for at
such times, by such methods, and in such forms, including, without limitation,
cash, Stock, other Awards, or other property, as the Committee shall determine.
Cash awards, as an element of or supplement to any other Award under the Plan,
may be granted pursuant to this Section 6(h).
7. Certain Provisions Applicable to Awards.
(a) Stand-Alone, Additional, Tandem, and Substitute Awards. Awards granted
under the Plan may, in the discretion of the Committee, be granted either alone
or in addition to, in tandem with or in substitution for any other Award granted
under the Plan or any award granted under any other plan of the Company, any
subsidiary or any business entity to be acquired by the Company or a subsidiary,
or any other right of a Participant to receive payment from the Company or any
subsidiary. Awards granted in addition to or in tandem with other Awards or
awards may be granted either as of the same time as or a different time from the
grant of such other Awards or awards.
(b) Term of Awards. The term of each Award shall be for such period as may
be determined by the Committee; provided, however, that in no event shall the
term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
(c) Form of Payment Under Awards. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a subsidiary
upon the grant, exercise or settlement of an Award may be made in such forms as
the Committee shall determine, including, without limitation, cash, Stock, other
Awards or other property, and may be made in a single payment or transfer, in
installments or on a deferred basis. Such payments may include, without
limitation, provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of
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Dividend Equivalents in respect of installment or deferred payments denominated
in Stock.
(d) Rule 16b-3 Compliance.
(i) Six-Month Holding Period. Unless a Participant could otherwise
dispose of equity securities, including derivative securities,
acquired under the Plan without incurring liability under
Section 16(b) of the Exchange Act, equity securities acquired
under the Plan must be held for a period of six months
following the date of such acquisition, provided that this
condition shall be satisfied with respect to a derivative
security if at least six months elapse from the date of
acquisition of the derivative security to the date of
disposition of the derivative security (other than upon
exercise or conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a Participant who
is then subject to Section 16 of the Exchange Act in respect
of the Company, the Committee shall implement transactions
under the Plan and administer the Plan in a manner that will
ensure that each transaction by such a Participant is exempt
from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been given to
the Participant regarding the non-exempt nature of such
transaction. The Committee may authorize the Company to
repurchase any Award or shares of Stock resulting from any
Award in order to prevent a Participant who is subject to
Section 16 of the Exchange Act from incurring liability under
Section 16(b). Unless otherwise specified by the Participant,
equity securities, including derivative securities, acquired
under the Plan which are disposed of by a Participant shall be
deemed to be disposed of in the order acquired by the
Participant.
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(e) Loan Provisions. With the consent of the Committee, and subject at all
times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee or arrange for a loan
or loans to a Participant with respect to the exercise of any Option or other
payment in connection with any Award, including the payment by a Participant of
any or all federal, state or local income or other taxes due in connection with
any Award. Subject to such limitations, the Committee shall have full authority
to decide whether to make a loan or loans hereunder and to determine the amount,
terms and provisions of any such loan or loans, including the interest rate to
be charged in respect of any such loan or loans, whether the loan or loans are
to be with or without recourse against the borrower, the terms on which the loan
is to be repaid and conditions, if any, under which the loan or loans may be
forgiven.
(f) Performance-Based Awards. The Committee may, in its discretion,
designate any Award the exercisability or settlement of which is subject to the
achievement of performance conditions as a performance-based Award subject to
this Section 7(f), in order to qualify such Award as "qualified
performance-based compensation" within the meaning of Code Section 162(m) and
regulations thereunder. The performance objectives for an Award subject to this
Section 7(f) shall consist of one or more business criteria and a targeted level
or levels of performance with respect to such criteria, as specified by the
Committee but subject to this Section 7(f). Performance objectives shall be
objective and shall otherwise meet the requirements of Section 162(m)(4)(C) of
the Code. Business criteria used by the Committee in establishing performance
objectives for Awards subject to this Section 7(f) shall be selected from among
the following:
(1) Annual return on capital;
(2) Annual earnings or earnings per share;
(3) Annual cash flow provided by operations;
(4) Changes in annual revenues; and/or
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(5) Strategic business criteria, consisting of one or more
objectives based on meeting specified revenue, market
penetration, geographic business expansion goals, cost
targets, and goals relating to acquisitions or divestitures.
The levels of performance required with respect to such business criteria may be
expressed in absolute or relative levels. Achievement of performance objectives
with respect to such Awards shall be measured over a period of not less than one
year nor more than five years, as the Committee may specify. Performance
objectives may differ for such Awards to different Participants. The Committee
shall specify the weighting to be given to each performance objective for
purposes of determining the final amount payable with respect to any such Award.
The Committee may, in its discretion, reduce the amount of a payout otherwise to
be made in connection with an Award subject to this Section 7(f), but may not
exercise discretion to increase such amount, and the Committee may consider
other performance criteria in exercising such discretion. All determinations by
the Committee as to the achievement of performance objectives shall be in
writing. The Committee may not delegate any responsibility with respect to an
Award subject to this Section 7(f).
(g) Acceleration upon a Change of Control. Notwithstanding anything
contained herein to the contrary, all conditions and/or restrictions relating to
the continued performance of services and/or the achievement of performance
objectives with respect to the exercisability or full enjoyment of an Award
shall immediately lapse upon a Change in Control, provided, however, that such
lapse shall not occur if (i) it is intended that the transaction constituting
such Change in Control be accounted for as a pooling of interests under
Accounting Principles Board Option No. 16 (or any successor thereto), and
operation of this Section 7(g) would otherwise violate Paragraph 47(c) thereof,
or (ii) the Committee, in its discretion, determines that such lapse shall not
occur, provided, further, that the Committee shall not have the discretion
granted in clause (ii) if it is intended that the transaction constituting such
Change in Control be accounted for as a pooling of interests under Accounting
Principles Board Option No. 16 (or any successor thereto), and such discretion
would otherwise violate Paragraph 47(c) thereof.
8. General Provisions.
(a) Compliance With Laws and Obligations. The Company shall not be
obligated to issue or deliver Stock in connection with any Award or take any
other action under the Plan in a transaction
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subject to the requirements of any applicable securities law, any requirement
under any listing agreement between the Company and any national securities
exchange or automated quotation system or any other law, regulation or
contractual obligation of the Company until the Company is satisfied that such
laws, regulations, and other obligations of the Company have been complied with
in full. Certificates representing shares of Stock issued under the Plan will be
subject to such stop-transfer orders and other restrictions as may be applicable
under such laws, regulations and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
(b) Limitations on Transferability. Awards and other rights under the Plan
will not be transferable by a Participant except by will or the laws of descent
and distribution or to a Beneficiary in the event of the Participant's death,
shall not be pledged, mortgaged, hypothecated or otherwise encumbered, or
otherwise subject to the claims of creditors, and, in the case of ISOs and SARs
in tandem therewith, shall be exercisable during the lifetime of a Participant
only by such Participant or his guardian or legal representative; provided,
however, that such Awards and other rights (other than ISOs and SARs in tandem
therewith) may be transferred to one or more transferees during the lifetime of
the Participant to the extent and on such terms as then may be permitted by the
Committee.
(c) No Right to Continued Employment or Service. Neither the Plan nor any
action taken hereunder shall be construed as giving any employee or other person
the right to be retained in the employ or service of the Company or any of its
subsidiaries, nor shall it interfere in any way with the right of the Company or
any of its subsidiaries to terminate any employee's employment or other person's
service at any time.
(d) Taxes. The Company and any subsidiary is authorized to withhold from
any Award granted or to be settled, any delivery of Stock in connection with an
Award, any other payment relating to an Award or any payroll or other payment to
a Participant amounts of withholding and other taxes due or potentially payable
in connection with any transaction involving an Award, and to take such other
action as the Committee may deem advisable to enable the Company and
Participants to satisfy obligations for the payment of withholding taxes and
other tax obligations relating to any Award.
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This authority shall include authority to withhold or receive Stock or other
property and to make cash payments in respect thereof in satisfaction of a
Participant's tax obligations.
(e) Changes to the Plan and Awards. The Board may amend, alter, suspend,
discontinue or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any such action shall be subject to the approval of the Company's stockholders
at or before the next annual meeting of stockholders for which the record date
is after such Board action if such stockholder approval is required by any
federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Stock may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
changes to the Plan to stockholders for approval; provided, however, that,
without the consent of an affected Participant, no such action may materially
impair the rights of such Participant under any Award theretofore granted to him
(as such rights are set forth in the Plan and the Award Agreement). The
Committee may waive any conditions or rights under, or amend, alter, suspend,
discontinue, or terminate, any Award theretofore granted and any Award Agreement
relating thereto; provided, however, that, without the consent of an affected
Participant, no such action may materially impair the rights of such Participant
under such Award (as such rights are set forth in the Plan and the Award
Agreement).
(f) No Rights to Awards; No Stockholder Rights. No Participant or employee
shall have any claim to be granted any Award under the Plan, and there is no
obligation for uniformity of treatment of Participants and employees. No Award
shall confer on any Participant any of the rights of a stockholder of the
Company unless and until Stock is duly issued or transferred and delivered to
the Participant in accordance with the terms of the Award or, in the case of an
Option, the Option is duly exercised.
(g) Unfunded Status of Awards; Creation of Trusts. The Plan is intended to
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
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provided, however, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Stock, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
(h) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.
(i) No Fractional Shares. No fractional shares of Stock shall be issued or
delivered pursuant to the Plan or any Award. The Committee shall determine
whether cash, other Awards, or other property shall be issued or paid in lieu of
such fractional shares or whether such fractional shares or any rights thereto
shall be forfeited or otherwise eliminated.
(j) Compliance with Code Section 162(m). It is the intent of the Company
that employee Options, SARs and other Awards designated as Awards subject to
Section 7(f) shall constitute "qualified performance-based compensation" within
the meaning of Code Section 162(m). Accordingly, if any provision of the Plan or
any Award Agreement relating to such an Award does not comply or is inconsistent
with the requirements of Code Section 162(m), such provision shall be construed
or deemed amended to the extent necessary to conform to such requirements, and
no provision shall be deemed to confer upon the Committee or any other person
discretion to increase the amount of compensation otherwise payable in
connection with any such Award upon attainment of the performance objectives.
(k) Governing Law. The validity, construction and effect of the Plan, any
rules and regulations relating to the Plan and any Award Agreement shall be
determined in accordance with the laws of the State of Delaware, without giving
effect to principles of conflicts of laws, and applicable federal law.
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(l) Effective Date; Plan Termination. The Plan shall become effective as
of the date of its adoption by the Board and approval of the Company=s
stockholders, and shall continue in effect until terminated by the Board.
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EXHIBIT 10.2
800-JR CIGAR, INC.
1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
1. Purpose. The purpose of this 1997 Non-Employee Directors' Stock Plan
(the "Plan") of 800-JR Cigar, Inc., a Delaware corporation (the "Company"), is
to advance the interests of the Company and its stockholders by providing a
means to attract and retain highly qualified persons to serve as non-employee
directors of the Company and to enable such persons to acquire or increase a
proprietary interest in the Company, thereby promoting a closer identity of
interests between such persons and the Company's stockholders.
2. Definitions. In addition to terms defined elsewhere in the Plan, the
following are defined terms under the Plan:
(a) "Board" means the Board of Directors of the Company.
(b) A "Change in Control" shall be deemed to have occurred on:
(i) the date of the acquisition by any "person" (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
excluding the Company or any of its subsidiaries or affiliates or
any employee benefit plan sponsored by any of the foregoing, of
beneficial ownership (within the meaning of Rule 13d-3 under the
Exchange Act) of 30% or more of either (x) the then outstanding
shares of common stock of the Company or (y) the then outstanding
voting securities entitled to vote generally in the election of
directors; or
(ii) the date the individuals who constitute the Board as of
the date of the Initial Public Offering (the "Incumbent Board")
cease for any reason to constitute at least a majority of the
members of the Board, provided that any individual becoming a
director subsequent to the effective date of this Agreement whose
election, or nomination for election by the Company's stockholders,
was approved by a vote of at least a majority of the directors then
comprising the Incumbent Board (other than any individual whose
nomination for election to Board membership was not endorsed by the
Company's management prior to, or at the time of, such individual's
initial nomination for election) shall be, for purposes of this
Agreement, considered as though such person were a member of the
Incumbent Board; or
(iii) the consummation of a merger, consolidation,
recapitalization, reorganization, sale or disposition of all or a
substantial portion of the Company's assets, a reverse stock split
of outstanding voting securities, the issuance of shares
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of stock of the Company in connection with the acquisition of the
stock or assets of another entity, provided, however, that a Change
in Control shall not occur under this clause (iii) if consummation
of the transaction would result in at least 70% of the total voting
power represented by the voting securities of the Company (or, if
not the Company, the entity that succeeds to all or substantially
all of the Company's business) outstanding immediately after such
transaction being beneficially owned (within the meaning of Rule
13d-3 promulgated pursuant to the Exchange Act) by at least 75% of
the holders of outstanding voting securities of the Company
immediately prior to the transaction, with the voting power of each
such continuing holder relative to other such continuing holders not
substantially altered in the transaction.
(c) "Deferred Share" means a credit to a Participant's deferral account
under Section 7 which represents the right to receive one Share upon settlement
of the deferral account. Deferral accounts, and Deferred Shares credited
thereto, are maintained solely as bookkeeping entries by the Company evidencing
unfunded obligations of the Company.
(d) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
References to any provision of the Exchange Act shall be deemed to include rules
thereunder and successor provisions and rules thereto.
(e) "Fair Market Value" of a Share on a given date means the fair market
value of such Share determined by such methods or procedures as shall be
established from time to time by the Board, provided, however, that (i) if the
Shares are listed on a national securities exchange or quoted in an interdealer
quotation system, the Fair Market Value of such Shares on a given date shall be
based upon the last sales price or, if unavailable, the average of the closing
bid and asked prices per Share on such date (or, if there was no trading or
quotation in the Shares on such date, on the next preceding date on which there
was trading or quotation) as provided by one of such organizations, (ii) the
"fair market value" of the Shares on the date on which Shares are first issued
and sold pursuant to a registration statement filed with and declared effective
by the Securities and Exchange Commission shall be the Initial Public Offering
price of the Shares so issued and sold, as set forth in the first final
prospectus used in such offering and (iii) the "fair market value" of the Shares
prior to the date of the Initial Public Offering shall be as determined by the
Board.
(f) "Initial Public Offering" means an initial public offering of shares
in a firm commitment underwriting registered with the Securities and Exchange
Commission in compliance with the provisions of the Securities Act of 1933, as
amended.
(g) "Option" means the right, granted to a director under Section 6, to
purchase a specified number of Shares at the specified exercise price for a
specified period of time under the Plan. All Options will be non-qualified stock
options.
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(h) "Participant" means a person who, as a non-employee director of the
Company, has been granted an Option or Deferred Shares which remain outstanding
or who has elected to be paid fees in the form of Shares or Deferred Shares
under the Plan.
(i) "Rule 16b-3" means Rule 16b-3, as from time to time in effect and
applicable to the Plan and Participants, promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act.
(j) "Share" means a share of common stock, $.01 par value, of the Company
and such other securities as may be substituted for such Share or such other
securities pursuant to Section 8.
3. Shares Available Under the Plan. Subject to adjustment as provided in
Section 8, the total number of Shares reserved and available for issuance under
the Plan is 100,000. Such Shares may be authorized but unissued Shares, treasury
Shares, or Shares acquired in the market for the account of the Participant. For
purposes of the Plan, Shares that may be purchased upon exercise of an Option or
delivered in settlement of Deferred Shares will not be considered to be
available after such Option has been granted or Deferred Share credited, except
for purposes of issuance in connection with such Option or Deferred Share;
provided, however, that, if an Option expires for any reason without having been
exercised in full, the Shares subject to the unexercised portion of such Option
will again be available for issuance under the Plan.
4. Administration of the Plan. The Plan will be administered by the Board;
provided, however, that any action by the Board relating to the Plan will be
taken only if, in addition to any other required vote, such action is approved
by the affirmative vote of a majority of those directors who are not then
eligible to participate in the Plan.
5. Eligibility. Each director of the Company who, at the time an Option is
to be granted under Section 6 or at which fees are to be paid which could be
received in the form of Shares or deferred in the form of Deferred Shares under
Section 7, is not an employee of the Company or any subsidiary of the Company
will be eligible, at such date, to be granted an Option under Section 6 or
receive fees in the form of Shares or defer fees in the form of Deferred Shares
under Section 7. In addition, any person who, at the time the Company commences
an Initial Public Offering, has agreed to become a director upon consummation of
the Initial Public Offering will be eligible to be granted an Option under
Section 6. No person other than those specified in this Section 5 will be
eligible to participate in the Plan.
6. Options. An Option will be automatically granted (i) at the
commencement of the Initial Public Offering, to each person who is eligible
under Section 5 at that time, and thereafter (ii) at the effective date of
initial election to the Board, to each person so elected who is eligible under
Section 5 at that date. Notwithstanding the foregoing, any Option granted at the
commencement of the Initial Public Offering shall be canceled and forfeited if
the Initial
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Public Offering is not consummated or, in the case of an Option granted to a
person who has agreed to become a director, such person does not commence
serving as a non-employee director of the Company promptly following the
consummation of the Initial Public Offering.
(a) Number of Shares Subject to Automatic Option Grant. In the case of any
Option granted at the commencement of the Initial Public Offering, the number of
Shares to be subject to each Option shall be 10,000, subject to adjustment as
provided in Section 8. In the case of any Option granted thereafter, the number
of Shares to be subject to each Option shall be the number specified in the
preceding sentence or, if so determined by the Board, such other number of
Shares specified in the most recent resolution of the Board adopted on or prior
to the date of such grant.
(b) Exercise Price. The exercise price per Share purchasable upon exercise
of an Option will be equal to 100% of the Fair Market Value of a Share on the
date of grant of the Option.
