<PAGE>
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
Of the Securities Exchange Act of 1934
For Quarter Ended JUNE 30, 1997
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Commission file number: 0-22675
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800-JR CIGAR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-2022117
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State or other jurisdiction of IRS Employer Identification No.
Incorporation or organization
301 ROUTE 10 EAST WHIPPANY, NJ 07981
------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (973) 884-9555
Former name, former address and former fiscal year, if changed since last
report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES NO X
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $.01 par value - 12,750,000 shares as of August 13, 1997
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Index to Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) PAGE
Consolidated Statements of Income for the Three-Month Periods
ended June 30, 1996 and 1997 and the Six-Month Periods ended
June 30, 1996 and 1997 (Unaudited)........................................3
Consolidated Balance Sheets as of December 31, 1996 and June 30, 1997
(Unaudited)...............................................................4
Consolidated Statements of Cash Flows for the Six-Month Periods ended
June 30, 1996 and 1997 (Unaudited)........................................5
Notes to Consolidated Financial Statements.................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................13
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................19
Signatures..................................................................20
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE-MONTH PERIOD SIX-MONTH PERIOD
ENDED JUNE 30 ENDED JUNE 30
----------------------------------------------------------------------------------
1997 1996 1997 1996
----------------------------------------------------------------------------------
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Net sales $60,435 $46,530 $ 110,118 $ 86,426
Cost of goods sold 48,057 38,380 88,688 71,267
---------------------------------- -----------------------------------
Gross profit 12,378 8,150 21,430 15,159
Operating expenses:
Selling 1,244 1,163 2,373 1,990
General and administrative expenses 5,715 3,771 9,396 7,369
Depreciation and amortization 198 171 385 338
---------------------------------- -----------------------------------
Income from operations 5,221 3,045 9,276 5,462
Other income (expense):
Interest expense (271) (213) (444) (392)
Interest income 74 51 164 130
Rental income 56 11 101 63
Insurance settlement - - - 373
Other, net 53 - 61 -
---------------------------------- -----------------------------------
Income before income taxes 5,133 2,894 9,158 5,636
Provision (credit) for income taxes (1,480) 49 (1,339) 70
---------------------------------- -----------------------------------
Net income $ 6,613 $ 2,845 $ 10,497 $ 5,566
================================== ===================================
Pro forma:
Historical income before provision
for income taxes $ 5,133 $ 9,158
Pro forma adjustments other than
income taxes 1,251 977
------------------ -------------------
Pro forma income before income taxes 6,384 10,135
Pro forma provision for income taxes 2,605 4,135
------------------ -------------------
Pro forma net income $ 3,779 $ 6,000
================== ===================
Pro forma earnings per share $ .38 $ .59
================== ===================
Pro forma common shares outstanding 9,811 9,811
================== ===================
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Balance Sheets
(IN THOUSANDS)
<TABLE>
<CAPTION>
(PREDECESSOR)
JUNE DECEMBER
30, 1997 31, 1996
----------------------------------------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,188 $ 6,056
Stock subscription receivable 54,545
Accounts receivable, net of allowance for doubtful accounts
of $118 and $173 (unaudited) at December 31, 1996 and
June 30, 1997, respectively 1,922 1,703
Merchandise inventory 21,963 19,616
Prepaid expenses and other current assets 1,655 700
Loans receivable - affiliates and other associated entities 996 1,070
Loans receivable - stockholders - 2,471
-------------- --------------
Total current assets 85,269 31,616
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization 12,002 10,876
Other assets 271 165
Deferred tax asset, net 1,258 25
-------------- --------------
$98,800 $42,682
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 9,976 $ 2,167
Current portion of capital lease obligations 45 89
Accounts payable 9,876 8,947
Accrued expenses 4,527 1,891
-------------- --------------
Total current liabilities 24,424 13,094
Long-term debt, less current portion 21,053 6,112
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Total liabilities 45,477 19,206
Commitments and contingencies
Stockholders' equity:
Common stock 128 21
Additional paid-in capital 52,700 28
Retained earnings 495 23,845
-------------- --------------
53,323 23,894
Less treasury stock, at cost - (418)
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Total stockholders' equity 53,323 23,476
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$98,800 $42,682
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
ENDED JUNE 30
-----------------------------------
1997 1996
