FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: SEC #: 0-22675
800-JR Cigar, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 52-2022117
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
301 Route 10 East, Whippany, New Jersey 07981, (Address of principal executive
offices) (Zip code)
(973)884-9555
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Securities Exchanges on which Registered
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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 X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
The aggregate market value of Registrants' Common Stock held by
non-affiliates as of March 27, 1998 was $72,450,000.00 based on 3,450,000 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $21.00 as reported by the Nasdaq National Market.
The number of shares of Common Stock of the registrant outstanding at
March 30, 1998 was 12,750,000.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
Notice and Proxy Statement for the 1998 Annual Meeting of Stockholders to be
held May 20, 1998
<PAGE>
Index
Part I
Item 1. Business............................................................4
Item 2. Properties....................................................... 12
Item 3. Legal Proceedings................................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.............. 12
Part II
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters............................................... 13
Item 6. Selected Financial Data.......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................ 15
Item 8. Financial Statements and Supplementary Data...................... 19
Item 9. Changed in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................... 20
Part III
Item 10. Directors and Executive Officers of the Registrant............... 20
Item 11. Executive Compensation........................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management... 20
Item 13. Certain Relationships and Related Transactions................... 20
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K. 21
<PAGE>
Part I
Item 1. Business
General
800-JR Cigar is one of the largest distributors and retailers 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 45 are the Company's
proprietary brands. Among the company's proprietary products are nationally
recognized brand names such as Belinda(R), Casa Blanca(R), El Rey del Mundo(R),
5 Star Seconds(R), Jose Marti(TM), J.R Alternative(R), J.R, Ultimate(R), La
Finca(R), Rosa Cuba(TM), and Santa Clara(R). The Company is the largest customer
for each of the world's leading cigar manufacturers, inducing Consolidated Cigar
Holdings, Inc. ("Consolidated Cigar"), General Cigar Holdings, Inc. ("General
Cigar"), Swisher International, Inc. ("Swisher") and Villazon & Company, Inc.
("Villazon").
800-JR Cigar, Inc. is a holding company owning 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., J R Cigar (DC), Inc., J.R.
Tobacco of Burlington, Inc., and Casa Blanca Inc.
The Company is well known for its cigar business, principally the sale of
premium cigars, at discounted prices. Associated sales of other discount
products, including cigarettes, general merchandise, fragrances and other
tobacco related products, benefit from this recognition.
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, six stand alone cigar stores (four in the
New York metropolitan area, one outside Detroit, Michigan, and one in
Washington, D.C., and two discount outlet stores in North Carolina.)
Direct Mail. The company markets a wide variety of premium cigars (including its
own brand names) and related tobacco products on a retail basis throughout the
United States by direct mail. For over 25 years, the Company has maintained an
extensive proprietary mail order list of regular customers. The Company's
average order size is presently over $110. Management utilizes its mail order
catalogs as it 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
Company 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 currently carried by the Company. In the event that the Company does
not have a particular product in stock, a customer may place an order to ship on
arrival, or knowledgeable telemarketers may direct the customer to similar
products by utilizing the Company's sophisticated database. The Company has
increased the frequency and circulation of its mail order catalog and introduced
its own website in 1997 as an additional means of advertising. Retail mail order
sales increased 49.0% to $52.9 million in 1997, accounting for 22.0% of net
sales, compared to $35.5 million in 1996, representing 18.5% of net sales.
Cigar Stores. The Company currently maintains 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: (iii) maintain fully humidified
and climate-controlled stores to ensure freshness. In July 1997, the Company
relocated its Hasbrouck Heights, NJ store to Paramus, NJ, an upscale area of
Bergen County. In March 1998, the Company relocated one of its New York stores
to Wall Street. Sales generated by the Company's cigar stores increased 42.0% to
$23.0 million in 1997 accounting for 9.6% of the Company's net sales, compared
to $16.2 million in 1996, accounting for 8.4% of the 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) to 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. 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 6.5% to $63.6 million in 1997,
accounting for 26.5% of net sales, compared to $59.7 million in 1996,
representing 31.1% of net sales.
Cigar Bars. In January 1998, the Company purchased, for a nominal amount, Casa
Blanca Inc., an affiliated entity, which operates a discount liquor store and
cigar bar at the Whippany location. In March 1998, the Company began operation
of a cigar bar at its Wall Street Court location.
Wholesale Operations
Wholesale activities are a major component of the Company's success, enabling
the Company to obtain favorable prices by giving it the ability to purchase
tobacco products, particularly cigars and cigarettes in large quantities, and
the flexibility to determine the amount, timing and manner by which it will
satisfy demand in the marketplace. 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 division grew 25.1% to $100.8 million in 1997, accounting for
approximately 41.9% of net sales, compared to $80.6 million in 1996, accounting
for 42.0% of net sales.