(c) Option Expiration. A Participant's Option will expire at the earlier
of (i) 10 years after the date of grant or (ii) ninety (90) days after the date
the Participant ceases to serve as a director of the Company for any reason,
provided, however, that with respect to clause (ii), such Option shall be
exercisable during such ninety-day period only to the extent it was exercisable
pursuant to Section 6(d) on the date of such cessation.
(d) Exercisability. Each Option shall become exercisable in five equal
installments on each of the first, second, third, fourth and fifth anniversary
dates of the date the Option is granted, or at such earlier date specified by
the Board; provided, however, that unless otherwise determined by the Board, all
Options held by a Participant shall become immediately exercisable upon (i) a
Change in Control or (ii) the death of such Participant.
(e) Method of Exercise. A Participant may exercise an Option, in whole or
in part, at such time as it is exercisable and prior to its expiration, by
giving written notice of exercise to the Secretary of the Company, specifying
the Option to be exercised and the number of Shares to be purchased, and paying
in full the exercise price in cash (including by check) or by surrender of
Shares already owned by the Participant (except for Shares acquired from the
Company by exercise of an Option less than six months before the date of
surrender) having a Fair Market Value at the time of exercise equal to the
exercise price, or by a combination of cash and Shares.
7. Receipt of Shares or Deferred Shares In Lieu of Fees. Each director of
the Company may elect to be paid fees, in his or her capacity as a director
(including annual retainer fees for service on the Board, fees for service on a
Board committee, fees for service as chairman of a Board committee, and any
other fees paid to directors) in the form of Shares or Deferred Shares in lieu
of cash payment of such fees, if such director is eligible to do so under
Section 5
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at the date any such fee is otherwise payable. If so elected, payment of fees in
the form of Shares or Deferred Shares shall be made in accordance with this
Section 7.
(a) Elections. Each director who elects to be paid fees for a given
calendar year in the form of Shares or to defer such payment of fees in the form
of Deferred Shares for such year must file an irrevocable written election with
the Secretary of the Company no later than December 31 of the year preceding
such calendar year or such other date as may be specified by the Secretary;
provided, however, that a director serving at the time the Plan becomes
effective, and any director newly elected or appointed thereafter, may file an
election applicable to compensation payable for any period of service that has
not yet commenced within the year of such effectiveness, election, or
appointment prior to the commencement of such period of service. An election by
a director shall be deemed to be continuing and therefore applicable to
subsequent Plan years unless the director revokes or changes such election by
filing a new election form by the due date for such form specified in this
Section 7(a). The election must specify the following:
(i) A percentage of fees to be received in the form of Shares or
deferred in the form of Deferred Shares under the Plan; and
(ii) In the case of a deferral, the period or periods during which
settlement of Deferred Shares will be deferred (subject to such
limitations as may be specified by the Company's Secretary).
(b) Payment of Fees in the Form of Shares. At any date on which fees are
payable to a Participant who has elected to receive such fees in the form of
Shares, the Company will issue to such Participant, or to a designated third
party for the account of such Participant, a number of Shares having an
aggregate Fair Market Value at that date equal to the fees, or as nearly as
possible equal to the fees (but in no event greater than the fees), that would
have been payable at such date but for the Participant's election to receive
Shares in lieu thereof. If the Shares are to be credited to an account
maintained by the Participant and to the extent reasonably practicable without
requiring the actual issuance of fractional Shares, the Company shall cause
fractional Shares to be credited to the Participant's account. If fractional
Shares are not so credited, any part of the Participant's fees not paid in the
form of whole Shares will be payable in cash to the Participant (either paid
separately or included in a subsequent payment of fees, including a subsequent
payment of fees subject to an election under this Section 7).
(c) Deferral of Fees in the Form of Deferred Shares. The Company will
establish a deferral account for each Participant who elects to defer fees in
the form of Deferred Shares under this Section 7. At any date on which fees are
payable to a Participant who has elected to defer fees in the form of Deferred
Shares, the Company will credit such Participant's deferral account with a
number of Deferred Shares equal to the number of Shares having an aggregate Fair
Market Value at that date equal to the fees that otherwise would have been
payable at such
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date but for the Participant's election to defer receipt of such fees in the
form of Deferred Shares. The amount of Deferred Shares so credited shall include
fractional Shares calculated to at least three decimal places.
(d) Crediting of Dividend Equivalents. Whenever dividends are paid or
distributions made with respect to Shares, a Participant to whom Deferred Shares
are then credited in a deferral account shall be entitled to receive, as
dividend equivalents, an amount equal in value to the amount of the dividend
paid or property distributed on a single Share multiplied by the number of
Deferred Shares (including any fractional Share) credited to his or her deferral
account as of the record date for such dividend or distribution. Such dividend
equivalents shall be credited to the Participant's deferral account as a number
of Deferred Shares determined by dividing the aggregate value of such dividend
equivalents by the Fair Market Value of a Share at the payment date of the
dividend or distribution.
(e) Settlement of Deferred Shares. The Company will settle the
Participant's deferral account by delivering to the Participant (or his or her
beneficiary) a number of Shares equal to the number of whole Deferred Shares
then credited to his or her deferral account (or a specified portion in the
event of any partial settlement), together with cash in lieu of any fractional
Share remaining at a time that less than one whole Deferred Share is credited to
such deferral account. Such settlement shall be made at the time or times
specified in the Participant's election filed in accordance with Section 7(a);
provided, however, that a Participant may further defer settlement of Deferred
Shares if counsel to the Company determines that such further deferral likely
would be effective under applicable federal income tax laws and regulations.
(f) Nonforfeitability. The interest of each Participant in any fees paid
in the form of Shares or Deferred Shares (and any deferral account relating
thereto) at all times will be nonforfeitable.
8. Adjustment Provisions.
(a) Corporate Transactions and Events. In the event of any
recapitalization, forward or reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase or exchange of Shares or other
securities, Share dividend or other special, large and non-recurring dividend or
distribution (whether in the form of cash, securities or other property),
liquidation, dissolution, or other similar corporate transaction or event
affects the Shares such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Participants under the Plan, then the
Board shall, in such manner as it may deem equitable, adjust any or all of the
(i) number and kind of Shares remaining reserved and available for issuance
under Section 3, (ii) number and kind of Shares to be subject to each automatic
grant of an Option under Section 6, (iii) number and kind of Shares issuable
upon exercise of outstanding Options, and/or exercise price per Share thereof
(provided that no fractional Shares will be issued upon exercise of any Option),
(iv) kind of Shares to be issued in lieu of fees under Section 7, and (v) number
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and kind of Shares to be issued upon settlement of Deferred Shares under Section
7. In addition, the Board is authorized to make adjustments in the terms and
conditions of, and the criteria included in, Options (including, without
limitation, cancellation of unexercised or outstanding Options, or substitution
of Shares using stock of a successor or other entity) in recognition of unusual
or nonrecurring events (including, without limitation, events described in the
preceding sentence and events constituting a Change in Control) affecting the
Company or any subsidiary or the financial statements of the Company or any
subsidiary, or in response to changes in applicable laws, regulations, or
accounting principles.
(b) Insufficient Number of Shares. If at any date an insufficient number
of Shares are available under the Plan for the automatic grant of Options or the
receipt of fees in the form of Shares or deferral of fees in the form of
Deferred Shares at that date, Options will first be automatically granted
proportionately to each eligible director, to the extent Shares are then
available (provided that no fractional Shares will be issued upon exercise of
any Option) and otherwise as provided under Section 6, and then, if any Shares
remain available, fees shall be paid in the form of Shares or deferred in the
form of Deferred Shares proportionately among directors then eligible to
participate to the extent Shares are then available and otherwise as provided
under Section 7.
9. Changes to the Plan. The Board may amend, alter, suspend, discontinue,
or terminate the Plan or authority to grant Options or pay fees in the form of
Shares or Deferred Shares under the Plan without the consent of stockholders or
Participants, except that any amendment or alteration will be subject to the
approval of the Company's stockholders at or before the next annual meeting of
stockholders for which the record date is after the date of such Board action if
such stockholder approval is required by any federal or state law or regulation
or the rules of any stock exchange or automated quotation system as then in
effect, and the Board may otherwise determine to submit other such amendments or
alterations to stockholders for approval; provided, however, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant with respect to any previously granted Option or any
previous payment of fees in the form of Shares or Deferred Shares.
10. General Provisions.
(a) Agreements. Options, Deferred Shares, and any other right or
obligation under the Plan may be evidenced by agreements or other documents
executed by the Company and the Participant incorporating the terms and
conditions set forth in the Plan, together with such other terms and conditions
not inconsistent with the Plan, as the Board may from time to time approve.
(b) Compliance with Laws and Obligations. The Company will not be
obligated to issue or deliver Shares in connection with any Option, in payment
of any directors' fees, or in settlement of Deferred Shares in a transaction
subject to the registration requirements of the Securities Act of 1933, as
amended, or any other federal or state securities law, any requirement
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under any listing agreement between the Company and any stock exchange or
automated quotation system, or any other law, regulation, or contractual
obligation of the Company, until the Company is satisfied that such laws,
regulations, and other obligations of the Company have been complied with in
full. Certificates representing Shares issued under the Plan will be subject to
such stop-transfer orders and other restrictions as may be applicable under such
laws, regulations, and other obligations of the Company, including any
requirement that a legend or legends be placed thereon.
(c) Limitations on Transferability. Unless otherwise permitted by the
Board, Options, Deferred Shares, and any other right under the Plan will not be
transferable by a Participant except by will or the laws of descent and
distribution or to a designated beneficiary in the event of a Participant's
death; provided, however, that Options and Deferred Shares (and rights relating
thereto) may be transferred to one or more transferees during the lifetime of
the Participant for purposes of the Participant's estate planning. The Company
may rely upon the beneficiary designation last filed in accordance with this
Section 10(c). Options, Deferred Shares, and other rights under the Plan may not
be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be
subject to the claims of creditors of any Participant.
(d) Compliance with Rule 16b-3.
(i) Six-Month Holding Period. Unless a Participant could otherwise
dispose of equity securities, including derivative securities,
acquired under the Plan without incurring liability under
Section 16(b) of the Exchange Act, equity securities acquired
under the Plan must be held for a period of six months
following the date of such acquisition, provided that this
condition shall be satisfied with respect to a derivative
security if at least six months elapse from the date of
acquisition of the derivative security to the date of
disposition of the derivative security (other than upon
exercise or conversion) or its underlying equity security.
(ii) Other Compliance Provisions. With respect to a Participant who
is then subject to Section 16 of the Exchange Act in respect
of the Company, it is the intent of the Company that
transactions shall be implemented under the Plan in a manner
that will ensure that each transaction by such a Participant
is exempt from liability under Rule 16b-3, except that such a
Participant may be permitted to engage in a non-exempt
transaction under the Plan if written notice has been given to
the Participant regarding the non-exempt nature of such
transaction. The Board may authorize the Company to repurchase
any Shares acquired in connection with the Plan in order to
prevent a Participant who is subject to Section 16 of the
Exchange Act from incurring liability under Section 16(b).
Unless other wise specified by the Participant, equity
securities, including derivative
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securities, acquired under the Plan which are disposed of by a
Participant shall be deemed to be disposed of in the order
acquired by the Participant.
(e) No Right To Continue as a Director. Nothing contained in the Plan or
any agreement hereunder will confer upon any Participant any right to continue
to serve as a director of the Company.
(f) No Stockholder Rights Conferred. Nothing contained in the Plan or any
agreement hereunder will confer upon any Participant (or any person or entity
claiming rights by or through a Participant) any rights of a stockholder of the
Company unless and until Shares are in fact issued to such Participant (or
person) or, in the case an Option, such Option is validly exercised in
accordance with Section 6.
(g) Nonexclusivity of the Plan. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements for directors as it may deem desirable.
(h) Governing Law. The validity, construction, and effect of the Plan and
any agreement hereunder will be determined in accordance with the laws of the
State of Delaware, without giving effect to principles of conflicts of laws, and
applicable federal law.
11. Stockholder Approval, Effective Date, and Plan Termination. The Plan
will be effective as of the date of its adoption by the Board, subject to
stockholder approval prior to the commencement of the Initial Public Offering,
and, unless earlier terminated by action of the Board, shall terminate at such
time as no Shares remain available for issuance under the Plan and the Company
and Participants have no further rights or obligations under the Plan.
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EXHIBIT 10.3
800-JR CIGAR, INC.
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I
Introduction
Sec. 1.01 Statement of Purpose. The purpose of the 800-JR Cigar,
Inc. Employee Stock Purchase Plan is to provide eligible employees of the
Company and its Subsidiaries, who wish to become stockholders, an opportunity to
purchase Common Stock of the Company. The Board of Directors of the Company
believes that employee participation in ownership will be to the mutual benefit
of the employees and the Company.
Sec. 1.02 Internal Revenue Code Considerations. The Plan is intended
to constitute an "employee stock purchase plan" within the meaning of section
423 of the Internal Revenue Code of 1986, as amended.
ARTICLE II
Definitions
Sec. 2.01 "Administrative Committee" means the committee appointed
by the Board to administer the Plan, as provided in Section 6.04 hereof.
Sec. 2.02 "Board" means the Board of Directors of the Company.
Sec. 2.03 "Code" means the Internal Revenue Code of 1986, as
amended.
Sec. 2.04 "Company" means 800-JR Cigar, Inc., a Delaware
corporation.
Sec. 2.05 "Compensation" means the total remuneration paid, during
the period of reference, to an Employee by the Company or a Subsidiary,
including regular salary or wages, overtime payments, bonuses, commissions and
vacation pay, to which has been added (a) any elective deferral amounts by which
the Employee has had his current remuneration reduced for the purposes of
funding a contribution to any plan sponsored by the Company and satisfying the
requirements of section 401(k) of the Code, and (b) any amounts by which the
Employee's compensation has been reduced pursuant to a compensation reduction
agreement between the Employee and the Company for the purpose of funding
benefits through any cafeteria plan sponsored by the Company meeting the
requirements of section 125 of the Code. There shall be excluded from
"Compensation" for the purposes of the Plan, whether or not reportable as income
by the Employee, expense reimbursements of all types, payments in lieu of
expenses, the Company contributions to any qualified retirement plan or other
program of deferred compensation (except as provided above), the Company
contributions to Social Security or worker's compensation, the costs paid by the
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Company in connection with fringe benefits and relocation, including gross-ups,
and any amounts accrued for the benefit of the Employee, but not paid, during
the period of reference.
Sec. 2.06 "Continuous Service" means the period of time during which
the Employee has been employed by the Company or a Subsidiary and during which
there has been no interruption of the Employee's employment by the Company. For
this purpose, periods of Excused Absence shall not be considered to be
interruptions of Continuous Service.
Sec. 2.07 "Effective Date" shall mean the date determined by the
Administrative Committee on which the first Offering shall commence, if within
twelve months of that date, the Plan is or has been approved at a meeting of the
stockholders of the Company by the affirmative vote of the holders of the
majority of Common Stock of the Company outstanding.
Sec. 2.08 "Eligible Employee" means each person who:
(a) is an Employee whose customary employment is for more than
5 months in any calendar year;
(b) is an Employee whose customary employment is for more than
20 hours per week;
(c) is employed on the Effective Date, or has completed at
least one year of Continuous Service; and
(d) is not deemed for purposes of section 423(b)(3) of the
Code to own stock possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of the
Company.
Sec. 2.09 "Employee" means each person employed by the Company or a
Subsidiary.
Sec. 2.10 "Excused Absence" means absence pursuant to a leave of
absence granted by the Company or any other entity constituting the Company,
absence due to disability or illness, absence by reason of a layoff, or absence
by reason of active duty in the armed forces of the United States. In no event
may an Excused Absence exceed six (6) months in length (or, if longer and if
applicable, the period of the individual's active duty in the armed forces of
the United States and such period thereafter as such individual's right to
reemployment by the Company is protected by law), and any absence shall cease to
be an Excused Absence upon the earlier of (a) the last day of the calendar month
in which the duration of the absence reaches six (6) months or (b) the last day
of the calendar month in which the leave expires by its terms, the layoff ends
by recall or permanent separation from service, or recovery from illness or
disability occurs.
Sec. 2.11 "Exercise Date" means the last day of each Purchase
Period, as determined by the Administrative Committee.
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Sec. 2.12 "Market Value" means, with respect to Stock, the fair
market value of such Stock, determined by such methods or procedures as shall be
established from time to time by the Administrative Committee, provided,
however, that if the Stock is listed on a national securities exchange or quoted
in an interdealer quotation system, the Market Value of such Stock on a given
date shall be based upon the last sales price or, if unavailable, the average of
the closing bid and asked prices per share of the Stock on such date (or, if
there was no trading or quotation in the Stock on such date, on the next
preceding date on which there was trading or quotation) as provided by one of
such organizations.
Sec. 2.13 "Offering" means the offering of shares of Stock under the
Plan.
Sec. 2.14 "Offering Date" means the date on which each Offering is
to commence, as determined by the Administrative Committee.
Sec. 2.15 "Participant" means each Eligible Employee who elects to
participate in the Plan.
Sec. 2.16 "Plan" means the 800-JR Cigar, Inc. Employee Stock
Purchase Plan, as the same is set forth herein and as the same may hereafter be
amended.
Sec. 2.17 "Purchase Agreement" means the document prescribed by the
Administrative Committee pursuant to which an Eligible Employee has enrolled to
be a Participant.
Sec. 2.18 "Purchase Period" means the period beginning on an
Offering Date and ending on the Exercise Date.
Sec. 2.19 "Purchase Price" means such term as it is defined in
Section 4.03 hereof.
Sec. 2.20 "Stock" means Common Stock of the Company.