-----------------------------------
(Predecessor)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 10,497 $ 5,566
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 385 338
Provision for uncollectible accounts 55 80
Deferred income taxes (1,233) (32)
Other - 2
Changes in operating assets and liabilities:
Accounts receivable (274) (703)
Merchandise inventory (2,347) 573
Prepaid expenses and other current assets (955) (1,803)
Other assets (106) 38
Accounts payable and accrued expenses 2,731 (1,821)
-------------- --------------
Net cash provided by operating activities 8,753 2,238
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,511) (1,337)
Loans (extended to) repaid by affiliates and other associated
entities 74 (319)
Loans extended to stockholders (445) (453)
-------------- --------------
Net cash used in investing activities (1,882) (2,109)
CASH FLOWS FROM FINANCING ACTIVITIES
Expenses paid in connection with common stock offering (500) -
Repayments of borrowings under revolving line of credit - (2,500)
Proceeds (payments) of long-term debt (1,050) 2,593
Payments of capital lease obligations (44) (40)
Distributions to stockholders (7,189) -
-------------- --------------
Net cash provided by (used in) financing activities (8,739) 53
-------------- --------------
Net increase (decrease) in cash and cash equivalents (1,868) 182
Cash and cash equivalents at beginning of period 6,056 3,202
-------------- --------------
Cash and cash equivalents at end of period $ 4,188 $ 3,384
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 122
============== ==============
Income taxes paid $ 52
============== ==============
Noncash distribution to stockholders $ 2,959
============== ==============
Distribution notes issued to stockholders $ 23,800
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
1. UNAUDITED FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles. For further information, such as
significant accounting policies followed by the Company, refer to the notes to
the Company's audited predecessor consolidated financial statements.
In the opinion of management, the unaudited financial statements include all
necessary adjustments (consisting of normal, recurring accruals) for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. The results of operations for the three-month
and six-month periods ended June 30, 1996 and 1997, are not necessarily
indicative of the operating results to be expected for a full year.
2. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES
BASIS OF PRESENTATION
800-JR Cigar, Inc. ("800-JR Cigar") was incorporated in Delaware in March 1997.
In connection with 800-JR Cigar's initial public offering of stock (the
"Offering") on June 26, 1997, the former principals of the predecessor group of
companies contributed to 800-JR Cigar all of the outstanding stock in the
entities that comprise the predecessor group of companies, in exchange for
9,300,000 shares of common stock of 800-JR Cigar (the "Reorganization"). The
accompanying financial statements include the results of operations for the
period January 1, 1996 to June 30, 1996, and from January 1, 1997 to June 26,
1997 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., J. R. Statesville, Inc. and JR Cigar (DC), Inc.; from April 1997 to
June 30, 1997 (together, the "Company" or the "Predecessor Entities").
6
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
2. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
For the period from June 27, 1997 through June 30, 1997, the accompanying
consolidated financial statements include the results of operations of 800-JR
Cigar, as well as all companies that were included in the Predecessor Entities.
All significant intercompany balances and transactions have been eliminated.
The financial statements of the Predecessor Entities are being presented on a
consolidated basis because of their common ownership. The 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. After
the Reorganization, the Predecessor Entities became subsidiaries of 800-JR
Cigar, Inc.
PRO FORMA ADJUSTMENTS
The unaudited pro forma net income for the three- and six-month periods ended
June 30, 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 $253 to $200 for the six-month period ended
June 30, 1997 and from $127 to $100 for the three-month period ended June 30,
1997 for the two of the Company's executives pursuant to their new employment
agreements; b) an increase in interest expense of $798 for the six-month period
ended June 30, 1997 and $381 for the three-month period ended June 30, 1997
assuming the issuance of the Distribution Notes; c) a reduction in interest
expense of $328 for the six-month period ended June 30, 1997 and $155 for the
three-month period ended June 30, 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 $106 for the six-month period
ended June 30, 1997 and $50 for the three-month period ended June 30, 1997
assuming the repayment to the Company of loans receivable from stockholders;
e) an increase of $1,500 for the three and six-month periods ended June 30,
1997, related to signing bonuses paid to an officer of the Company and to MC
Management in connection with the execution of long-term service agreements; and
f) an increase of $5,474 for the six-month period ended June 30, 1997 and $4,085
for the three-month period ended June 30, 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.