Catalog. The Company's wholesale mail order business is focused on the sale of
premium cigars. The Company's wholesale catalog consists of a comprehensive
price list of a wide selection of Company branded products as well as premium
and mass market cigars trademarked by others. The catalog is distributed to
approximately 5,000 smoke shops, fine restaurants, taverns, liquor stores and
other retail outlets throughout the United States. Wholesale catalog sales
increased from 41.1% to $46.0 million in 1997, accounting for 19.1% of net
sales, compared to $32.6 million in 1996, accounting for 17.0% of net sales.
Cash-and-Carry. The Company's cash-and-carry wholesale operations are conducted
on a walk-in basis at its two North Carolina discount outlet stores. The Company
maintains a 3,000 square foot wholesale store within each of its discount outlet
stores which serve wholesale customers. The Company obtains substantially all of
its cash-and-carry wholesale revenues at these locations from the sale of a wide
variety of premium cigarettes, generic cigarettes and deep discount label
cigarettes. The remainder of the Company's cash-and-carry wholesale revenues are
derived from mass market cigars, smokeless tobacco products and pipe tobaccos.
The Company's cash-and-carry sales grew 14.2% to $54.8 million in 1997,
accounting for 22.8% of net sales, compared to $48.0 million in 1996, accounting
for 25.0% of net sales.
Products
Cigars and Other Tobacco Products
Sales of premium and mass market cigars and other tobacco products increased
44.3% to $135.2 million for the year ended December 31, 1997, accounting for
56.3% of net sales, compared to $93.7 million for the year ended December 31,
1996, representing 48.8% of net sales.
Premium Cigars. Premium cigars are generally imported, 100% 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 30.5%, 66.3% and
75.89% in 1995, 1996 and 1997, respectively. The Dominican Republic, Honduras
and Jamaica collectively accounted for approximately 83.7% of premium cigars
imported into the United States in 1997. Approximately 90% of the cigars sold by
the Company are premium cigars.
The Company sells approximately 150 brands of premium cigars, of which 45 are
the Company's proprietary brands. Sales of the Company's proprietary cigars
represent approximately 45% of the Company's total gross dollar premium cigar
sales. The Company offers most of its cigars at discounts ranging from
approximately 20% to 60% off of manufacturers' suggested retail prices.
The Company believes that its proprietary product offerings are unmatched in the
marketplace for superior quality at affordable prices. The Company's premium
cigars are handmade and are principally produced in five countries, including
Honduras, the Dominican Republic, Nicaragua, Mexico and Jamaica. While premium
cigars generally sell at price points ranging up to $12.00 per cigar, the
Company's branded premium cigars are typically sold at prices ranging between
$1.75 to $4.00 per cigar with J.R Alternatives selling at price points ranging
from $.75 to $1.50 per cigar. In addition, the Company holds exclusive licenses
to distribute additional brands of premium cigars for certain periods of time.
The Company has the right to market the El Rey del Mundo(R) and Belinda(R) brand
names exclusively through the year 2012. Among the Company's premium brands,
several have received from Cigar Aficionado magazine among the highest ratings
of cigars sold, including, among others El Rey del Mundo, La Finca, Belinda,
Casa Blanca and Santa Clara.
The following premium cigars are either trademarks or pending trademarks of the
Company or brands exclusively licensed to the Company:
Honduras: Belinda, Chivis, Consuegra, Honduran Specials, J.R
Alternatives, J.R Ultimate, Jose Marti, La Finca, Lew's Smokers, Maria
Mancini, Mocha, Mocha Supreme, Rey del Mundo, Tena Y Vega, Vintage
Hondurans.
Dominican Republic: Casa Blanca, Casa Blanca Reserve, Dominican
Estates, Five Star, Five Star Seconds, J.R Alternatives, J.R Special
Caribbean, J.R Special Corona, J.R Special Jamaicans, Jose Marti,
Matasa 2nds, Quorum, Royal Dominicana.
Nicaragua: Jose Marti, La Finca, Rosa Cuba, Villar y Villar, Remedios,
Flor de Farach.
Mexico: Mocambo, Santa Clara, Shane
Jamaica: J.R Alternatives, Whitehall.
Philippines: Harrows.
Spain: La Fama.
Ireland: Mocambo Cigarillos.