Sec. 2.21 "Stock Purchase Account" means a noninterest bearing
account consisting of all amounts withheld from an Employee's compensation (or
otherwise paid into the Plan) for the purpose of purchasing shares of Stock for
such employee under the Plan, reduced by all amounts applied to the purchase of
Stock for such Employee under the Plan.
Sec. 2.22 "Subsidiary" shall mean a corporation described in section
424(f) of the Code that has, with the permission of the Board, adopted the Plan.
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ARTICLE III
Admission to Participation
Sec. 3.01 Initial Participation. Any Eligible Employee may elect to
be a Participant and may become a Participant by executing and filing with the
Administrative Committee a Purchase Agreement at such time in advance and on
such forms as prescribed by the Administrative Committee. The effective date of
an Eligible Employee's participation shall be the Offering Date next following
the date on which the Administrative Committee receives from the Eligible
Employee a properly executed and timely filed Purchase Agreement. Participation
in the Plan will continue automatically from one Purchase Period to another
unless notice is given pursuant to Section 3.02.
Sec. 3.02 Voluntary Discontinuance of Participation. Any Participant
may voluntarily withdraw from the Plan by filing a notice of withdrawal with the
Administrative Committee at such time in advance as the Administrative Committee
may specify. Upon such withdrawal, there shall be paid to the Participant the
amount, if any, standing to his credit in his Stock Purchase Account.
Sec. 3.03 Involuntary Discontinuance of Participation. If a
Participant ceases to be an Eligible Employee, the entire amount, if any,
standing to the Participant's credit in his Stock Purchase Account shall be
refunded to him.
Sec. 3.04 Readmission to Participation. Any Eligible Employee who
has previously been a Participant, who has discontinued participation, and who
wishes to be reinstated as a Participant may again become a Participant for any
subsequent Purchase Period by executing and filing with the Administrative
Committee, at such time in advance as the Administrative Committee shall
determine, a new Purchase Agreement on forms provided by the Administrative
Committee. Reinstatement to Participant status shall be effective as of the
Offering Date next following the date on which the Administrative Committee
receives from the Eligible Employee the properly executed and timely filed
Purchase Agreement. Notwithstanding the foregoing, readmission of any Eligible
Employee may be suspended for such time as may be necessary to comply with Rule
16b-3 promulgated under the Securities Exchange Act of 1934.
ARTICLE IV
Stock Purchase
Sec. 4.01 Reservation of Shares. There shall be 300,000 shares of
Stock reserved for the Plan, subject to adjustment in accordance with the
antidilution provisions hereinafter set forth. Except as provided in Section
5.02 hereof, the aggregate number of shares that may be purchased under the Plan
shall not exceed the number of shares reserved for the Plan.
Sec. 4.02 Limitation on Shares Available. The maximum number of
shares of Stock that may be purchased for each Participant on an Exercise Date
is the least of (a) the number of
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shares of Stock that can be purchased by applying the full balance of his Stock
Purchase Account to such purchase of shares at the Purchase Price (as
hereinafter determined), or (b) the Participant's proportionate part of the
maximum number of whole shares of Stock available within the limitation
established by the maximum aggregate number of such shares reserved for the
Plan, as stated in Section 4.01 hereof. Notwithstanding the foregoing, if any
person entitled to purchase shares pursuant to any offering hereunder would be
deemed for the purposes of section 423(b)(3) of the Code to own stock (including
any number of shares that such person would be entitled to purchase hereunder)
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of Company, the maximum number of shares that such
person shall be entitled to purchase pursuant to the Plan shall be reduced to
that number which, when added to the number of shares of Stock that such person
is so deemed to own (excluding any number of shares that such person would be
entitled to purchase hereunder), is one less than such five percent (5%). Any
portion of a Participant's Stock Purchase Account that cannot be applied by
reason of the foregoing limitation shall remain in the Participant's Stock
Purchase Account for application to the purchase of Stock on the next Offering
Date (unless withdrawn before that Offering Date).
Sec. 4.03 Purchase Price of Shares. The Purchase Price per share of
the Stock sold to Participants pursuant to any Offering shall be the sum of (a)
eighty-five percent (85%) of the Market Value of such share on the Offering Date
on which such Offering commences or on the Exercise Date on which such Offering
expires, whichever is lower, and (b) any transfer, excise or similar tax imposed
on the transaction pursuant to which such share of Stock is purchased. If the
Exercise Date with respect to the purchase of Stock is a day on which the stock
is selling ex-dividend but is on or before the record date for such dividend,
then for Plan purposes the Purchase Price per share will be increased by an
amount equal to the dividend per share. In no event shall the Purchase Price be
less than the par value of the Stock.
Sec. 4.04 Exercise of Purchase Privilege.
(a) Subject to the provisions of Section 4.02 above, if on the
date of the last paycheck of a Participant issued prior to any Exercise
Date there is a credit balance in the Participant's Stock Purchase
Account, there shall be purchased for the Participant at the Purchase
Price for the Purchase Period that expires on such Exercise Date the
largest number of whole shares of Stock, as can be purchased with the
entire amount standing to the Participant's credit in his Stock Purchase
Account on such paycheck issue date. Each such purchase shall be deemed to
have occurred on the Exercise Date occurring at the close of the Offering
for which the purchase was made.
(b) Any amount remaining in the Stock Purchase Account on the
Exercise Date after the purchase of the maximum number of whole shares
shall remain in the Stock Purchase Account to the credit of the
Participant and applied to purchase additional shares of Stock on
subsequent Exercise Dates.
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(c) Notwithstanding anything contained herein to the contrary,
a Participant may not during any calendar year purchase shares of Stock
having an aggregate Market Value, determined at the time of each Offering
Date during such calendar year, of more than $25,000.
Sec. 4.05 Establishment of Stock Purchase Account. Each Participant
shall authorize payroll deductions from Compensation for the purposes of funding
his Stock Purchase Account. In the Purchase Agreement, each Participant shall
authorize a deduction from each payment of his Compensation during a Purchase
Period, subject to Section 4.04(c). Subject to Section 3.02, a Participant may
not reduce or increase his payroll deduction rate during any Purchase Period.
However, a Participant may change the deduction to any permissible level for any
subsequent Offering by filing notice thereof at such time preceding the Offering
Date on which such subsequent Offering commences as the Administrative Committee
shall determine.
Sec. 4.06 Payment for Stock. The Purchase Price for all shares of
Stock purchased by a Participant under the Plan shall be paid out of the
Participant's Stock Purchase Account. As of each Exercise Date, the entire
amount standing to the credit of each Participant in his Stock Purchase Account
on the date of the last paycheck issued to the Participant prior to the Exercise
Date in the Purchase Period that expires on such Exercise Date shall be charged
with the aggregate Purchase Price of the shares of Stock purchased by such
Participant on the Exercise Date. No interest shall be paid or payable with
respect to any amount held in the Participant's Stock Purchase Account.
Sec. 4.07 Share Ownership; Issuance of Certificates.
(a) The shares purchased by a Participant on an Exercise Date
shall, for all purposes, be deemed to have been issued and/or sold at the
close of business on such Exercise Date. Prior to that time, none of the
rights or privileges of a stockholder of the Company shall inure to the
Participant with respect to such shares. All the shares of Stock purchased
under the Plan shall be delivered by the Company in a manner as determined
by the Administrative Committee.
(b) The Administrative Committee, in its sole discretion, may
determine that the shares of Stock shall be delivered by the Company (i)
by issuing and delivering to the Participant a certificate for the number
of whole shares of Stock purchased by such Participant on an Exercise Date
or during a Calendar year, or (ii) by issuing and delivering a certificate
or certificates for the number of shares of Stock purchased by all
Participants on an Exercise Date or during a Calendar year to a member
firm of the New York Stock Exchange which is also a member of the National
Association of Securities Dealers, as selected by the Administrative
Committee from time to time, which shares shall be maintained by such
member firm in separate brokerage accounts of each Participant, or (iii)
by issuing and delivering a certificate or certificates for the number of
shares of Stock purchased by all Participants on an Exercise Date or
during the calendar year to a bank or trust
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company or affiliate thereof, as selected by the Administrative Committee
from time to time, which shares shall be maintained by such bank or trust
company or affiliate in separate accounts for each Participant or, if he
designates on his Stock Purchase Agreement, in his name jointly with his
spouse, with right of survivorship. A Participant who is a resident of a
jurisdiction that does not recognize such joint tenancy may have a
certificate or account in his name as tenant in common with his spouse,
without right of survivorship. Such designation may be changed by filing a
notice thereof signed by the Participant and his spouse. Such spouse shall
be bound by all of the terms and conditions of the Plan as if such spouse
were a Participant.
Sec. 4.08 Restrictions on Resale. Stock acquired under the Plan may
not be sold or otherwise disposed of for at least six months after the Exercise
Date on which the shares were acquired, except in the case of death or
disability.
ARTICLE V
Special Adjustments
Sec. 5.01 Shares Unavailable. If, on any Exercise Date, the
aggregate funds available for the purchase of Stock would purchase a number of
shares in excess of the number of shares then available for purchase under the
Plan, the following events shall occur:
(a) The number of shares that would otherwise be purchased by
each Participant shall be proportionately reduced on the Exercise Date in
order to eliminate such excess;
(b) The Plan shall automatically terminate immediately after
the Exercise Date as of which the supply of available shares is exhausted;
and
(c) Any amount remaining in the Stock Purchase Account of each
of the Participants shall be repaid to such Participants.
Sec. 5.02 Antidilution Provisions. The aggregate number of shares of
Stock reserved for purchase under the Plan, as hereinabove provided, and the
calculation of the Purchase Price per share may be appropriately adjusted to
reflect any increase or decrease in the number of issued shares of Stock
resulting from a subdivision or consolidation of shares or other capital
adjustment, or the payment of a stock dividend, or other increase or decrease in
such shares, if effected without receipt of consideration by the Company. Any
such adjustment shall be made by the Administrative Committee acting with the
consent of, and subject to the approval of, the Board.
Sec. 5.03 Effect of Certain Transactions. Subject to any required
action by the stockholders, if the Company shall be the surviving or resulting
corporation in any merger or
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consolidation, or if the Company shall be merged for the purpose of changing the
jurisdiction of its incorporation, any Offering hereunder shall pertain to and
apply to the shares of stock of the Company or the survivor. However, in the
event of a dissolution or liquidation of the Company, or of a merger or
consolidation in which the Company is not the surviving or resulting
corporation, the Plan and any Offering hereunder shall terminate upon the
effective date of such dissolution, liquidation, merger or consolidation, and
the balance then standing to the credit of each Participant in his Stock
Purchase Account shall be returned to him.
ARTICLE VI
Miscellaneous
Sec. 6.01 Nonalienation. The right to purchase shares of Stock under
the Plan is personal to the Participant, is exercisable only by the Participant
during his lifetime except as hereinafter set forth, and may not be assigned or
otherwise transferred by the Participant. Notwithstanding the foregoing, there
shall be delivered to the executor, administrator or other personal
representative of a deceased Participant such shares of Stock and such residual
balance as may remain in the Participant's Stock Purchase Account as of the date
the Participant's death occurs. However, such representative shall be bound by
the terms and conditions of the Plan as if such representative were a
Participant.
Sec. 6.02 Administrative Costs. The Company shall pay all
administrative expenses associated with the operation of the Plan. No
administrative charges shall be levied against the Stock Purchase Accounts of
the Participants.
Sec. 6.03 Collection of Taxes. The Company shall be entitled to
require any Participant to remit, through payroll withholding or otherwise, any
tax that it determines it is so obligated to collect with respect to the
issuance of Stock hereunder, or the subsequent sale or disposition of such
Stock, and the Administrative Committee shall institute such mechanisms as shall
insure the collection of such taxes.
Sec. 6.04 Administrative Committee. The Compensation Committee of
the Board shall appoint an Administrative Committee, which shall have the
authority and power to administer the Plan and to make, adopt, construe, and
enforce rules and regulations not inconsistent with the provisions of the Plan.
The Administrative Committee shall adopt and prescribe the contents of all forms
required in connection with the administration of the Plan, including, but not
limited to, the Purchase Agreement, payroll withholding authorizations,
withdrawal documents, and all other notices required hereunder. The
Administrative Committee shall have the fullest discretion permissible under law
in the discharge of its duties. The Administrative Committee's interpretations
and decisions in respect of the Plan, the rules and regulations pursuant to
which it is operated, and the rights of Participants hereunder shall be final
and conclusive.
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Sec. 6.05 Amendment of the Plan. The Board may amend the Plan
without the consent of stockholders or Participants, except that any such action
shall be subject to the approval of the Company's stockholders at or before the
next annual meeting of stockholders for which the record date is after such
Board action if such stockholder approval is required by any federal or state
law or regulation or the rules of any stock exchange or automated quotation
system on which the Stock may then be listed or quoted, and the Board may
otherwise, in its discretion, determine to submit other such changes to the Plan
to stockholders for approval; provided, however, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under any award theretofore granted to him.
Sec. 6.06 Termination of the Plan. The Plan shall continue in effect
unless terminated pursuant to action by the Board, which shall have the right to
terminate the Plan at any time without prior notice to any Participant and
without liability to any Participant. Upon the termination of the Plan, the
balance, if any, then standing to the credit of each Participant in his Stock
Purchase Account shall be refunded to him.
Sec. 6.07 Repurchase of Stock. The Company shall not be required to
purchase or repurchase from any Participant any of the shares of Stock that the
Participant acquired under the Plan.
Sec. 6.08 Notice. A Purchase Agreement and any notice that a
Participant files pursuant to the Plan shall be on the form prescribed by the
Administrative Committee and shall be effective only when received by the
Administrative Committee. Delivery of such forms may be made by hand or by
certified mail, sent postage prepaid, to 800-JR Cigar, Inc. 301 Route 10 East,
Whippany, NJ 07981, Attention: Stock Purchase Plan Committee. Delivery by any
other mechanism shall be deemed effective at the option and discretion of the
Administrative Committee.
Sec. 6.09 Government Regulation. The Company's obligation to sell
and to deliver the Stock under the Plan is at all times subject to all approvals
of any governmental authority required in connection with the authorization,
issuance, sale or delivery of such Stock.
Sec. 6.10 Headings, Captions, Gender. The headings and captions
herein are for convenience of reference only and shall not be considered as part
of the text. The masculine shall include the feminine, and vice versa.
Sec. 6.11 Severability of Provisions; Prevailing Law. The provisions
of the Plan shall be deemed severable. In the event any such provision is
determined to be unlawful or unenforceable by a court of competent jurisdiction
or by reason of a change in an applicable statute, the Plan shall continue to
exist as though such provision had never been included therein (or, in the case
of a change in an applicable statute, had been deleted as of the date of such
change). The Plan shall be governed by the laws of the State of Delaware, to the
extent such laws are not in conflict with, or superseded by, federal law.
9
<PAGE>
Exhibit 10.4
WHEREAS, this Board desires to establish a plan pursuant to which this
Corporation will pay certain bonuses for calendar year 1997 to certain
employees of this Corporation, the employees to receive such bonuses and
the amounts thereof to be determined by this Board in its discretion.
RESOLVED, that this Board hereby establishes a plan to be known as the
"800-JR Cigar, Inc. Bonus Pool Plan" pursuant to which this Corporation may
pay bonuses for calendar year 1997 to such employees of this Corporation
and in such amounts as this Board shall determine in its discretion, such
amounts not to exceed in the aggregate 5% of the amount by which (i) the
Corporation's income before income taxes and the effects of any changes in
accounting method for calender year 1997 exceeds (ii) the Corporation's
budgeted income before income taxes and the effects of any changes in
accounting method for calender year 1997, as approved by this Board.
RESOLVED, that this Board hereby authorizes and directs this
Corporation, pursuant to the terms of said plan, to pay to such
employees of this Corporation as this Board shall determine in its
discretion, and allocate among such employees in such manner as this
Board shall determine in its discretion, bonuses for calendar year
1997 that in the aggregate do not exceed 5% of the amount by which (i)
the Company's income before income taxes and the effects of any
changes in accounting method for calendar year 1997 exceeds (ii) 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.
RESOLVED, that this Board hereby authorizes and directs the officers of
this Corporation to expend funds of this Corporation and to execute and
deliver any and all certificates, documents and other instruments and do
any and all other things as may be necessary or desirable to carry out the
foregoing resolutions and the terms of said plan.
<PAGE>
EXHIBIT 10.8
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT (this "Agreement") entered into as of the ____
day of June, 1997, by and among MC MANAGEMENT, INC., a New Jersey corporation
(the "Management Company"), and 800-JR CIGAR, INC., a Delaware corporation ("JR
Cigar"), recently formed to hold all of the outstanding shares of capital stock
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 JR Cigar (DC), Inc. (collectively, the
"Constituent Entities" and, together with JR Cigar, the "JR Entities").
WHEREAS, JR Cigar intends to effect a reorganization (the
"Reorganization") pursuant to which the stockholders of the Constituent Entities
will contribute to JR Cigar all of the outstanding shares of capital stock of
the Constituent Entities in exchange for shares of common stock of JR Cigar, all
upon the terms and subject to the conditions set forth in a certain contribution
agreement (the "Contribution Agreement") and, simultaneously therewith, to
conduct an initial public offering of its common stock (the "Offering");
WHEREAS, the Management Company has staff specially skilled in
corporate finance, accounting, telemarketing and other management services;
WHEREAS, prior to the date hereof, the Management Company has become
familiar with the operations and business of the Constituent Entities as a
result of its having provided substantial management services to the Constituent
Entities over the course of the past several years;
WHEREAS, following the consummation of the Reorganization and the
Offering, JR Cigar will require the Management Company's special skills and
services in connection with its general business operations; and
WHEREAS, the Management Company is willing to provide such skills
and services to JR Cigar;
NOW THEREFORE, in consideration of the mutual rights and obligations
set forth herein, the parties hereto, intending to be legally bound, do hereby
agree as follows:
1. Engagement. JR Cigar hereby engages the Management Company upon
the terms and conditions set forth herein to provide management and consulting
services to JR Cigar. These services will be in the field of corporate finance,
accounting, telemarketing and such other management areas as the Management
Company and JR Cigar shall mutually agree.