7
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
2. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
On June 6, 1997, the Company issued Distribution Notes to the former 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. These notes bear
interest at the rate of 7.0% per annum, and are payable on a quarterly basis
over the three-year period following the Offering.
On June 6, 1997, the Predecessor Entities also paid a dividend in the form of
additional notes payable to the former principal stockholders with a nominal
initial principal amount, which amount shall be increased by an amount equal to
the S Corporation earnings of each of the Predecessor Entities in excess of the
principal amount of the Distribution Notes for the taxable period of 1997 that
such Predecessor Entity was an S Corporation based upon such Predecessor
Entity's final S Corporation tax returns or resulting from a final determination
by the Internal Revenue Service or a court increasing such Predecessor 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 on June 1, 2000
and bear interest at the rate of 7.0% per annum.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is based on 9,300,000 shares of common stock
outstanding prior to the Offering, increased by the sale of 511,327 shares of
common stock at the initial public offering price of $17.00 per share ($15.45,
net of underwriting discounts, commissions and offering expenses), the proceeds
of which would be necessary to pay approximately $7,900, the current portion of
the Distribution Notes. The net income used in the calculation of pro forma
earnings per share represents pro forma net income decreased by the interest
expense on debt of $155 ($92 on an after-tax basis) for the three-month period
ended June 30, 1997, and $328 ($194 on an after-tax basis) for the six-month
period ended June 30, 1997.
Supplementary pro forma earnings per share for the three-month period ended
June 30, 1997 and six-month period ended June 30, 1997, are .37 and .58,
respectively, based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by (a) the sale of 511,327 shares of common stock at the
initial public offering price of $17.00 per
8
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
2. BASIS OF PRESENTATION, PRO FORMA ADJUSTMENTS AND SUMMARY OF ACCOUNTING
POLICIES (CONTINUED)
share ($15.45, net of underwriting discounts, commissions and 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
467,896 shares of common stock at the initial public offering price of
$17.00 per share ($15.45, net of underwriting discounts, commissions and
offering expenses), the proceeds of which would be necessary to repay
approximately $7,229, the amount of outstanding debt at June 30, 1997. The net
income used in the calculation of supplementary pro forma earnings per share is
the pro forma net income of $3,779 and $6,000 for the three-month period ended
June 30, 1997 and the six-month period ended June 30, 1997, respectively.
3. INITIAL PUBLIC OFFERING
Effective June 26, 1997, the Company sold 3,450,000 shares of its common stock
at a price of $17 per share in an initial public offering. Net proceeds of the
Offering, after deducting underwriting discounts and commissions, and
professional fees aggregated $53,297. In July 1997, proceeds of the Offering
were used to repay outstanding indebtedness of $7,229 and to pay signing bonuses
to an officer and to MC Management in connection with long-term service
agreements. The Company intends to use approximately $7,900 to pay the current
portion of the Distribution Notes previously issued, plus approximately $1,500
of interest related to the Distribution Notes during the 12 months following the
Offering. The remaining proceeds will be used for other general corporate
purposes.
4. 1997 LONG-TERM INCENTIVE PLAN
Prior to the Offering, the Board of Directors ("Board") and Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Incentive Plan"). The purpose of the Incentive Plan is to provide executive
officers, key employees, and others with additional incentives enabling such
persons to increase their ownership interests in the Company. 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.
9
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
4. 1997 LONG-TERM INCENTIVE PLAN (CONTINUED)
In connection with the Offering, Non-Qualified Stock Options to purchase a total
of 450,000 shares of Common Stock of the Company were granted to executives,
other employees and consultants of the Company, and employees of MC
Management. Each of the foregoing options have an exercise price per share
equal to the initial public offering price. These options vest generally in
three equal installments on each of the first three anniversaries of the
Offering, 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.