Mass Market Cigars. Mass market 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. The Company sells approximately 75 mass market large cigars, as
well as four proprietary brands of mass market cigars. The Company's proprietary
mass market cigars sell at prices as low as $.50 per cigar. 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 Tobacco Products and Pipe Tobacco. The Company sells moist snuff,
loose leaf chewing tobacco, and dry snuff in each of its retail stores,
including its two discount outlet stores in North Carolina. The Company also
plans to sell smokeless tobacco products in the stores it opens in the future.
Smokeless tobacco products are made from tobacco that has been cured, aged,
fermented and then dried and flavored. In addition to cigars and smokeless
tobacco products, the Company sells pipe tobaccos of various types, grades,
countries or origin and crop years.
Tobacco Accessories. The Company also sells a wide variety of tobacco
accessories, including, among other things, humidors, cutters, pipes, disposable
lighters, cigar cases and ashtrays. Although sales of such products represent a
small component of the Company's overall business, the Company believes that
their inclusion among the Company's product mix enhances the look of the
Company's retail catalog and rounds out the range of products offered by the
Company.
New Product Development. The Company is continually engaging in new product
development, and expects to launch two new premium cigar brands during the first
half of 1998: Remedios which will be produced in Nicaragua, and Trinidad y Cia,
which will be produced in the Dominican Republic. In the second half of 1998,
the Company will launch Casa Blanca Reserve a Dominican Republic cigar and
Perfecto Garcia from Nicaragua. In addition, the Company expects to receive
exclusive distribution rights to two existing famous cigar brands this year.
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. In 1997, the
Company grossed approximately $20.5 million and $30.5 million, respectively,
from cigarette sales in the Selma, North Carolina and Statesville, North
Carolina discount outlet stores alone. Overall cigarette sales grew 6.3% to
$83.3 million in 1997, accounting for 34.6% of net sales, compared to $78.4
million in 1996, accounting for 40.8% of net sales.
Fragrances and Other Merchandise.
The Company believes that diversification in its product mix encourages
increased retail sales. The Company purchases a wide variety of designer
fragrances and specialty goods from distributors for resale exclusively in its
discount outlet stores and, to a lesser extent, other Company retail stores.
Such specialty goods include, among other things, books, collectibles, gift
items, toys, household items, jewelry, jeans and other clothing items. The
Company offers all such products at significantly reduced prices, with
fragrances frequently sold at prices ranging from 20% to 75% off the suggested
retail price. The Company believes that diversification in its product mix
encourages customers to purchase more than one type of item and contributes to
increased sales. Although the majority of such products are sold from the
Company's two discount outlet stores, the Company is able to ship inventory to
its other retail stores at targeted times, such as the Christmas holiday season,
to maximize sales at these stores. Sales of fragrances and other merchandise
grew 9.5 % to $21.8 million in 1997, accounting for 9.1% of net sales, compared
to $19.9 million in 1996, accounting for 10.4% of net sales.
Sources of Supply; Production
Cigar manufacturers have recently experienced shortages in raw material
(principally properly aged tobacco) due to unanticipated increases in demand for
tobacco for premium cigars. The Company, therefore, has also experienced
shortages in supply and increasing prices. To address this issue the Company
believes that major manufacturers have strengthened their relationships with
tobacco growers around the world and have increased production in an effort to
meet demand. The Company believes that the quality and strength of its business
relationships with such manufacturers, developed over a 25 years period, have
positioned it to obtain a significant portion of such increased production.
In addition, to enhance the supply of the Company's own brand name premium
cigars, the Company has entered into five-year supply agreements with Nicaraguan
American Tobacco, S.A. ("NATSA") and Tabacalera Nacional Dominicana, S.A.
("TANDSA"), affiliated entities which own and operate manufacturing facilities
in Nicaragua and the Dominican Republic, respectively. Pursuant to such
agreements, NATSA produces products exclusively for the Company and one-third of
TANDSA's production, which commenced in May 1997, is allocated to the Company.
Each of NATSA and TANDSA produces 50,000 and 10,000 premium cigars per day,
respectively, and together currently represents approximately 30% of the
Company's supply of premium cigars. The Company, however has not entered into
formal contracts with any other manufacturer. In January 1998, the Board of
Directors approved the Company's purchase of Nicaragua American Tobacco Co.,
Inc., ("NATCO"), the exclusive importer of all NATSA products for a multiple of
NATCO's earnings.
An important factor in the success of the Company's discount outlet stores has
been its status as a licensed cigarette distributor in the State of North
Carolina for virtually every major U.S. cigarette manufacturer. As a direct
buying account of every major cigarette manufacturer, the Company is eligible to
participate in various goal oriented promotions and to receive display
allowances, which enables it to pass substantial savings onto its customers.