<PAGE>
In consideration of the compensation specified herein, the Management Company
accepts such engagement and agrees to perform the services specified herein.
2. Management Term. The engagement hereunder shall be for an initial
term commencing on the date the Offering is consummated (the "Retention Date")
and expiring on the fifth anniversary thereof and shall automatically be
extended for successive periods of one (1) year each, unless the Management
Company or JR Cigar shall give written notice of termination of the engagement
at the end of the initial term or such one (1) year period, as the case may be,
to the other at least ninety (90) days prior to the end of the initial term or
such one (1) year period, as the case may be, in which case the engagement
hereunder shall terminate at the end of the initial term or such one (1) year
period, as the case may be.
3. Services to be Performed. The Management Company shall devote
such time and efforts to the performance of the management and consulting
services contemplated by this Agreement as JR Cigar and the Management Company
deem necessary or appropriate. However, no precise number of hours is required
to be devoted by the Management Company on a weekly or monthly basis. The
Management Company may perform services under this Agreement directly, through
its employees or agents, or, with the approval of JR Cigar, indirectly through
such outside consultants as the Management Company may engage for such purpose;
provided, however, that the Management Company shall be solely responsible for
any fees due to such outside consultants unless payment therefor is approved by
the Board of Directors of JR Cigar. The Management Company may also be retained
to provide such additional special services to JR Cigar as approved from time to
time by the Board of Directors of JR Cigar, upon terms and conditions mutually
acceptable to the Management Company and JR Cigar. JR Cigar acknowledges that
the Management Company's services to JR Cigar are not exclusive and that the
Management Company and its affiliates (including its officers, directors,
employees, representatives and agents) may render similar services to other
persons; provided, however, that the Management Company shall not render
services to any other entity or person engaged in the business of manufacturing,
distributing or selling tobacco or tobacco-related products during the term of
this Agreement other than to Lew Rothman, Lavonda Rothman or entities controlled
by Lew Rothman, Lavonda Rothman or members of their immediate families; and
provided further, that during the course of and for two years following the
termination of the Management Company's retention by JR Cigar, the Management
Company shall not, without receiving the prior approval of JR Cigar: (i)
directly or indirectly own, manage, control, participate in, consult with,
render services for, or in any manner engage in any business competing with the
businesses of JR Cigar or any of the Constituent Entities, within any
geographical area in which JR Cigar or any of the Constituent Entities engage or
plan to engage in such businesses; (ii) interfere with the relationship between
JR Cigar or any of the Constituent Entities and any employee thereof; (iii)
induce or attempt to induce any customer, supplier, licensee or other entity or
person having a business relationship with JR Cigar or any of the Constituent
Entities to cease doing business with JR Cigar or any of the Constituent
Entities; or (iv) interfere with the relationship between any such customer,
supplier, licensee or other entity or person and JR Cigar or any of the
Constituent Entities.
2
<PAGE>
4. Compensation; Expense Reimbursement.
4.1 Signing Bonus; Management Fees. In consideration of the
Management Company providing management and consulting services to JR Cigar, JR
Cigar shall pay the Management Company management fees in an aggregate amount
equal to the percentages of gross product sales by the JR Cigar Entities as set
forth on the attached Schedule I. An estimate of such fee payable for each month
shall be paid in advance on the first day of such month based upon the
projections of JR Cigar of gross product sales for such month and shall be
adjusted, as necessary, to reflect the actual fee payable for such month within
30 days after the close of such month.
4.2 Expenses. The Management Company will assume and pay all
expenses that relate to the services it performs hereunder, including, without
limitation, expenses on account of rent, utilities, insurance, office supplies,
office equipment, travel, entertainment and salaries, other compensation, fringe
benefits and expenses of the Management Company's officers, directors, employees
and agents; provided, however, that the Management Company shall not be required
to pay (and if paid by the Management Company, the Management Company shall be
reimbursed by JR Cigar for payments of): (i) taxes relating to the business or
operations of JR Cigar, (ii) professional fees and expenses relating to the
business or operations of JR Cigar, including, without limitation, legal,
auditing, accounting and investment banking fees and expenses and (iii) all
other extraordinary costs and expenses properly borne by JR Cigar.
4.3 Other Interests; Director Fees and Expenses. It is understood
that any stockholder, director, officer, employee or agent of the Management
Company may be a stockholder of, or otherwise have an interest in, JR Cigar. Any
affiliates (including directors, officers, employees, agents or representatives)
of the Management Company or any investors in the Management Company who serve
as directors of JR Cigar and who are not employees of JR Cigar may be paid
customary director fees paid to non-employee directors of JR Cigar and will be
reimbursed by JR Cigar for all of their reasonable out-of-pocket costs and
expenses in connection therewith.
5. Confidentiality. The Management Company shall maintain secrecy
with respect to all non-public information of JR Cigar which may come into its
possession as a result of performance of services under this Agreement
(including, without limitation, client lists and trade secrets), and shall use
its best efforts to ensure that its affiliates (including its officers,
directors, employees, representatives and agents) also maintain the secrecy of
such information, except for any such information which is required to be
disclosed by the Management Company or its affiliates pursuant to law.
6. Indemnification. JR Cigar agrees to indemnify the Management
Company and its affiliates in accordance with the Indemnification Agreement
attached as Exhibit A, which Indemnification Agreement is being executed and
delivered simultaneously with the execution and delivery of this Agreement.
3
<PAGE>
7. Notices. All notices hereunder, to be effective, shall be in
writing and shall be personally delivered, transmitted by facsimile with
confirmation of receipt or mailed by certified mail, postage prepaid, as
follows:
(i) If to the Management Company:
MC Management, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Attention: Maureen Colleton
Fax: (201) 884-9556
(ii) If to JR Cigar:
JR CIGAR, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Attention: Lewis I. Rothman
Fax: (201) 884-9556
8. Entire Agreement; Cancellation of Prior Agreements. Effective the
Retention Date, this Agreement shall constitute the entire agreement between the
parties hereto with regard to the subject matter hereof, superseding all prior
understandings and agreements, whether written or oral, and all prior agreements
between the Management Company and the Constituent Entities shall terminate.
9. Modifications. This Agreement may not be amended or revised
except by a writing signed by the parties.
10. Successors and Assigns. This Agreement shall be binding upon and
insure to the benefit of the parties and their respective successors and
assigns, but may not be assigned by either party without the prior written
consent of the other.
11. Captions. Captions have been inserted solely for convenience of
reference and in no way define, limit or describe the scope or substance of any
provisions of this Agreement.
12. Severability. The provisions of this Agreement are severable,
and the invalidity of any provision shall not affect the validity of any other
provision.
13. Governing Law. This Agreement shall be construed under and
governed by the laws of the State of New Jersey applicable to agreements made
and to be wholly performed therein.
4
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as
of the date first above written.
MC MANAGEMENT, INC.
By:
----------------------------
Name: Maureen A. Colleton
Title: President
800-JR CIGAR, INC.
By:
----------------------------
Name: Lewis I. Rothman
Title: President
5
<PAGE>
SCHEDULE I
Management Fees
Cigarette Sales Other Product Sales
--------------- -------------------
J.R. Tobacco of America, Inc. 1.00% 2.90%
Cigars by Santa Clara, N.A., Inc. 1.00% 2.90%
J.R. Tobacco NC, Inc. 1.00% 0.5%
J.N.R. Grocery Corp. 1.00% 0.5%
J&R Tobacco (New Jersey) Corp. 1.00% 0.5%
J.R. Tobacco Company of Michigan, Inc. 1.00% 0.5%
J.R.-46th Street, Inc. 1.00% 0.5%
J.R. Tobacco Outlet, Inc. 1.00% 0.5%
J.R. Statesville, Inc. 1.00% 0.5%
JR Cigar (DC), Inc. 1.00% 0.5%
<PAGE>
SCHEDULE A
June __, 1997
Indemnification Agreement
MC Management, Inc.
301 Route 10 East
Whippany, New Jersey 07981
Ladies and Gentlemen:
As part of the consideration for the agreement of MC Management,
Inc., a New Jersey corporation (the "Management Company"), to furnish services
to 800-JR CIGAR, Inc., a Delaware corporation ("JR Cigar"), pursuant to the
terms of the Management Agreement, dated as of June __, 1997, between the
Management Company and JR Cigar (the "Management Agreement"), JR Cigar agrees to
indemnify and hold harmless the Management Company and its affiliates and the
respective officers, directors, employees and agents of and persons controlling
the Management Company or any of its affiliates within the meaning of either
Section 15 of the Securities Act of 1933, as amended, or Section 20 of the
Securities Exchange Act of 1934, as amended, and each of their respective
successors and assigns (individually, an "Indemnified Party" and collectively,
the "Indemnified Parties") from and against, and JR Cigar agrees that no
Indemnified Person shall have any liability to JR Cigar or any of its
affiliates, security holders or creditors for, all claims, liabilities,
expenses, losses or damages (or actions or proceedings in respect thereof)
(collectively, "Losses") relating to or arising out of actions taken (or omitted
to be taken) by any of the Indemnified Parties pursuant to the Management
Agreement or any Indemnified Party's role in connection therewith; provided,
however, that JR Cigar shall not be responsible in any such case for any Losses
to the extent that it is finally judicially determined that such Losses resulted
solely from actions taken or omitted to be taken by an Indemnified Party due to
such Indemnified Party's gross negligence or willful misconduct.
Promptly after receipt by an Indemnified Party of notice of any
complaint or the commencement of any action or proceeding with respect to which
indemnification may be sought against JR Cigar, such Indemnified Party will
notify JR Cigar in writing of the receipt or commencement thereof, but failure
to notify JR Cigar will relieve JR Cigar from any liability which it may have
hereunder only if, and to the extent that, such failure results in the
forfeiture of substantial rights and defenses, and will not in any event relieve
JR Cigar from any other obligation to any Indemnified Party other than under
this Indemnification Agreement. JR Cigar shall assume the defense of such action
(including payment of fees and disbursements of counsel) insofar as such action
shall relate to any alleged liability in respect of which indemnity
<PAGE>
may be sought against JR Cigar. An Indemnified Party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and disbursements of such counsel shall be at the expense
of such Indemnified Party unless employment of such counsel has been
specifically authorized by JR Cigar in writing.
JR Cigar shall authorize separate counsel for an Indemnified Party
if the named parties to any action (including any impleaded parties) include JR
Cigar (or any of the directors of JR Cigar) and such Indemnified Party and (i)
in the good faith judgment of such Indemnified Party the use of joint counsel
would present such counsel with an actual or potential conflict of interest, or
(ii) an Indemnified Party shall have been advised by counsel that there may be
one or more legal defenses available to it which are different from or
additional to those available to JR Cigar (or its directors(s)).
JR Cigar will reimburse each Indemnified Party for all expenses
(including fees and disbursements of counsel authorized by JR Cigar) as they are
incurred by such Indemnified Party in connection with investigating, preparing
for or defending any action, claim or proceeding ("Action") referred to above
(or enforcing this Agreement, the Management Agreement of which this agreement
forms a part or any related agreement), whether or not any Indemnified Party is
or becomes a party to any Action, and whether or not such Action is initiated
or brought by the Management Company. JR Cigar further agrees that JR Cigar
will not settle, compromise or consent to the entry of any judgment in any
pending or threatened Action in respect of which indemnification may be sought
hereunder (whether or not an Indemnified Party is a party therein) unless JR
Cigar has given the Management Company reasonable prior written notice thereof
and obtained an unconditional release of each Indemnified Party from all
liability arising therefrom. An Indemnified Party shall not be liable to JR
Cigar or to any other person in connection with the services which it renders
pursuant to the Management Agreement, except for such Indemnified Party's gross
negligence or willful misconduct judicially determined as aforesaid. The
indemnification and expense reimbursement obligations that JR Cigar has under
this Agreement shall be in addition to any liability JR Cigar may otherwise
have.
The provisions of this Agreement shall apply to the Management
Company's services under the Management Agreement and any modification thereof
and shall remain in full force and effect regardless of the completion or
termination of the Management Agreement. This Agreement and any other agreements
relating hereto shall be governed by and construed in
2
<PAGE>
accordance with the laws of the State of New Jersey, without regard to
principles of conflicts of law.
Very truly yours,
800-JR CIGAR, INC.
By:
----------------------------
Name: Lewis I. Rothman
Title: President
Agreed to and accepted
this ___ day of June, 1997
MC MANAGEMENT, INC.
By:
-----------------------------------
Name: Maureen A. Colleton
Title: President
3
<PAGE>
EXHIBIT 10.9
INDEMNIFICATION AGREEMENT
AGREEMENT dated as of this day of _________, 1997, between 800-JR
CIGAR, INC., a Delaware corporation (the "Company") and __________________ (the
"Indemnitee").
WHEREAS, the Company may experience difficulty in obtaining
directors' and officers' liability insurance or significantly higher premiums
for such insurance than has historically been charged the Company or reductions
in the coverage of such insurance;
WHEREAS, there can be no assurance that such insurance will continue
to be available to the Company and Indemnitee, and the Company believes that it
is possible that the cost of such insurance, if obtainable, may not be
acceptable to the Company;
WHEREAS, Indemnitee may become unwilling to continue to serve the
Company in Indemnitee's position as an officer or director, or both, without
assurances that adequate liability insurance, indemnification or a combination
thereof is, and will continue to be, provided;
WHEREAS, the Company has agreed to provide Indemnitee with the
benefits contemplated by this Agreement which benefits are intended to
supplement or replace, if necessary, the Company's existing directors' and
officers' liability insurance; and
WHEREAS, as a result of the provision of such benefits Indemnitee
has agreed to continue to serve as a director or executive officer, or both, of
the Company.
NOW, THEREFORE, in consideration of the promises and conditions set
forth herein, including the Indemnitee's continued service to the Company, the
Company and Indemnitee hereby agree as follows:
1. Definitions. The following terms, as used herein, shall have the
following respective meanings:
"Covered Amount" means the aggregate amount of all Losses and
Expenses which, in type or amount, are not insured under the directors' and
officers' liability insurance maintained by the Company from time to time.
"Covered Act" means any breach of duty, neglect, error,
misstatement, misleading statement, omission or other act done or wrongfully
attempted by Indemnitee or any of the foregoing alleged by any claimant or any
claim against Indemnitee solely by reason of him being a director or officer, or
both, of the Company.
<PAGE>
"D&O Insurance" means the directors' and officers' liability
insurance issued by the insurer(s), and having the policy number(s), amount(s)
and deductible(s) set forth on Exhibit A hereto and any replacement or
substitute policies issued by one or more reputable insurers providing in all
respects coverage at least comparable to and in the same amount as that provided
under the policy or policies identified on Exhibit A.
"Determination" means a determination, based on the facts known at
the time, made by:
(i) a majority vote of a quorum of disinterested directors of the
Company;
(ii) independent legal counsel in a written opinion prepared at the
request of a majority of a quorum of disinterested directors
of the Company;
(iii) a majority of the disinterested stockholders of the Company;
or
(iv) a final adjudication by a court of competent jurisdiction.
"Determined" shall have a correlative meaning.
"Excluded Claim" means any Loss or Expense:
(i) based upon or attributable to Indemnitee gaining in fact any
personal profit or advantage to which Indemnitee is not
entitled;
(ii) for the return by Indemnitee of any remuneration paid to
Indemnitee without the previous approval of the stockholders
of the Company which is illegal;
(iii) for an accounting of profits in fact made from the purchase or
sale by Indemnitee of securities of the Company within the
meaning of Section 16 of the Securities Exchange Act of 1934,
as amended, or any similar provision of any state law;
(iv) resulting from Indemnitee's knowingly fraudulent, dishonest or
willful misconduct;
(v) the payment of which by the Company under this Agreement is
not permitted by applicable law; or
(vi) which is not within the Covered Amount.
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<PAGE>
"Expenses" means any reasonable expenses incurred by Indemnitee as a
result of a claim or claims made against him for any Covered Act including,
without limitation, counsel fees and costs of investigative, judicial or
administrative proceedings or appeals, but shall not include Fines.
"Fines" means any fine, penalty or, with respect to an employee
benefit plan, any excise tax or penalty assessed with respect thereto.
"Loss" means any amount which Indemnitee is legally obligated to pay
as a result of a claim or claims made against him for any Covered Act including,
without limitation, damages and judgments and sums paid in settlement of a claim
or claims, but shall not include Fines.
2. Maintenance of D&O Insurance.
(a) The Company hereby represents and warrants that Exhibit A
contains a complete and accurate description of the policies of directors' and
officers' liability insurance maintained by the Company and that all such
policies are in full force and effect.
(b) The Company hereby covenants and agrees that, so long as
Indemnitee shall continue to serve as a director or officer, or both, of the
Company and thereafter so long as Indemnitee shall be subject to any possible
claim or threatened, pending or completed action, suit or proceeding, whether
civil, criminal or investigative, by reason of the fact that Indemnitee was a
director or officer, or both, of the Company, the Company, subject to Section
2(c), shall maintain in full force and effect D&O Insurance.
(c) The Company shall have no obligation to maintain D&O
Insurance if the Company determines in good faith that such insurance is not
reasonably available, the premium cost for such insurance is disproportionate to
the amount of coverage provided, or the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit.
3. Indemnification. The Company shall indemnify Indemnitee and hold
him harmless from the Covered Amount of any and all Losses and Expenses subject,
in each case, to the further provisions of this Agreement.
4. Excluded Coverage.
(a) The Company shall have no obligation to indemnify
Indemnitee and hold him harmless from any Loss or Expense which has been
Determined to constitute an Excluded Claim.