5. 1997 NON-EMPLOYEE DIRECTORS' STOCK PLAN
Prior to the Offering, the Company adopted and the stockholders approved 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.
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 10 years from the date of grant. Options will vest and become
exercisable ratably, 20% per year, following the date of grant of the options,
subject to acceleration by the Board. 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.
6. 1997 EMPLOYEE STOCK PURCHASE PLAN
Prior to the Offering, the Company adopted and the stockholders approved, the
1997 Employee Stock Purchase Plan, effective on July 1, 1997. This plan permits
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
10
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, 1997
6. 1997 EMPLOYEE STOCK PURCHASE PLAN (CONTINUED)
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.
7. REVOLVING CREDIT FACILITY
The Company, upon consummation of the Offering, entered into a new $15 million
revolving Credit Facility through October 31, 1997. Borrowings under this
facility are unsecured and bear interest at the bank's prime rate minus 1/2% or,
at the option of the Company, 1.5% over the London Interbank Offered Rate
(LIBOR). No amounts were outstanding under this facility at June 30, 1997.
8. HISTORICAL AND PRO FORMA INCOME TAXES
The historical income tax provision for the three- and six-month periods ended
June 30, 1996 principally reflects taxes payable by the S Corporations which
were levied by certain state and local governments. The income tax provision
for the periods ended June 30, 1997 principally reflects the S Corporation tax
provision of approximately $361, for the period from January 1, 1997 through
June 26, 1997; federal and state income tax benefit of $491, for the period from
June 27, 1997 to June 30, 1997, which period includes $1,500 of expenses related
to signing bonuses, and a tax benefit of $1,209 for the deferred tax asset
recorded in accordance with the provisions of SFAS No. 109.
The entities in the Predecessor Company were corporations that had elected to be
taxed as S Corporations pursuant to the Internal Revenue Code. In connection
with the Offering, the Company has become subject to federal and additional
state income tax. 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.
Concurrent with becoming subject to federal and additional state income taxes,
the Company recorded a deferred tax asset and a corresponding tax benefit in the
statement of income in accordance with the provisions of SFAS No. 109. This was
approximately $1,209, and, as of the date of the offering, resulted in a total
deferred tax asset of approximately $1,258 which includes certain state and
local tax assets recorded on a historical basis.
11
<PAGE>
8. HISTORICAL AND PRO FORMA INCOME TAXES (CONTINUED)
Income tax expense for the three- and six-month periods ended June 30, 1997
includes a provision for federal, state and local taxes of $2,605 and $4,135,
respectively at an effective rate of approximately 41%. This amount is
comprised of current expense of $1,800 and $4,479, respectively and a deferred
benefit of $270 and $344 for the three and six months periods respectively.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for historical matters, certain matters discussed in this Form 10-Q may
contain forward-looking statements. Such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties. Actual
results may differ from those projected in the forward-looking statements as of
result of various factors.
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 underdeveloped
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.
THREE-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO THREE MONTH PERIOD ENDED JUNE
30, 1996
Net sales were $60.4 million and $46.5 million for the second quarters of
1997 and 1996, respectively, an increase of $13.9 million or 29.9%. Retail
sales increased 23.3% to $34.0 million for the second quarter of 1997 from $27.6
million for the second quarter of 1996. The increase in retail sales was due
primarily to a $3.8 million or 41.3% increase in direct mail cigar sales and a
$2.3 million or 69.2% increase in cigar store sales. Wholesale sales increased
39.6% to $26.4 million for the second quarter of 1997 from $18.9 million over
the same period in the prior year. The increase in wholesale sales was due
primarily to a $6.0 million, or 99.6% increase in direct mail cigar sales and to
a lesser extent to a $1.5 million, or 11.3% increase in cash and carry cigarette
sales. The total increase in net sales was attributable to increases in unit
volume, primarily for premium cigars and cigar related products.