-3-
<PAGE>
(b) The Company shall have no obligation to indemnify
Indemnitee and hold him harmless from any Loss or Expense to the extent that
Indemnitee is indemnified by the Company pursuant to the Company's By-laws or
otherwise indemnified.
5. Indemnification Procedures.
(a) Promptly after receipt by Indemnitee of notice of the
commencement of or the threat of commencement of any action, suit or proceeding,
Indemnitee shall, if indemnification with respect thereto may be sought from the
Company under this Agreement, notify the Company of the commencement or threat
of commencement thereof.
(b) If, at the time of the receipt of such notice, the Company
has D&O Insurance in effect, the Company shall give prompt notice of the
commencement or the threat of commencement of such action, suit or proceeding to
the insurers in accordance with the procedures set forth in the respective
policies in favor of Indemnitee. The Company shall thereafter take all necessary
or desirable action to cause such insurers to pay, on behalf of Indemnitee, all
Losses and Expenses payable as a result of such action, suit or proceeding in
accordance with the terms of such policies.
(c) To the extent the Company does not, at the time of the
commencement of or the threat of commencement of such action, suit or
proceeding, have applicable D&O Insurance, or if a Determination is made that
any Expenses arising out of such action, suit or proceeding will not be payable
under the D&O Insurance then in effect, the Company shall be obligated to pay
the Expenses of such action, suit or proceeding in advance of the final
disposition thereof and the Company, if appropriate, shall be entitled to assume
the defense of such action, suit or proceeding, with counsel satisfactory to
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, the Company will not be liable to
Indemnitee under this Agreement for any legal or other Expenses subsequently
incurred by the Indemnitee in connection with such defense other than reasonable
Expenses of investigation; provided, that Indemnitee shall have the right to
employ its counsel in any such action, suit or proceeding but the fees and
expenses of such counsel incurred after delivery of such notice shall be at the
Indemnitee's expense; and provided, further that if (i) the employment of
counsel by Indemnitee has been previously authorized by the Company, (ii)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense
or (iii) the Company shall not, in fact, have employed counsel to assume the
defense of such action, the fees and expenses of such counsel employed by
Indemnitee shall be at the expense of the Company.
(d) All payments on account of the Company's indemnification
obligations under this Agreement shall be made within sixty (60) days of
Indemnitee's written request therefor unless a Determination is made that the
claims giving rise to Indemnitee's request are Excluded Claims or otherwise not
payable under this Agreement; provided, that all payments on account of the
Company's obligations under Section 5(c) of this Agreement prior to the final
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<PAGE>
disposition of any action, suit or proceeding shall be made within 20 days of
Indemnitee's written request therefor and such obligation shall not be subject
to any such determination but shall be subject to Section 5(e) of this
Agreement.
(e) Indemnitee agrees that he or she will reimburse the Company for
all Losses and Expenses paid by the Company in connection with any action, suit
or proceeding against Indemnitee in the event and only to the extent that a
Determination shall have been made by a court in a final adjudication from which
there is no further right of appeal that the Indemnitee is not entitled to be
indemnified by the Company for such Expenses because the claim is an Excluded
Claim or because Indemnitee is otherwise not entitled to payment under this
Agreement.
6. Settlement. The Company shall have no obligation to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of any
action, suit or proceeding effected without the Company's prior written consent.
The Company shall not settle any claim in any matter which would impose any Fine
or any obligation on Indemnitee without Indemnitee's written consent. Neither
the Company nor Indemnitee shall unreasonably withhold their consent to any
proposed settlement.
7. Rights Not Exclusive. The rights provided hereunder shall not be
deemed exclusive of any other rights to which the Indemnitee may be entitled
under any by-law, agreement, vote of stockholders or of disinterested directors
or otherwise, both as to action in his or her official capacity and as to action
in any other capacity by holding such office, and shall continue after the
Indemnitee ceases to serve the Company as an Indemnitee.
8. Enforcement.
(a) Indemnitee's right to indemnification shall be enforceable
by Indemnitee only in the courts of the State of New Jersey or in the United
States District Court for New Jersey and shall be enforceable notwithstanding
any adverse Determination. In any such action, if a prior adverse Determination
has been made, the burden of proving that indemnification is required under this
Agreement shall be on Indemnitee. The Company shall have the burden of proving
that indemnification is not required under this Agreement if no prior adverse
Determination shall have been made.
(b) In the event that any action is instituted by Indemnitee
under this Agreement, or to enforce or interpret any of the terms of this
Agreement, Indemnitee shall be entitled to be paid all court costs and expenses,
including reasonable counsel fees, incurred by Indemnitee with respect to such
action, unless the court determines that each of the material assertions made by
Indemnitee as a basis for such action was not made in good faith or was
frivolous.
-5-
<PAGE>
9. Severability. In the event that any provision of this Agreement
is determined by a court to require the Company to do or to fail to do an act
which is in violation of applicable law, such provision shall be limited or
modified in its application to the minimum extent necessary to avoid a violation
of law, and, as so limited or modified, such provision and the balance of this
Agreement shall be enforceable in accordance with the terms thereof.
10. Choice of Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware.
11. Consent to Jurisdiction. The Company and the Indemnitee each
hereby irrevocable consent to the jurisdiction of the courts of the State of New
Jersey and the United States District Court for New Jersey for all purposes in
connection with any action or proceeding which arises out of or relates to this
Agreement and agree that any action instituted under this Agreement shall be
brought only in the courts of the State of New Jersey or in the United States
District Court for New Jersey.
12. Successor and Assigns. This Agreement shall be (i) binding upon
all successors and assigns of the Company (including any transferee of all or
substantially all of its assets and any successor by merger or otherwise by
operation of law) and (ii) shall be binding on and inure to the benefit of the
heirs, personal representatives and estate of Indemnitee.
13. Amendment. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless made in a writing
signed by each of the parties hereto.
-6-
<PAGE>
IN WITNESS WHEREOF, the Company and Indemnitee have executed this
Agreement as of the day and year first above written.
800-JR CIGAR, INC.
By:
---------------------------
Title:
------------------------------
-7-
<PAGE>
EXHIBIT 10.10
CONTRIBUTION AGREEMENT
June __, 1997
Board of Directors
800-JR Cigar, Inc.
301 Route 10 East
Whippany, N.J. 07981-2104
Ladies and Gentlemen:
1. Contributions. Each of the undersigned (each a "Subscriber" and
collectively the "Subscribers") desires to subscribe to the number of shares of
common stock, par value $.01 per share ("Common Stock"), of 800-JR Cigar, Inc.,
a Delaware corporation (the "Company"), set forth opposite such Subscriber's
name on attached Schedule A ("Company Shares"), and in exchange therefor
contribute to the Company the number of shares of capital stock ("Constituent
Entities Shares") of each of the corporations (each a "Constituent Entity" and
collectively the "Constituent Entities") set forth opposite such Subscriber's
name on attached Schedule B, all upon the terms and subject to the conditions
hereinafter set forth. It is intended that the contributions by the Subscribers
of the Constituent Entities Shares to be contributed by the Subscribers to the
Company, which will occur in connection with an initial public offering by the
Company of shares of Common Stock (the "Offering"), constitute tax-free capital
contributions under Section 351 of the Internal Revenue Code of 1986, as
amended, (the "Code").
2. Closing. The consummation of the contributions contemplated hereby (the
"Closing") shall occur on a date (the "Closing Date") to be specified by the
parties, which shall be no later than the fifth business day after satisfaction
of the latest to occur of the conditions set forth in Section 6 at the offices
of Morgan, Lewis & Bockius LLP, 101 Park Avenue, New York, New York 10178,
unless another date or place is agreed to in writing by each of the parties
hereto. At the Closing, the Company shall deliver to each Subscriber
certificates for the Company Shares to be issued to such Subscriber as set forth
on attached Schedule A against receipt of certificates for the Constituent
Entities Shares to be contributed by such Subscriber as set forth on attached
Schedule B duly endorsed or accompanied by duly executed stock powers,
transferring ownership to the Company of the Constituent Entities Shares to be
contributed by such Subscriber to the Company.
<PAGE>
3. Representations and Warranties.
(a) Representations and Warranties of the Subscribers. Each
Subscriber severally and not jointly hereby represents and warrants to the
Company that such Subscriber:
(i) (x) owns the Constituent Entities Shares to be contributed by
such Subscriber to the Company free and clear of any lien, claim, security
interest or other encumbrance, including, without limitation, any
restriction on transfer and (y) has the full legal right, and any approval
required by law to contribute, transfer and deliver to the Company such
Constituent Entities Shares in the manner provided in this Agreement, and
upon delivery to the Company of the certificates for such Constituent
Entities Shares hereunder, the Company will acquire valid title to such
Constituent Entities Shares free and clear of any lien, claim, security
interest or other encumbrance.
(ii) (x) is acquiring the Company Shares to be issued to such
Subscriber for such Subscriber's own account for investment and not with a
view to the distribution thereof or with any present intention of selling
any thereof, (x) has been informed by the Company that the Company Shares
to be issued to such Subscriber have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and understands
that such Company Shares must be held indefinitely unless subsequently
registered under the Securities Act or an exemption from such registration
is available and (z) is fully aware of the restrictions on disposing of
the Company Shares resulting from the provisions of the Securities Act and
the General Rules and Regulations of the Securities and Exchange
Commission (the "Commission") thereunder (including, without limitation,
Rule 144), and understands that, except as provided in Sections 4 and 5,
the Company is under no obligation to effect compliance with Regulation A
or any other exemption or to register the Company Shares to be issued to
such Subscriber.
(b) Representations and Warranties of the Company. The Company
represents and warrants to each Subscriber that the Company Shares to be
issued by the Company and delivered to each Subscriber hereunder have been
duly authorized and, when issued, delivered in the manner set forth in
this Agreement, will be validly issued, fully paid and nonassessable.
4. Certain Agreements.
(a) Tax Agreement. At or prior to the Closing, each of the
Subscribers and the Company shall, and the Company shall cause the
Constituent Entities to, enter into the Tax Agreement attached hereto as
Exhibit A.
-2-
<PAGE>
(b) Transferability. Prior to any sale, transfer, pledge or other
disposition of any Company Shares, each Subscriber shall give written
notice to the Company of such proposed sale, transfer, pledge or other
disposition and as to the circumstances thereof. Promptly upon receiving
such notice, the Company shall obtain from the Company's counsel and, if
the Company at its option so requests, such Subscriber will obtain from
such Subscriber's counsel and deliver to the Company, as promptly as
practicable, an opinion as to whether the proposed sale, transfer, pledge
or disposition may be effected without registration of such Company Shares
under the Securities Act. If in the opinion of each such counsel such
sale, transfer, pledge or disposition may be made in the manner described
in the notice thereof in compliance with applicable Federal and state
securities laws, such Subscriber may make such sale, transfer, pledge or
disposition. If either counsel shall fail to render an opinion to such
effect, such Subscriber shall not make such sale, transfer, pledge or
disposition unless and until registration of such Company Shares under the
Securities Act has become effective or is no longer required in the
opinion of the respective counsel.
Each certificate representing any of the Company Shares or
representing any shares issued in payment or distribution of any stock
dividend thereon, or split-up thereof, and each certificate, issued upon
any transfer or exchange of any such certificate, shall bear the following
legend unless, in the opinion of the Company's counsel, such legend is no
longer necessary to assure compliance with the Securities Act:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares have been
acquired for investment and may not be pledged or hypothecated, and
may not be sold or transferred, in the absence of an effective
Registration Statement for the shares under the Securities Act of
1933 or an opinion of counsel to the Company that registration is
not required under the Securities Act of 1933."
The Company will enter appropriate stop-transfer orders on any register or
records maintained by or on behalf of the Company with respect to the
Company Shares to insure that the Company Shares are not transferred
except in accordance with this Agreement.
(c) Information; Public Filings. If at any time the Common Stock is
required to be registered under Section 12(b) or Section 12(g), whichever
is applicable, of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), then thereafter the Company will:
(i) maintain effective a registration statement (containing such
information and documents as the Commission shall specify and otherwise
complying with the Securities Exchange Act), under Section 12(b) or
Section 12(g), whichever is applicable, of the Securities Exchange Act,
with respect to the Common Stock, and the
-3-
<PAGE>
Company will file as required such information, documents and reports as
the Commission may require or prescribe for companies whose stock has
been registered pursuant to such Section 12(b) or Section 12(g),
whichever is applicable; and
(ii) upon the request of any holder of Company Shares, make
whatever other filings with the Commission, or otherwise make generally
available to the public such financial and other information, as any such
holder may deem reasonably necessary or desirable in order to enable such
holder to be permitted to sell Company Shares pursuant to the provisions
of Rule 144.
5. Registration Rights. If, at any time following the first anniversary of
the Closing Date, the Company shall determine to register any other shares of
Common Stock under the Securities Act for its own account (other than on Form
S-4 or Form S-8 or a comparable form), the Company will, at its expense:
(a) furnish prompt written notice thereof to each holder of the
Company Shares, and
(b) include among the securities which it then registers and
qualifies, all of the Company Shares specified in a written request or
requests, made within 10 days after the giving of such written notice by
the Company, from any holder or holders of any of the Company Shares,
provided, however, that (i) if and to the extent that any such holder or
holders shall at the time have no present intention of selling or
distributing any of such Company Shares, the Company shall be obligated to
effect such registration, qualification or compliance with respect to such
holder's or holders' Company Shares only if and to the extent, in each
case, that such registration, qualification or compliance is at the time
permitted by the applicable statute or the rules and regulations thereunder
or the practices of the governmental authority concerned, (ii) if and to
the extent that, in the opinion of the Company's counsel, the holder or
holders thereof may sell or dispose of their Company Shares without
registration under the Securities Act, the Company shall not be obligated
to register the same, and (iii) if, in the reasonable opinion of the
prospective underwriters, the inclusion in the Registration Statement by
the holder or holders of any Company Shares would be detrimental to the
prospective offering, the Company may reduce the number of Company Shares
of each holder to be so included in proportion to their relative holdings
of Company Shares.
In the case of each registration, qualification or compliance pursuant
to this Section 5, the Company will keep the holders of all of the Company
Shares being registered advised in writing as to the initiation of
proceedings for such registration, qualification and compliance and as to
the completion thereof, and will advise any such holder, upon request, of
the progress of such proceedings. The Company will pay all of the costs
incident to such registration, qualification and compliance, except
underwriting discounts, registration or filing fees and other expenses
computed on the basis of the
-4-
<PAGE>
number of the shares of Common Stock or the aggregate value thereof being
registered. Each holder of the Company Shares being registered shall pay
that proportion of all such discounts, fees and expenses relating to the
Company Shares being registered that the number of the Company Shares of
such holder being registered bears to the total number of shares of Common
Stock being registered. At the expense of the Company, the Company will
keep such registration, qualification and compliance effective for a period
of 90 days by such action as may be necessary or appropriate, including,
without limitation, the filing of post-effective amendments and supplements
to any registration statement or prospectus necessary to keep the
registration correct and to permit the sale or distribution of the Company
Shares not theretofore sold or distributed, and further qualification under
any applicable blue sky or other state securities law to permit such sale
or distribution, all as requested by the holders.
Each holder of any of the Company Shares being registered shall
furnish to the Company such information regarding such holder and the
distribution of the Company Shares being registered held by such holder as
the Company may request in writing and as shall be required in connection
with any registration, qualification and compliance referred to in this
Section 5.
The Company will furnish to each holder of the Company Shares being
registered such number of prospectuses, offering circulars and other
documents incident to any registration, qualification or compliance
referred to in this Section 5, at the expense of the Company, as such
holders from time to time may reasonably request. The Company will
indemnify each such holder and each underwriter of the Company Shares being
registered against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained therein (or in any
related registration statement, notification or the like) or any omission
(or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
or any violation by the Company of any rule or regulation promulgated under
the Securities Act applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such holder and each
such underwriter for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action; provided, however, that the Company will not be liable
in any such case to the extent that any such claim, loss, damage or
liability arises out of or is based on any untrue statement or omission
based upon written information furnished to the Company by an instrument
duly executed by such holder or underwriter and stated to be specifically
for use therein.
As a condition of any such registration each of the holders of the
Company Shares being registered will agree (i) if the Company so requests,
to sell all of such Company Shares being registered through an underwriter
or underwriters designated by the
-5-
<PAGE>
Company, (ii) if the Company so requests, to delay the sale of the Company
Shares being registered for a period of up to 60 days after the effective
date of such registration, qualification or compliance, and (iii) to
severally indemnify the Company, its directors and officers, each person,
if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act, and each
underwriter of the Company Shares being registered, to the extent of the
net proceeds received by each holder from the sale of Company Shares,
against all claims, losses, damages and liabilities (or actions in respect
thereof) arising out of, or in connection with, or based on any untrue
statement (or alleged untrue statement) of a material fact contained in the
prospectus, offering circular or any other document incident to such
registration, qualification or compliance (or in any related registration
statement, notification or the like) or any omission (or alleged omission)
to state therein a material fact required to be stated therein or necessary
to make the statement therein not misleading, or any violation by such
holder of any rule or regulation promulgated under the Securities Act or
the Securities Exchange Act applicable to such holder and relating to
action or inaction required of such holder in connection with any such
registration, qualification or compliance, based on any untrue statement or
omission based upon written information furnished to the Company or any
such underwriter by an instrument duly executed by such holder and stated
to be specifically for use therein, and will reimburse the Company, each
such director and officer, each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act or Section 20 of the
Securities Exchange Act, and each underwriter for any legal fees and
expenses or any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage, liability or
action, based on any untrue statement or omission based upon written
information furnished to the Company or any such underwriter by an
instrument duly executed by such holder and stated to be specifically for
use therein or resulting from any violations by such holder of any rule or
regulation promulgated under the Securities Act or the Securities Exchange
Act.