Gross profit was $12.4 million and $8.2 million for the second quarters of
1997 and 1996, respectively, an increase of $4.2 million or 51.9%. The increase
in gross profit was due primarily to the increase in premium cigar sales, which
have higher gross profit margins relative to the Company's other products. As a
percentage of net sales, gross profit increased to 20.5% for the second quarter
of 1997 from 17.5% for the second quarter of 1996, primarily due to an increase
in unit volume of higher margin, premium cigars.
13
<PAGE>
Selling, general and administrative expenses ("S,G&A") were $7.2 million
and $5.1 million for the second quarters of 1997 and 1996, respectively, an
increase of $2.1 million or 40.2%. Included in S,G&A expenses in 1997 was a one
time, $1.5 million expense related to signing bonuses paid to a key employee and
MC Management, Inc., a service provider to the Company. In connection with the
execution of long term service agreements. The balance of the increase in S,G&A
expenses was related to increased staffing and other costs. As a percentage of
net sales, S,G&A expenses increased to 11.8% (9.4% excluding the $1.5 million of
signing bonus) for the second quarter of 1997 from 11.0% for the second quarter
of 1996.
Income from operations was $5.2 million and $3.0 million for the second
quarters of 1997 and 1996, respectively, an increase of $2.2 million or 71.5%.
As a percentage of net sales, income from operations increased to 8.6% for the
second quarter of 1997 from 6.5% for the second quarter of 1996, primarily due
to an increase in sales of higher margin, premium cigars.
Interest expense was $.3 million and $.2 million for the second quarters of
1997 and 1996, respectively, an increase of $.1 million due to the higher level
of debt during the second quarter of 1997. Other income, primarily interest and
rental income, was $.2 million and $.1 million for the second quarters of 1997
and 1996, respectively.
The income tax credit of $1.5 million for the three month period ended June
30, 1997, includes a federal and state income tax benefit of $.5 million for the
period from June 27, 1997 to June 30, 1997, which period includes $1.5 million
of expenses related to signing bonuses, and a tax benefit of $1.2 million for
the deferred tax asset recorded in accordance with the provision of SFAS No.
109.
As a result of the foregoing, the Company had net income of $6.6 million in
the second quarter of 1997, compared to $2.8 million for the second quarter of
1996, an increase of $3.8 million or 132.4%.
SIX-MONTH PERIOD ENDED JUNE 30, 1997 COMPARED TO SIX MONTH PERIOD ENDED JUNE 30,
1996
Net sales were $110.1 million and $86.4 million for the first six months of
1997 and 1996, respectively, an increase of $23.7 million or 27.4%. Retail
sales increased 30.5% to $62.8 million for the first six months of 1997 from
$48.2 million for the first six months of 1996. The increase in retail sales
was due primarily to a $7.5 million or 48.3% increase in direct mail cigar sales
and a $4.7 million or 88.0% increase in cigar store sales. Wholesale sales
increased 23.5% to $47.3 million for the first six months of 1997 from $38.2
million over the same period in the prior year. The increase in wholesale sales
was due primarily to a $8.7 million, or 68.2% increase in direct mail cigar
sales. The total increase in net sales was attributable to increases in unit
volume and prices, primarily for premium cigars and cigar related products.
14
<PAGE>
Gross profit was $21.4 million and $15.1 million for the first six months
of 1997 and 1996, respectively, an increase of $6.3 million or 41.4%. The
increase in gross profit was due primarily to the increase in premium cigar
sales, which have higher gross profit margins relative to the Company's other
products. As a percentage of net sales, gross profit increased to 19.5% for the
first six months of 1997 from 17.5% for the first six months of 1996, primarily
due to an increase in unit volume of higher margin, premium cigars.
Selling, general and administrative expenses ("S,G&A") were $12.2 million
and $9.7 million for the first six months of 1997 and 1996, respectively, an
increase of $2.5 million or 25.3%. Included in S,G&A expenses was a one time,
$1.5 million expense paid in the second quarter related to signing bonuses paid
to a key employee and MC Management, Inc., a service provider to the Company, in
connection with the execution of long term service agreements. The balance of
the increase in S,G&A expenses was related to increased staffing and other
costs. As a percentage of net sales, S,G&A expenses decreased to 11.0% (9.7%
excluding the $1.5 million of signing bonuses) for the first six months of 1997
from 11.2% for the first six months of 1996.