6. Conditions to Closing.
(a) Conditions to Obligations of the Company. The obligations of the
Company to issue and deliver to the Subscribers the Company Shares to be
issued and delivered hereunder are subject to the fulfillment, at or prior
to the Closing, of each of the following conditions (all or any of which
may be waived in whole or in part by the Company):
(i) Representations and Warranties. Each of the representations
and warranties made by the Subscribers in this Agreement shall be true and
correct in all material respects.
(ii) Performance. Each Subscriber shall have performed and
complied with, in all material respects, each agreement, covenant and
obligation required by this
-6-
<PAGE>
Agreement to be so performed or complied with by such Subscriber at or
before the Closing.
(iii) Underwriting Agreement. Each of the Company, Lewis I.
Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the Luke Rothman
Trust, the Marni Rothman Trust and the Samantha Rothman Trust, Wheat,
First Securities, Inc. and J.C. Bradford & Co., as representatives of the
several underwriters shall have entered into an underwriting agreement
(the "Underwriting Agreement") relating to the purchase and sale of shares
of Common Stock, and the Underwriters (as defined therein) shall have
purchased and paid for the Firm Securities (as defined therein) pursuant
thereto.
(b) Conditions to Obligations of the Subscribers. The obligations of each
Subscriber to purchase the Company Shares to be purchased by such Subscriber
hereunder are subject to the fulfillment, at or prior to the Closing, of each of
the following conditions (all or any of which may be waived in whole or in part
by the Subscribers):
(i) Representations and Warranties. Each of the representations
and warranties made by the Company in this Agreement shall be true and
correct in all material respects.
(ii) Performance. The Company shall have performed and complied
with, in all material respects, each agreement, covenant and obligation
required by this Agreement to be so performed or complied with by it at or
before the Closing.
(iii) Underwriting Agreement. Each of the Company, Lewis I.
Rothman, LaVonda M. Rothman, the Shane Rothman Trust, the Luke Rothman
Trust, the Marni Rothman Trust and the Samantha Rothman Trust, Wheat,
First Securities, Inc. and J.C. Bradford & Co., as representatives of the
several Underwriters, shall have entered into the Underwriting Agreement
and the Underwriters shall have purchased and paid for the Firm Securities
pursuant thereto.
7. Miscellaneous.
(a) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed
by each of the parties and delivered to the other parties, it being
understood that all parties need not sign the same counterpart.
(b) Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral,
among the parties with respect to
-7-
<PAGE>
the subject matter hereof and is not intended to confer upon any person
other than the parties hereto any rights or remedies hereunder.
(c) Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New Jersey without regard to
applicable principles of conflicts of law thereof.
(d) Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto, whether by operation of law or otherwise, without the prior
written consent of the other parties. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective heirs or successors.
Very truly yours,
--------------------------
Lewis I. Rothman
--------------------------
LaVonda M. Rothman
Trust f/b/o Shane Rothman,
pursuant to trust agreement dated November 1,
1994, Lew Rothman, Grantor
By:
--------------------------
Samuel Bornstein
Special Trustee
Trust f/b/o Luke Rothman,
pursuant to trust agreement dated November 1,
1994, Lew Rothman, Grantor
By:
--------------------------
Samuel Bornstein
Special Trustee
-8-
<PAGE>
Trust f/b/o Marni Rothman,
pursuant to trust agreement dated November 1,
1994, Lew Rothman, Grantor
By:
--------------------------
Samuel Bornstein
Special Trustee
Trust f/b/o Samantha Rothman,
pursuant to trust agreement dated November 1,
1994, Lew Rothman, Grantor
By:
--------------------------
Samuel Bornstein
Special Trustee
CONSENTED TO AND AGREED:
800-JR CIGAR, INC.
By:
----------------------
Lewis I. Rothman
President
-9-
<PAGE>
SCHEDULE A
COMPANY SHARES
Number of Company Shares
Name of Stockholder to be Issued
- ------------------- ------------------------
Lew Rothman 4,387,920
LaVonda Rothman 4,387,920
Marni Rothman Trust 131,040
Samantha Rothman Trust 131,040
Shane Rothman Trust 131,040
Luke Rothman Trust 131,040
<PAGE>
SCHEDULE B
SHARES OF CAPITAL STOCK
OF CONSTITUENT ENTITIES
TO BE CONTRIBUTED
<TABLE>
<CAPTION>
Number of
Class and Par Value of Shares to be
Stockholder Constituent Entity Capital Stock Contributed
----------- ------------------ ------------- -----------
<S> <C> <C> <C>
Lew Rothman J.R Tobacco of America, Inc. Common Stock, $1.00 par value 100
Cigars by Santa Clara, N.A., Inc. Common Stock, $1.00 par value 100
J.N.R. Grocery Corp. Common Stock, no par value 30
J.R Tobacco NC, Inc. Common Stock, $1.00 par value 100
J&R Tobacco (New Jersey) Corp. Common Stock, no par value 20
J.R Tobacco Company of Michigan, Inc. Common Stock, $1.00 par value 350
J.R-46th Street, Inc. Common Stock, no par value 100
J.R Tobacco Outlet, Inc. Common Stock, no par value 50
J.R Statesville, Inc. Common Stock, $1.00 par value 52
J R Cigar (DC), Inc. Common Stock, no par value 25
LaVonda Rothman J.R Tobacco of America, Inc. Common Stock, $1.00 par value 100
Cigars by Santa Clara, N.A., Inc. Common Stock, $1.00 par value 100
J.N.R. Grocery Corp. Common Stock, no par value 30
J.R Tobacco NC, Inc. Common Stock, $1.00 par value 100
J&R Tobacco (New Jersey) Corp. Common Stock, no par value 20
J.R Tobacco Company of Michigan, Inc. Common Stock, $1.00 par value 350
J.R-46th Street, Inc. Common Stock, no par value 100
J.R Tobacco Outlet, Inc. Common Stock, no par value 50
J.R Statesville, Inc. Common Stock, $1.00 par value 52
J R Cigar (DC), Inc. Common Stock, no par value 25
Marni Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Samantha Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Shane Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Luke Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
</TABLE>
<PAGE>
EXHIBIT 10.11
EXHIBIT A
TAX AGREEMENT
Tax Agreement, dated as of June __, 1997, among 800-JR CIGAR, Inc., a
Delaware corporation (the "Company"), and each of the undersigned persons or
entities named on attached Schedule A (each a "Subscriber" and collectively the
"Subscribers").
WHEREAS, concurrently herewith the Company and the Subscribers are
entering into a Contribution Agreement (the "Contribution Agreement") pursuant
to which, among other things, each of the Subscribers will subscribe for shares
of Common Stock, par value $.01 per share, of the Company ("Common Stock"), and,
in exchange therefor, contribute to the Company the number of shares of capital
stock of each of the corporations (each a "Constituent Entity" and collectively
the "Constituent Entities") set forth opposite such Subscriber's names on
attached Schedule A ("Constituent Entities Shares"), all upon the terms and
subject to the conditions set forth in the Contribution Agreement; and
WHEREAS, in connection with the transactions contemplated by the
Contribution Agreement, the Company and the Subscribers desire to enter into
this Agreement setting forth certain agreements of the Company and the
Subscribers with respect to certain tax matters relating to the transactions
contemplated by the Contribution Agreement;
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties hereby agree as follows:
1. Certain Covenants. The Subscribers and the Company shall, and the
Company shall cause each of the Constituent Entities to, comply with the tax
reporting requirements of Section 1.351-3 of the Treasury Regulations and not
take any action inconsistent with the contributions to the Company of the
Constituent Entities Shares being tax-free capital contributions under Section
351 of the Internal Revenue Code of 1986, as amended (the "Code"). The Company
shall cause each Constituent Entity to prepare and timely file all income tax
returns of such Constituent Entity for all periods when such Constituent Entity
was an "S Corporation" within the meaning of Section 1361 of the Code, and the
corresponding provisions of any state or local law (beginning on the effective
date of its election to be treated as such, as set forth on attached Schedule
B), that are required to be filed on or after the Closing Date (as defined in
the Contribution Agreement) ("Post-Closing S Corporation Tax Returns"), and the
Subscribers shall pay any and all taxes with respect to such returns. At least
fifteen (15) days prior to the filing of any such Post-Closing S Corporation Tax
Return, the Company shall furnish to each Subscriber copies of such tax return
for such Subscriber's review, comment and consent, which consent shall not be
unreasonably delayed or withheld. With respect to any such return of any such
Constituent Entity for any taxable year beginning on or after January 1, 1997
and
<PAGE>
ending on the date preceding the date the Constituent Entities Shares of such
Constituent Entity are contributed to the Company (the "S Corporation
Termination Date"), the portion of such Constituent Entity's taxable income
allocated to such period shall be determined by using the "closing of the books"
method. Each party hereto shall, and shall cause its subsidiaries and affiliates
to, provide to each of the other parties hereto such cooperation and information
as any of them shall reasonably request in the filing of any tax return, amended
tax return or claim for refund or in connection with an audit of any such
return. Such cooperation shall include providing copies of all relevant portions
of the return, together with all work papers and other relevant documents and
records. Each Subscriber shall make himself or herself, and the Company shall
make its and the Constituent Entities' employees, reasonably available on a
mutually convenient basis at the Company's cost to provide explanation or
assistance in connection with any such documents. The Company shall cause each
Constituent Entity to retain all tax returns, schedules, work papers and all
material records and other documents relating to taxes for all periods of such
Constituent Entity ending on or before the S Corporation Termination Date until
the later of (i) the expiration of seven years after the later of the filing or
due date for each such tax return or (ii) the expiration of any relevant statute
of limitations. The Company shall, and shall cause the Constituent Entities to,
not destroy any such returns, schedules, work papers, records or other documents
relating to any period of any of the Constituent Entities ending on or before
the S Corporation Termination Date, without first offering them to the
Subscribers. The Company shall file, or shall cause the appropriate Constituent
Entity to file, all tax returns required to be filed for all taxable periods
ending after the S Corporation Termination Date, and shall pay all taxes
required to be paid with respect thereto.
2. Tax Indemnity. The Subscribers, severally (according to the relative
percentage of the outstanding shares of capital stock of the Constituent Entity
owned by each Subscriber on the last day of the applicable period to which a
liability described below relates) and not jointly, agree to indemnify and hold
harmless the Company against any and all 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, as set forth on attached
Schedule B and ending on the S Corporation Termination Date. Each of the Company
and the Subscribers agree that (i) within 10 days of receiving written notice of
any income tax examinations, claims, settlements, proposed adjustments or
related matters that may affect in any way the income tax liability of a party
under this Agreement, such person shall provide written notice thereof to each
other party hereto, and (ii) the party or parties who would be responsible for
the payment of the applicable taxes if the matter in question were to be
resolved adversely shall be entitled, in his, her or its reasonable discretion
and at his, her or its sole expense, to handle, control and compromise or settle
the defense thereof, so long as such party or parties are acting diligently and
in good faith. Such party or parties shall keep the other party(ies) apprised of
the status thereof and shall consult with such other party(ies) concerning the
conduct of the defense thereof. Notwithstanding the foregoing, however, the
party handling such matters shall not compromise or settle any matter
-2-
<PAGE>
which could adversely affect the tax liability of another party without such
other party's written consent, which shall not be unreasonably withheld.
3. Governing Law. This Agreement shall be construed, interpreted and the
rights of the parties determined in accordance with the laws of the State of New
Jersey, without reference to its choice of law provisions.
IN WITNESS WHEREOF, each of the parties hereto has duly executed and
delivered, or has caused this Agreement to be duly executed and delivered on its
behalf, as of the date first above written.
800-JR CIGAR, Inc.
By:
-----------------------------
Name:
Title:
---------------------------------
Lewis I. Rothman
---------------------------------
LaVonda M. Rothman
Trust f/b/o Shane Rothman,
pursuant to trust agreement dated
November 1, 1994,
Lew Rothman, Grantor
By:
-----------------------------
Samuel Bornstein
Special Trustee
-3-
<PAGE>
Trust f/b/o Luke Rothman,
pursuant to trust agreement dated
November 1, 1994,
Lew Rothman, Grantor
By:
-----------------------------
Samuel Bornstein
Special Trustee
Trust f/b/o Marni Rothman,
pursuant to trust agreement dated
November 1, 1994,
Lew Rothman, Grantor
By:
-----------------------------
Samuel Bornstein
Special Trustee
Trust f/b/o Samantha Rothman,
pursuant to trust agreement dated
November 1, 1994,
Lew Rothman, Grantor
By:
-----------------------------
Samuel Bornstein
Special Trustee
-4-
<PAGE>
SCHEDULE A
SHARES OF CAPITAL STOCK
OF CONSTITUENT ENTITIES
TO BE CONTRIBUTED
<TABLE>
<CAPTION>
Number of
Class and Par Value of Shares to be
Stockholder Constituent Entity Capital Stock Contributed
- --------------------- ------------------------------------- ----------------------------- ------------
<S> <C> <C> <C>
Lew Rothman J.R Tobacco of America, Inc. Common Stock, $1.00 par value 100
Cigars by Santa Clara, N.A., Inc. Common Stock, $1.00 par value 100
J.N.R. Grocery Corp. Common Stock, no par value 30
J.R Tobacco NC, Inc. Common Stock, $1.00 par value 100
J&R Tobacco (New Jersey) Corp. Common Stock, no par value 20
J.R Tobacco Company of Michigan, Inc. Common Stock, $1.00 par value 350
J.R-46th Street, Inc. Common Stock, no par value 100
J.R Tobacco Outlet, Inc. Common Stock, no par value 50
J.R Statesville, Inc. Common Stock, $1.00 par value 52
J R Cigar (DC), Inc. Common Stock, no par value 25
LaVonda Rothman J.R Tobacco of America, Inc. Common Stock, $1.00 par value 100
Cigars by Santa Clara, N.A., Inc. Common Stock, $1.00 par value 100
J.N.R. Grocery Corp. Common Stock, no par value 30
J.R Tobacco NC, Inc. Common Stock, $1.00 par value 100
J&R Tobacco (New Jersey) Corp. Common Stock, no par value 20
J.R Tobacco Company of Michigan, Inc. Common Stock, $1.00 par value 350
J.R-46th Street, Inc. Common Stock, no par value 100
J.R Tobacco Outlet, Inc. Common Stock, no par value 50
J.R Statesville, Inc. Common Stock, $1.00 par value 52
J R Cigar (DC), Inc. Common Stock, no par value 25
Marni Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Samantha Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Shane Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
Luke Rothman Trust J.R Statesville, Inc. Common Stock, $1.00 par value 24
</TABLE>
<PAGE>
SCHEDULE B
EFFECTIVE DATES OR
S CORPORATION ELECTIONS
Constituent Entity Federal State
------------------ ------- -----
Cigars by Santa Clara, N.A., Inc. 7/2/90 7/2/90 (NC)
J.N.R. Grocery Corp. 5/1/87 ---
J&R Tobacco (New Jersey) Corp. 7/28/82 1/1/97 (NJ)
J.R-46th Street, Inc. 1/1/91 1/1/97 (NY)
J.R Statesville, Inc. 7/2/93 7/2/93 (NC)
J.R Tobacco Company of Michigan, Inc. 7/1/88 ---
J.R Tobacco NC, Inc. 7/2/90 7/2/90 (NC)
J.R Tobacco of America, Inc. 7/2/90 7/2/90 (NC)
J.R Tobacco Outlet, Inc. 1/1/90 1/1/97 (NJ)
<PAGE>
BUSINESS LEASE
The Landlord and the Tenant agree to lease the Rental Space for the Term and at
the Rent stated, as follows:(The words Landlord and Tenant include all landlords
and all tenants under this Lease.)
Landlord: J.R Tobacco Outlet, Inc. Tenant: Casa Blanca, Inc.
301 Route 10 East 301 Route 10 East
Whippany, New Jersey 07981 Whippany, New Jersey 07981
Rental Space: Liquor Store and Bar Area Comprising of 1,200 sq. ft. running
along West Wall of Cigar Store Building
in the Building at: 301 Route 10 East, Whippany, New Jersey 07981
Date of Lease: March 1, 1996.
Term: Five (5) Years
Beginning: March 1, 1996.
Ending: February 28, 2001.
Security $: None.
Broker. The Landlord and the Tenant recognize: None.
as the Broker who brought about this Lease. The None shall pay
the Broker's commission.
Liability Insurance. Minimum amounts: for each person injured $1,000,000, for
any one accident $2,000,000, for property damage $500,000.
Municipal Real Estate Taxes $ N/A, Base Year 19 . Percent of Increase 15.0%
Use of Rental Space: For A Retail Liquor Store and An Upscale Cigar Bar Only.
Additional agreements: Owner Shall Restrict Spirit and Wine Consumption to the
Bar Area Only.
Rent for the Term is $253,000.00
The Rent is payable in advance on the first day of each month, as follows:
For the Period March 1, 1996 through December 31, 1996: $2,950.00
For the Period January 1, 1997 through February 28, 2001: $4,666.66.
1
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1. Possession and Use 16. No Alterations
2. Delay in Giving of Possession 17. Signs
3. No Assignment or Subletting 18. Access to Rental Space
4. Rent and Additional Rent 19. Fire and Other Casualty
5. Security 20. Eminent Domain
6. Liability Insurance 21. Subordination to Mortgage
7. Unavailability of Fire Insurance, Rate Increases 22. Tenant's Certificate
8. Water Damage 23. Violations, Eviction, Re-entry and Damages
9. Liability of Landlord and Tenant 24. Notices
10. Real Estate Taxes 25. No Waiver
11. Acceptance of Rental Space 26. Survival
12. Quite Enjoyment 27. End of Term
13. Utilities and Services 28. Binding
14. Tenant's Repairs, Maintenance and Compliance 29. Full Agreement
15. Landlord's Repairs and Maintenance
</TABLE>
1. Possession and Use
The Landlord shall give possession of the Rental Space to the Tenant for
the Term. The Tenant shall take possession of and use the Rental Space for the
Purpose stated above. The Tenant may not use the Rental Space for any other
purpose without the written consent of the Landlord.
The Tenant shall not allow the Rental Space to be used for any unlawful or
hazardous purpose. The Tenant is satisfied that the Rental Space is zoned for
the Use stated. The Tenant shall obtain any necessary certificate of occupancy
or other certificate permitting the Tenant to use the Rental Space for that Use.
The Tenant shall not use the Rental Space in any manner that results in (1)
an increase in the rate of fire or liability insurance or (2) cancellation of
any fire or liability insurance policy on the Rental Space. Then Tenant shall
comply with all requirements of the insurance companies insuring the Rental
Space. The Tenant shall not abandon the Rental Space during the Term of this
Lease or permit it to become vacant for extended periods.
2. Delay in Giving of Possession
This paragraph applies if (a) the Landlord cannot give possession of the
Rental Space to the Tenant on the beginning date and (b) the reason for the
delay is not the Landlord's fault. The Landlord shall not be held liable for
the delay. The Landlord shall then have 30 days in which to give possession.
If possession is given within that time, the Tenant shall accept possession and
pay the Rent from that date. The ending date of the Term shall not change. If
possession is not given within that time this lease may be canceled by either
party on notice to the other.
3. No Assignment or Subletting
The Tenant may not do any of the following without the Landlord's written
consent: (a) assign this lease (if the Tenant is a corporation, the sale of a
majority of its shares shall be treated as an assignment), (b) sublet all or any
part of the Rental Space or (c) permit any other person or business to use the
Rental Space.
4. Rent and Additional Rent
Tenant shall pay the Rent to the Landlord at the Landlord's address.
If the Tenant fails to comply with any agreement in this Lease, the
Landlord may do so on behalf of the Tenant. The Landlord may charge the cost to
comply, including reasonable attorney's fees, to the Tenant as "additional
rent". The additional rant shall be due and payable as Rent with the next
monthly Rent payment. Non-payment of additional rent shall give the Landlord
the same rights against the Tenant as if the Tenant failed to pay the Rent.
2
<PAGE>
5. Security
The Tenant has given to the Landlord the Security stated above. The
Security shall be held by the Landlord during the Term of this Lease. The
Landlord may deduct from the Security any expenses incurred in connection with
the Tenant's violation of any agreement in this Lease. For example, if the
Tenant does not leave the Rental Space in good condition at the end of the Term,
the Security may be used to put it in good condition. If the amount of damage
exceeds the Security, the Tenant shall pay the additional amount to the Landlord
on demand.
If the Landlord uses the Security or any part of it during the Term, the
Tenant shall on demand pay the Landlord for the amount used. The amount of the
Security is to remain constant throughout the Term. The Security is not to be
used by the Tenant for the payment of Rent. The Landlord shall repay to the
Tenant any balance remaining within a reasonable time after the end of the term.
The Tenant shall not be entitled to interest on the Security.
If the Landlord's interest in the Rental Space is transferred, the Landlord
shall turn over the Security to the new Landlord. The Landlord shall notify the
Tenant of the name and address of the new Landlord. Notification must be given
within 5 days after the transfer, by registered or certified mail. The Landlord
shall then no longer be responsible to the Tenant for the repayment of the
Security. The new Landlord shall be responsible to the Tenant for the return of
the Security in accordance with the terms of this Lease.
6. Liability Insurance
The Tenant shall obtain, pay for, and keep in effect for the benefit of the
Landlord and the Tenant public liability insurance on the Rental Space. The
insurance company and the broker must be acceptable to the Landlord. This
coverage must be in at least the minimum amounts states above.
All policies shall state that the insurance company cannot cancel or refuse
to renew without at lease 10 days written notice to the Landlord.
The Tenant shall deliver the original policy to the Landlord with proof of
payment of the first year's premiums. This shall be done not less than 15 days
before the Beginning of the Term. The Tenant shall deliver a renewal policy to
the Landlord with Proof of payment not less than 15 days before the expiration
date of each policy.
7. Unavailability of Fire Insurance, Rate Increases
If due to the Tenant's use of the Rental Space the Landlord cannot obtain
and maintain fire insurance on the Building in an amount and form reasonably
acceptable to the Landlord, the Landlord may cancel this Lease on 30 days notice
to the Tenant. If due to the Tenant's use of the Rental Space the fire
insurance rate is increased, the Tenant shall pay the increase in the premium to
the Landlord on demand.
8. Water Damage
The Landlord shall not be liable for any damage or injury to any persons or
property caused by the leak or flow of water from or into any part of the
Building.
9. Liability of Landlord and Tenant
The Landlord shall not be liable for injury or damage to any person or
property unless it is due to the Landlord's act or neglect. The Tenant is
liable for any loss, injury or damage to any person or property caused by the
act or neglect of the Tenant or the Tenant's employees. The Tenant shall defend
the Landlord from and reimburse the Landlord for all liability and costs
resulting from any injury or damage due to the act or neglect of the Tenant or
the Tenant's employees.
10. Real Estate Taxes
The Landlord shall pay the yearly Municipal Real Estate Taxes on the
Building in the amount stated above, This is the tax assessed for the Base Year
stated above. The Tenant shall pay the Percent of Increase stated above or each
yearly increase in the Municipal Real Estate Taxes over the tax for the Base
Year. The Tenant shall pay this amount yearly in one sum within 30 days of the
Landlord's written request accompanied by a copy of the current year's tax bill.
The Tenant's liability for this payment shall be prorated for any part of the
year the Tenant does not occupy the Rental Space under this Lease.
11. Acceptance of Rental Space
The Tenant has inspected the Rental Space and agrees that the Rental Space
is in satisfactory condition. The Tenant accepts the Rental Space "as is".
12. Quite Enjoyment
The Landlord has the right to enter into this Lease. If the Tenant
complies with this Lease, the Landlord must provide the Tenant with undisturbed
possession of the Rental Space.
3
<PAGE>
13. Utilities and Services
The Tenant shall arrange and pay for all utilities and services required
for the Rental Space, including the following: (a) Heat, (b) Hot and cold
water, (c) Electric and (d) Gas.
The Landlord shall pay for the following utilities and services: 13(a)
through 13(d).
The Landlord is liable for any inconvenience or harm caused by any stoppage
or reduction of utilities and services beyond the control of the Landlord. This
does not excuse the Tenant from paying Rent.
14. Tenant's Repairs, Maintenance, and Compliance
The Tenant shall:
(a) Promptly comply with all laws, orders, rules and requirements of
governmental authorities, insurance carriers, board of fire underwriters, or
similar groups.
(b) Maintain the Rental Space and all equipment and fixtures in it in good
repair and appearance.
(c) Make all necessary repairs to the Rental Space and all equipment and
fixtures in it, except structural repairs.
(d) Maintain the Rental Space in a neat, clean, safe, and as sanitary
condition, free of all garbage.
(e) Keep the walks, driveway, parking area, year, entrances, hallways, and
stairs clean and free from trash, debris, snow and ice.
(f) Use all electric, plumbing and other facilities in the Rental Space
safely.
(g) Use no more electricity than the wiring or feeders to the Rental Space
can safely carry.
(h) Promptly replace all broken glass in the Rental Space.
(i) Do nothing to destroy, deface, damage, or remove any part of the
Rental Space.
(j) Keep nothing in the Rental Space which is inflammable, dangerous or
explosive or which might increase the danger of fire or other casualty.
(k) Promptly notify the Landlord when there are conditions which need
repair.
(l) Do nothing to destroy the peace and quiet of the Landlord, other
tenants, or persons in the neighborhood.
(m) Avoid littering in the building or on its grounds.
The Tenant shall pay any expenses involved in complying with the above.
15. Landlord's Repairs and Maintenance
The Landlord shall:
(a) Maintain the public areas, roof and exterior walls in good condition.
(b) Make all structural repairs unless these repairs are made necessary by
the act or neglect of the Tenant of the Tenant's employees.
(c) Make necessary replacements of the plumbing, cooling, heating and
electrical systems, except when made necessary by the act or neglect of the
Tenant or the Tenant's employees.
(d) Maintain the elevators in the Building, if any.
16. No Alterations
The Tenant may not make any changes or additions to the Rental Space
without the Landlord's written consent. Any changes or additions made without
the Landlord's written consent shall be removed by the Tenant on demand.
All changes or additions made with the Landlord's written consent shall
become the property of the Landlord when completed and paid for by the Tenant.
They shall remain as part of the Rental Space at the end of the Term. The
Landlord may demand that the Tenant remove any changes or additions at the end
of the Term. The Tenant shall promptly pay for all costs of any permitted
changes or additions. The Tenant shall not allow any mechanic's lien or other
claim to be filed against the Building. If any lien or claim is filed against
the Building, The Tenant shall have it promptly removed.
17. Signs
The Tenant shall obtain the Landlord's written consent before placing any
sign on or about the Rental Space. Signs must conform with all applicable
municipal ordinances and regulations.
18. Access to Rental Space
The Landlord shall have access to the Rental Space on reasonable notice to
the Tenant to (a) inspect the Rental space, (b) make necessary repairs,
alterations, or improvements, (d) supply services, and (d) show it to
prospective buyers, mortgage lenders, contractors or insurers.
The Landlord may show the Rental Space to rental applicants or reasonable
hours on notice to the Tenant within 6 months before the end of the Term.
The Landlord may enter the Rental Space at any time without notice to the
Tenant in case of emergency.
4
<PAGE>
19. Fire and Other Casualty
The Tenant shall notify the Landlord at once of any fire or other casualty
in the Rental Space. The Tenant is not required to pay Rent when the Rental
Space is unusable. If the Tenant uses part of the Rental Space, the Tenant must
pay Rent pro-rata for the usable part.
If the Rental Space is partially damaged by fire or other casualty, the
Landlord shall repair it as soon as possible. This includes the damage to the
Rental Space and fixtures installed by the Landlord. The Landlord need not
repair or replace anything installed by the Tenant.
Either party may cancel this Lease if the Rental Space is so damaged by
fire or other casualty that is cannot be repaired within 90 days. If the
parties cannot agree, the opinion of a contractor chosen by the Landlord and the
Tenant will be binding on both parties.
This Lease shall end if the Rental Space is totally destroyed. The Tenant
shall pay rent to the date of destruction.
If the fire or other casualty is caused by the act or neglect of the Tenant
or the Tenant's employees, the Tenant shall pay for the repairs and all other
damage.
20. Eminent Domain
Eminent domain is the right of a government to lawfully condemn and take
private property for public use. Fair value must be paid for the property. The
taking occurs either by court order or by deed to the condemning party. If any
part of the Rental Space is taken by eminent domain, either party may cancel
this Lease on 30 days notice to the other. The entire payment for the taking
shall belong to the Landlord. The Tenant shall make no claim for the value of
this Lease for the remaining part of the Term.
21. Subordination to Mortgage
In a foreclosure sale all mortgages which now or in the future affect the
Building have priority over this Lease. This means that the holder of a
mortgage may end this Lease on a foreclosure sale. The Tenant shall sign all
papers needed to give any mortgage priority over this Lease. If the Tenant
refuses, the Landlord may sign the papers on behalf of the Tenant.
22. Tenant's Certificate
At the request of the Landlord, the Tenant shall sign a certificate stating
that (a) this Lease has not been amended and is in effect, (b) the Landlord has
fully performed all of the Landlord's agreements in this Lease, (c) the Tenant
has no rights to the Rental Space except as stated in this Lease, (d) the Tenant
has paid all Rent to date, and (e) the Tenant has not paid Rent for more than
one month in advance. The Certificate shall also list all the property attached
to the Rental Space owned by the Tenant.
23. Violation, Eviction, Re-entry and Damages
The Landlord reserves a right of re-entry which allows the Landlord to end
this Lease and re-enter the Rental Space if the Tenant violates any agreement in
this Lease. This is done by eviction. Eviction is a court procedure to remove
a tenant. Eviction is started by the filing of a complaint in court and the
service on a tenant of the complaint and summons to appear in court. The
Landlord may also evict the Tenant for any other cause allowed by law. After
obtaining a judgment for possession and compliance with the warrant of removal,
the Landlord may re-enter and take back possession of the Rental Space. If the
cause for eviction is non-payment of Rent, notice does not have to be given to
the Tenant before the Landlord files a complaint. If there is any other cause
to evict, the Landlord must give to the Tenant the notice required by law before
the Landlord files a complaint for eviction.
The Tenant is liable for all damages caused by the Tenant's violation of
any agreement in this Lease. This includes reasonable attorney's fees and
costs. The rights and remedies of the Landlord under this Lease are not
intended to be inclusive but as additional to all other rights and remedies
allowed to the Landlord by law.
After eviction he Tenant shall pay the unpaid Rent for the Term or until
the Landlord re-rents the Rental Space, if sooner. The Landlord re-rents the
Rental Space for less than the Tenant's Rent, the Tenant shall pay the
difference until the end of the Term. The Tenant shall not be entitled to any
excess resulting from the re-renting. The Tenant shall also pay (a) all
reasonable expenses incurred by the Landlord in preparing the Rental Space for
re-renting and (b) commissions paid to the broker for finding a new tenant.
24. Notices
All notices given under this Lease must be in writing. Each party must
accept and claim the notices given by the other. Unless otherwise provided by
law, they pay be given by (a) personal delivery, or (b) certified mail, return
receipt requested. Notices shall be addressed to the Landlord at the address
written at the beginning of this Leases and to the Tenant at the Rental Space.
25. No Waiver
The Landlord's failure to enforce any agreement in this Lease shall not
prevent the Landlord from enforcing the agreement for any violations occurring
at a later time.
26. Survival
If any agreement in this Lease is contrary to law, the rent of the Lease
shall remain in effect.
5
<PAGE>
27. End of Term
At the end of the Term the Tenant shall (a) leave the Rental Space clean,
(b) remove all the Tenant's property, (c) remove all signs and restore that
portion of the Rental Space on which they were placed, (d) repair all damage
caused by moving, and (e) return the Rental Space to the Landlord in the same
condition as it was at the beginning of the Term except for normal wear and
tear.
If the Tenant leaves any property in the Rental Space, the Landlord may (a)
dispose of it and charge the Tenant for the cost of disposal, or (b) keep it as
abandoned property.
28. Binding
This Lease binds the Landlord and the Tenant and all parties who lawfully
succeed to their rights or take their places.
29. Full Agreement
The parties have read this Lease. If contains their full agreement. It
may not be changed except in writing signed by the Landlord and the Tenant.
Signatures The Landlord and the Tenant agree to the terms of this Lease by
signing below. If a party is a corporation, this Lease is signed
by its proper corporate officers and its corporate seal is
affixed.
Witnessed or attested by: ----------------------------------------
Lewis Rothman, President Landlord
- --------- ----------------- ----------------------------------------
As to Landlord Landlord
----------------------------------------
LaVonda Rothman, President Tenant
- --------- ----------------- ----------------------------------------
As to Tenant Tenant
6
<PAGE>
EXHIBIT 10.17
THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY
NOT BE TRANSFERRED OR SOLD, IN WHOLE OR IN PART, UNLESS REGISTERED OR EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL
APPLICABLE STATE SECURITIES LAWS.
FORM OF NOTE
$_______________ Whippany, New Jersey
_____________, 1997
FOR VALUE RECEIVED,________________________ , a _____________________
corporation (the "Company"), hereby unconditionally promises to pay to the order
of the parties listed on the attached Schedule A (each a "Lender" and
collectively the "Lenders"), in the respective percentages set forth opposite
each Lender's name on the attached Schedule A, the principal amount of _________
Dollars ($__________) in twelve (12) equal installments of $_______________ on
September 1, December 1, March 1 and June 1 of each year commencing September 1,
1997.
The Company will pay interest (computed on the basis of a 360-day year of
twelve 30-day months) on the unpaid balance of the principal of this Note on
September 1, 1997 and on each December 1, March 1, June 1 and September 1
thereafter at the rate of 7.0% per annum compounded annually (the "Applicable
Rate") until the principal amount of this Note, together with any accrued and
unpaid interest, is fully paid. Payments hereunder shall be applied first
against accrued and unpaid interest and then against the unpaid balance of the
principal hereof. If the Company shall default in the payment of the principal
of or interest on this Note when due and payable (whether upon a payment date,
upon Maturity Date or by acceleration hereof), the Company shall on demand, from
time to time, pay interest on such defaulted amount from the time of such
default until such defaulted amount is paid at a per annum rate equal to two
percent over the Applicable Rate. Notwithstanding anything contained herein to
the contrary, if at any time the rate of interest charged hereunder, together
with all other charges provided for herein which are treated as interest under
applicable law, shall exceed the maximum lawful rate which may be contracted
for, charged or received by a Lender in accordance with applicable law (the
"Maximum Rate"), the rate of interest, if any, payable under this Note, together
with all such other charges, shall be limited to the Maximum Rate.
<PAGE>
All Payments hereunder shall be made in lawful money of this United States
of America at the address of each Lender set forth on Schedule A hereto, or at
such other place or places as each Lender may designate by notice to the
Company. This Note is issued by the Company as a dividend declared in connection
with the termination of the Company's status in accordance with and subject to
the terms and conditions herein set forth.
1. Subordination. If required pursuant to the terms of any Bank
Indebtedness (as hereinafter defined), the payment of the principal of and
interest on this Note shall be subordinated in right of payment to such Bank
Indebtedness and each Lender and each subsequent Holder or assign, by its
acceptance hereof, if required by the terms of such Bank Indebtedness, agrees to
enter into an appropriate subordination agreement acceptable to the holders of
such Bank Indebtedness. As used herein, "Bank Indebtedness" shall mean all
indebtedness of the Company for money borrowed (including principal, interest,
premium, if any, and fees, if any) from banks or other financial institutions,
whether outstanding on the date hereof or hereinafter incurred, as the same may
be extended, modified or renewed.