Income from operations was $9.3 million and $5.5 million for the first six
months of 1997 and 1996, respectively, an increase of $3.8 million or 69.8%. As
a percentage of net sales, income from operations increased to 8.4% for the
first six months of 1997 from 6.3% for the first six months of 1996, primarily
due to an increase in sales of higher margin, premium cigars.
Interest expense was unchanged at $.4 million for the first six months of
1997 and 1996, respectively. Other income, primarily interest and rental
income, was $.3 million and $.6 million for the first six months of 1997 and
1996, respectively. Other income for 1996 included $.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 and a $1.3 million credit for income taxes,
the Company had net income of $10.5 million in the first six months of 1997,
compared to $5.6 million for the first six months of 1996, an increase of $4.9
million or 88.6%.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically has financed its business through internally
generated funds, bank debt and loans from certain shareholders. The Company's
net cash provided by operating activities was $8.8 million for the six month
period ended June 30, 1997. Net cash used in investing activities during such
period was $1.9 million and net cash used in financing activities was $8.8
million, primarily for distributions to shareholders prior to the Offering and
repayment of bank debt.
15
<PAGE>
As of June 30, 1997, the Company had working capital of $60.8 million compared
to $18.5 million at December 31, 1996. Working capital at June 30, 1997
includes cash of $4.2 million, stock subscription receivable of $54.5 million,
accounts receivable of $1.9 million, $22.0 million of inventory, and $14.4
million of accounts payable and accrued expenses. On July 1, 1997 the Company
received $54.5 million from the underwriting syndicate representing net proceeds
of the Company's Initial Public Offering.
At June 30, 1997 the Company had three long term notes payable to a bank
totaling $4.8 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
of $1.2 million, $1.1 million and $2.5 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
16
<PAGE>
interest at the bank's base rate less 0.5% or the London Interbank Offered Rate
("LIBOR") plus 2.0%. At June 30, 1997 the company had no borrowings under this
line of credit. The notes were repaid on July 1, 1997 with the proceeds of the
offering and the Credit Agreement was terminated.
The Company has entered into a new credit agreement, which was subject to the
successful consummation of the Offering, to provide working capital and to fund
other general corporate purposes. The new short term, unsecured line of credit
is in the amount of $15.0 million will be available through October 31, 1997 and
will be charged interest at either the bank's base rate minus 50 basis points or
LIBOR plus 150 basis points, at the Company's option.
At June 30, 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 June 30, 1997, with interest floating at the bank's
prime rate (8.5% at June 30, 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, the company had outstanding notes issued to a former stockholder of
the Company in the aggregate amount of $81,000, which are payable in monthly
installments through April, 1998. Such notes accrue interest at 12% per annum.
The aforementioned $0.4 million mortgage and the $81,000 of notes were prepaid
on July 1, 1997 with the proceeds of the Offering. The $2.0 million mortgage
will be repaid on October 14, 1997 with the proceeds of the offering subsequent
to the expiration of a 3% prepayment penalty.
On June 6, 1997 the Company issued notes in the aggregate amount of $23.8
million to shareholders of the predecessor companies, representing the estimated
cumulative undistributed earnings of the predecessor companies which operated
under Subchapter "S" of the Internal Revenue Service code. The notes have a
fixed interest rate of 7% and require quarterly payments in aggregate of $2.0
million plus interest through June 1, 2000. The holders of the notes have
agreed to subordinate payment of principal and interest to senior lenders if
required by credit agreement. The new credit agreement does require
subordination in the event of a default under the terms and conditions of the
agreement.
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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the three months ended
June 30, 1997.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
800-JR CIGAR, INC.
(Registrant)
Date: AUGUST 14, 1997 by /s/ Lewis I. Rothman
Chairman and President
Date: AUGUST 14, 19997 /s/ Timothy P. Shannon
Chief Financial Officer
19
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