2. Waivers. The non-exercise by Lender of any of its rights hereunder
in any particular instance shall not constitute a waiver thereof in that or any
subsequent instance.
3. Events of Default. In the case of the happening of any of the
following events (each, an "Event of Default"):
(a) The Company shall default in the payment of principal of and
interest on this Note, as and when due and payable, whether upon a Payment Date,
the Maturity Date, by acceleration hereunder or otherwise;
(b) Any obligor under any note issued to Lenders or the other
Existing Stockholders (as defined in the Registration Statement of 800-JR Cigar,
Inc.) on the date hereof shall default in the payment of principal of or
interest on such note, as and when due and payable, whether upon a payment date,
the maturity date, by acceleration thereunder or otherwise;
(c) The Company shall (i) become insolvent or admit in writing its
inability to pay its debts as they mature, (ii) apply for, consent to, or
acquiesce in the appointment of a receiver, trustee, liquidator or similar
official for itself or any of its assets, (iii) make a general assignment for
the benefit of creditors, (iv) be adjudicated as bankrupt or insolvent, (v)
voluntarily commence a proceeding or file a petition under any law relating to
bankruptcy, insolvency, the relief of debtors or the liquidation or adjustment
of indebtedness or (vi) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or the filing of any petition
described in paragraph (c) below; or
-2-
<PAGE>
(d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed under any law relating to bankruptcy, insolvency, the
relief of debtors or the liquidation or adjustment of indebtedness against the
Company, or the assets of the Company, and such proceeding or petition shall not
be dismissed within thirty (30) days;
then, and in any such event, and at any time thereafter during the continuance
of such event, the Lenders may, by five business days' prior written notice to
the Company, declare this Note to be (provided, however, that in the case of an
event described in paragraph (c) or (d) of this Section 4, this Note shall
automatically become) immediately due and payable, whereupon this Note shall
become immediately due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby expressly waived by the Company,
anything contained herein to the contrary notwithstanding. In addition, upon the
occurrence of an Event of Default, the Lenders may exercise any or all rights,
powers and remedies available to the Lenders at law or in equity or by statute
or otherwise for the protection and enforcement of the rights of Lender.
4. Costs. The Company shall pay to Lenders, on demand, all costs and
expenses incurred to collect any indebtedness evidenced hereby, including,
without limitation, reasonable attorneys' fees.
5. Severability. In the event any one or more of the provisions of this
Note shall be held to be invalid, illegal or unenforceable, or operate to
invalidate this Note, then only such provision or provisions shall be deemed
null and void and shall not affect any other provision of this Note and the
remaining provisions of this Note, and the remaining provisions of this Note
shall remain operative and in full force and effect.
6. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED, INTERPRETED AND THE
RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
JERSEY.
7. Titles. The titles, captions or headings of the paragraphs herein
are for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Note.
8. Miscellaneous.
(a) If this Note is mutilated, lost, stolen or destroyed, the
Company may issue a new Note of like form and maturity to the Holder hereof upon
presentment and surrender of the mutilated Note, in the case of mutilation, and
upon receipt of evidence satisfactory to the Company of loss, theft or
destruction in all other cases.
(b) All agreements of the Company in this Note shall bind its
successor.
-3-
<PAGE>
(c) The terms of this Note may be amended, modified or supplemented
by the Company with the consent of the Lenders and Holders of a majority of the
then outstanding principal amount of this Note; provided, however, that, without
the consent of each Lender and Holder of this Note, the interest rate and the
principal amount of this Note may not be reduced, the date when interest or
principal under this Note becomes due, and this Section 12(c) may not be
amended, modified or supplemented.
[NAME OF CORPORATION]
By:
--------------------------------
Name:
Title:
(Corporate Seal)
ATTEST:
By:
-----------------------------
Name:
Title:
-4-
<PAGE>
SCHEDULE A
Lender Principal Amount
- ------ ----------------
Lewis Irving Rothman..................................... [$___________]
La Vonda Rothman......................................... [$___________]
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Shane
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ [$___________]
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Luke
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ [$___________]
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Samantha
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ [$___________]
La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Marni
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ [$___________]
- --------
(1) To be included on Schedule A to the Note issued by J.R. Statesville, Inc.
only.
<PAGE>
EXHIBIT 10.18
FORM OF ADDITIONAL NOTE
THE SECURITY REPRESENTED BY THIS NOTE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE MAY
NOT BE TRANSFERRED OR SOLD, IN WHOLE OR IN PART, UNLESS REGISTERED OR EXEMPT
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL
APPLICABLE STATE SECURITIES LAWS.
Whippany, New Jersey
____________, 1997
FOR VALUE RECEIVED, the undersigned,___________________________, a
___________________________ corporation (the "Company"), hereby unconditionally
promises to pay to the order of the parties listed on Schedule A (each, a
"Lender") or registered assigns (the "Holder"), the aggregate principal amount
of Twenty-Five Dollars ($25.00), as such sum may be increased pursuant to
Section 2 below, to be paid in the percentages indicated on Schedule A, together
with interest, compounded as provided below, at a rate of 7.0% per annum on the
principal amount hereof from time to time outstanding as provided below.
1. Payments.
(a) The Company shall pay the entire unpaid principal amount of this
Note on June 1, 2000 (the "Maturity Date"), unless accelerated as provided
herein.
(b) If any payment hereunder becomes due on a day that is a legal
holiday, such payment or prepayment shall become due on the next succeeding
business day.
2. Principal.
(a) The initial principal amount of this Note shall be Twenty-Five
Dollars ($25.00). The principal amount of this Note shall be adjusted (i) on
such date that the Company files its tax return for its "S Short Year,"
beginning on January 1, 1997 as such term is defined under section 1362(e)(1)(A)
of the Internal Revenue Code of 1986, as amended (the "Code") (a "Short Year
Adjustment Date") or (ii) in the event that any future examination of any tax
return by the Internal Revenue Service (the "IRS") results in a final
determination by the IRS or a court increasing the taxable income of the Company
for the S Short Year beginning on January 1, 1997 (a "Examination Adjustment.")
On the Short Year Adjustment Date, the principal amount of this Note shall be
increased by an amount equal to the excess, if any, of (i) the sum of (A) the
Company's items of separately stated income and gain (within the meaning of
section 1366(a)(1)(A) of the Code reduced, to the extent applicable, by the
Company's separately stated items of deduction and loss (within the meaning of
section 1366(a)(1)(B) of the Code) and (B) the Company's own separately computed
income or loss (within the meaning of section 1366(a)(2)(B) (such sum referred
to as "S Corporation Taxable Income"), over (ii) $__________
<PAGE>
[the estimate for the 1997 S Short Year]. At the time of any Examination
Adjustment, the principal amount of this Note shall be increased by an amount
equal to the increase, if any, in S Corporation Taxable Income resulting from
such examination. Notwithstanding the foregoing, in no event shall the
adjustments to principal of this Note, when added to all prior adjustments to
the principal of similar notes issued as of this date by the Constituent
Entities (as such term is defined in the Registration Statement on Form S-1
for 800-JR CIGAR, INC. (No. 333-23401)), exceed $1 million.
(b) On the Maturity Date principal on this Note shall be payable in
an amount equal to the unpaid principal on this Note shall be paid.
3. Interest Rate.
Interest shall accrue (computed on the basis of a 360-day year of
twelve 30-day months) on the outstanding principal of this Note at the rate of
7.0% per annum compounded annually (the "Applicable Rate"), payable on the
Maturity Date. For purposes of calculating interest, any adjustment to principal
pursuant to Section 2(a) hereof shall be deemed to have occurred on the issue
date of this Note. Payments hereunder shall be applied first against accrued and
unpaid interest and then against principal hereof. If the Company shall default
in the payment of the principal of or interest on this Note when due and
payable, the Company shall on demand, from time to time, pay interest on such
defaulted amount from the time of such default until such defaulted amount is
paid at a per annum rate equal to two percent over the Applicable Rate.
Notwithstanding anything contained herein to the contrary, if at any time the
rate of interest charged hereunder, together with all other charges provided for
herein which are treated as interest under applicable law, shall exceed the
maximum lawful rate which may be contracted for, charged or received by a Lender
or a Holder in accordance with applicable law (the "Maximum Rate"), the rate of
interest, if any, payable under this Note, together with all such other charges,
shall be limited to the Maximum Rate.
4. Form of Payments. All Payments hereunder shall be made in lawful
money of this United States of America at the address of each Lender set forth
on Schedule A hereto, or at such other place or places as each Lender may
designate by notice to the Company.
5. Waivers. The Company hereby waives diligence, presentment, demand,
protest and notice of any kind. The non-exercise by Lender of any of its rights
hereunder in any particular instance shall not constitute a waiver thereof in
that or any subsequent instance.
6. Subordination. If required pursuant to the terms of any Bank
Indebtedness (as hereinafter defined), the payment of the principal of and
interest on this Note shall be subordinated in right of payment to such Bank
Indebtedness and each Lender and each subsequent Holder or assign, by its
acceptance hereof, if required by the terms of such Bank Indebtedness, agrees to
enter into an appropriate subordination agreement acceptable to the holders of
such Bank Indebtedness. As used herein, "Bank Indebtedness" shall mean all
indebtedness of the Company for money borrowed (including principal, interest,
premium, if
2
<PAGE>
any, and fees, if any) from banks or other financial institutions, whether
outstanding on the date hereof or hereinafter incurred, as the same may be
extended, modified or renewed.
7. Events of Default. In the case of the happening of any of the
following events (each, an "Event of Default"):
(a) The Company shall default in the payment of principal of and
interest on this Note, as and when due and payable, whether upon the Maturity
Date, by acceleration hereunder or otherwise;
(b) Any obligor under any note issued to Lenders or the other
Existing Stockholders (as defined in the Registration Statement of 800-JR Cigar,
Inc.) on the date hereof shall default in the payment of principal of or
interest on such note, as and when due and payable, whether upon a payment date,
the maturity date, by acceleration thereunder or otherwise;
(c) The Company shall (i) become insolvent or admit in writing its
inability to pay its debts as they mature, (ii) apply for, consent to, or
acquiesce in the appointment of a receiver, trustee, liquidator or similar
official for itself or any of its assets, (iii) make a general assignment for
the benefit of creditors, (iv) be adjudicated as bankrupt or insolvent, (v)
voluntarily commence a proceeding or file a petition under any law relating to
bankruptcy, insolvency, the relief of debtors or the liquidation or adjustment
of indebtedness or (vi) consent to the institution of, or fail to contest in a
timely and appropriate manner, any proceeding or the filing of any petition
described in paragraph (c) below; or
(d) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed under any law relating to bankruptcy, insolvency, the
relief of debtors or the liquidation or adjustment of indebtedness against the
Company, or the assets of the Company, and such proceeding or petition shall not
be dismissed within thirty (30) days;
then, and in every such event, and at any time thereafter during the continuance
of such event, the Lenders may, by five business days' prior written notice to
the Company, declare this Note to be (provided, however, that in the case of an
event described in paragraph (c) or (d) above, this Note shall automatically
become) immediately due and payable, whereupon this Note shall become
immediately due and payable without presentment, demand, protest or other notice
of any kind, all of which are hereby expressly waived by the Company, anything
contained herein to the contrary notwithstanding. In addition, upon the
occurrence of an Event of Default, the Lenders may exercise any or all rights,
powers and remedies available to the Lenders at law or in equity or by statute
or otherwise for the protection and enforcement of the rights of Lender.
8. Costs. The Company shall pay to Lenders, on demand, all costs and
expenses incurred to collect any indebtedness evidenced hereby, including,
without limitation, reasonable attorneys' fees.
3
<PAGE>
9. Severability. In the event any one or more of the provisions of this
Note shall be held to be invalid, illegal or unenforceable, or operate to
invalidate this Note, then only such provision or provisions shall be deemed
null and void and shall not affect any other provision of this Note and the
remaining provisions of this Note, and the remaining provisions of this Note
shall remain operative and in full force and effect.
10. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED, INTERPRETED AND THE
RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
JERSEY.
11. Titles. The titles, captions or headings of the paragraphs herein
are for convenience of reference only and are not intended to be a part of or to
affect the meaning or interpretation of this Note.
12. Miscellaneous.
(a) If this Note is mutilated, lost, stolen or destroyed, the
Company may issue a new Note of like form and maturity to the Holder hereof upon
presentment and surrender of the mutilated Note, in the case of mutilation, and
upon receipt of evidence satisfactory to the Company of loss, theft or
destruction in all other cases.
(b) All agreements of the Company in this Note shall bind its
successor.
(c) The terms of this Note may be amended, modified or supplemented
by the Company with the consent of the Lenders and Holders of a majority of the
then outstanding principal amount of this Note; provided, however, that, without
the consent of each Lender and Holder of this Note, the interest rate and the
principal amount of this Note may not be reduced, the date when interest or
principal under this Note becomes due, and this Section 12(c) may not be
amended, modified or supplemented.
[NAME OF CORPORATION]
By:
-----------------------------
Name:
Title:
4
<PAGE>
(Corporate Seal)
ATTEST:
By:
--------------------------
Name:
Title:
5
<PAGE>
SCHEDULE A
Percentage of
Lender Principal Amount
- ------ ----------------
Lewis Irving Rothman..................................... __________%
La Vonda Rothman......................................... __________%
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Shane
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ __________%
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Luke
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ __________%
[La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Samantha
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ __________%
La Vonda Rothman and Lewis Irving
Rothman, Trustees and Samuel Bornstein
as Special Trustee of trust f/b/o Marni
Rothman created under trust agreement
dated November 1, 1994, Lewis Rothman Grantor](1)........ __________%
- --------
(1) To be included on Schedule A to the Note issued by J.R. Statesville, Inc.
only.
<PAGE>
[J.H. COHN LLP LETTERHEAD]
EXHIBIT 16.1
June 2, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: 800-JR Cigar, Inc.
Gentlemen:
We were previously the principal accountants for 800-JR Cigar, Inc. (the
"Company") and on May 21, 1996 we reported on the predecessor combined financial
statements of the Company as of December 31, 1995 and for the years ended
December 31, 1994 and 1995 included elsewhere in the Prospectus of this
Registration Statement. On October 5, 1996, we were informed that we were
dismissed as the principal accountants for the Company. We agree with the
Company's statement, included under the caption "Experts" in the Prospectus of
the Registration Statement, that: "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."
Very truly yours,
/s/ J.H. COHN LLP
-------------------------------------------------------------
J. H. COHN LLP
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
(FOLLOWING THE TRANSACTIONS)
J.R. Tobacco of America, Inc.---North Carolina corporation
Cigars by Santa Clara, N.A., Inc.---North Carolina corporation
J.N.R. Grocery Corp.---New York corporation
J.R. Tobacco NC, Inc.---North Carolina corporation
J&R Tobacco (New Jersey) Corp.---New Jersey corporation
J.R. Tobacco Company of Michigan, Inc.---Michigan corporation
J.R.-46th Street, Inc.---New York corporation
J.R. Tobacco Outlet, Inc.---New Jersey corporation
J.R. Statesville, Inc.---North Carolina corporation
J R Cigar (DC), Inc.---District of Columbia corporation
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated April 21, 1996, in the Registration Statement on
Form S-1 (No. 333-23401), as amended, and related Prospectus of 800-JR Cigar,
Inc., for the registration of 3,000,000 shares of its common stock.
Ernst & Young LLP
MetroPark, New Jersey
June 2, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus of this Amendment No. 1 to
the Registration Statement on Form S-1 (No. 333-23401) of our report dated May
21, 1996 on 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. We
also consent to the references to our firm under the caption "Experts" in the
Prospectus of the Registration Statement.
/s/ J. H. COHN LLP
-------------------------------------------------------------
J. H. COHN LLP
Roseland, New Jersey
June 2, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF STEPHEN J. BLOOM
I, Stephen J. Bloom, hereby consent to being named as a person who will
become a director of 800-JR CIGAR, Inc. in the Prospectus included in the
Registration Statement to which this consent is an exhibit.
Dated: June 2, 1997
/s/ STEPHEN J. BLOOM
--------------------------------------
Name: Stephen J. Bloom
Title: Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 6,056 7,720
<SECURITIES> 0 0
<RECEIVABLES> 5,244 5,735
<ALLOWANCES> (118) (173)
<INVENTORY> 19,616 20,312
<CURRENT-ASSETS> 31,616 34,988
<PP&E> 14,290 14,667
<DEPRECIATION> (3,414) (3,601)
<TOTAL-ASSETS> 42,682 46,610
<CURRENT-LIABILITIES> 13,094 13,693
<BONDS> 0 0
0 0
0 0
<COMMON> 21 21
<OTHER-SE> 23,455 27,339
<TOTAL-LIABILITY-AND-EQUITY> 42,682 46,610
<SALES> 191,982 49,683
<TOTAL-REVENUES> 192,757 49,826
<CGS> 158,007 40,631
<TOTAL-COSTS> 21,437 4,942
<OTHER-EXPENSES> 797 173
<LOSS-PROVISION> 191 55
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> 12,325 4,025
<INCOME-TAX> 144 141
<INCOME-CONTINUING> 12,181 3,884
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,181 3,884
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99.1
[LETTERHEAD OF CIGAR AFICIONADO]
June 4, 1997
Fax to: Mr. Lew Rothman
From: Marvin R. Shanken
Dear Lew:
This letter will confirm that the statement in your prospectus, "many of the
Company's proprietary premium cigars ... have gained national prominence and
have received high ratings from CIGAR AFICIONADO magazine," is accurate.
Furthermore, we hereby consent to the use of our name and the foregoing
statement in the registration statement (file no. 333-23401) of 800-JR-CIGAR
Inc.
If you need further assistance, please let me know.
Sincerely,
/s/ MARVIN R. SHANKEN
- ---------------------
Marvin R. Shanken
/jm