Another important factor in the Company's 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 vendors. The Company regularly purchases overstocked or
overproduced items from manufacturers and other retailers, including
end-of-season, out-of-season and end-of-run merchandise and manufacturers'
slight irregulars. As a result of the Company's relationships, experience and
reputation for prompt payment, many suppliers offer special purchase
opportunities to the Company prior to attempting to dispose of merchandise
through other channels.
Sales and Advertising
The Company has relied successfully upon the strength of its reputation and word
of mouth to achieve steadily increasing sales during years of industry decline
as well as industry prosperity, and believes that 25% of the nation's premium
cigar smoking public represents its customer base. 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 and 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. The Company believes that the lack of significant marketing
expenditures enables it to fulfill its mission to provide quality and
affordability.
The Company does, however, conduct a limited amount of advertising in local
newspapers catering to the Company's retail communities and on highway
billboards located within a 20 to 90 mile radius surrounding the Company's North
Carolina discount outlet stores. The Company anticipates spending approximately
1% of its net sales annually in advertising. In 1997 the Company issued five
catalogs and plans to distribute seven during 1998.
Information Systems
Over the past several years, the Company has made a substantial investment in
its information systems, which has enabled it to manage its inventory and
monitor sales on a real time basis. During 1997, the Company engaged Computer
Generated Solutions Inc. and RMP Computer Science to review its management
information systems and to recommend improvements to such systems. In addition,
the Company introduced its own website during 1997 as a new cost-effective means
of direct marketing.
Approximately 85% of the Company's purchased inventory is bar-coded by the
manufacturer, and the Company uses alpha numeric coding to identify its
remaining inventory, consisting principally of premium cigars. The Company's
headquarters and warehouse are electronically linked to each discount outlet and
cigar store location, enabling the Company's senior management to monitor daily
sales and inventory levels at each location by SKU. As a consequence, the
Company is able to identify the best selling items, to forecast product demand
by SKU. In addition, the Company's software is able to identify low stock
situations and to communicate product re-orders directly to its North Carolina
warehouse instantaneously. The Company believes that this capability greatly
reduces out-of-stock situations in its retail outlets.
MC Management, the Company's telemarketing provider, has access to the Company's
information systems, and is 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 it the desired cigar is out of stock. The
Company believes that these capabilities have enabled it to increase sales
despite periods of industry shortages. In addition, because the Company's
systems are on-line with all major credit cards, the Company is able to obtain
instant credit checks prior to the release of an order, thereby reducing the
Company's bad debt experience.
Competition
The Company operates in a large and highly fragmented industry characterized by
multiple and relatively undeveloped channels of distribution. The Company
believes that no single corporation competes against the Company in all of the
Company's lines of business, although several companies compete against the
Company in one or more of its market segments. The Company faces retail
competition from numerous small smoke shops. Likewise, the Company's cash and
carry wholesale stores face price 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.
Intellectual Property
The Company markets a number of cigar brand names which are registered
trademarks of the Company: Quorum(R), 5 Star Seconds(R), J.R Ultimate(R),
Mocambo(R), Maria Mancini(R), Consuegra(R), La Finca(R), Whitehall(R), Perfecto
Garcia(R), Perfecto Garcia Crown Royals(R), Garcia y Garcia(R), Rey del Rey(R),
Mocha(R), Farach(R), Casa Blanca(R), Santa Clara(R), Robustos de Manuel
Zavalla(R), Jose Marti(R), Villar y Villlar(R) and El Secreto del Rio Jagua(R).
The Company has also registered the J.R(R) mark, which precedes Company brand
names such as J.R Special Jamaica, J.R Special Corona, and J.R Special
Caribbean. The J.R Alternative(R) brand name, which is used to market cigars
that are manufactured for the Company in Jamaica, the Dominican Republic, and
Honduras, is also a registered trademark of the Company. Trademark applications
are pending for LaguitoTM, and La MecaTM brand names. In addition to the
foregoing, the Company holds trademarks for the following ring size names of
cigars: Remedios(R), Principales(R), Clemenceau(R), Reynitas(R) and Jeroboam(R)
and trademark applications are pending for the RectangulareTM and ValentinasTM
cigar sizes. 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. With regard to its non-tobacco products, the Company also
holds a registered trademark for CigarwareTM, which it intends to use to market
a line of clothing. The Company has also filed a trademark application for its
direct mail telephone number 1-800-JR-CIGARTM.
Employees
As of December 31, 1997, the Company had 690 employees, of whom 319 were engaged
in sales, eight in finance and administration, 147 in operations and 216 in
various part-time and temporary capacities. The Company will be required to hire
additional employees on a periodic basis in connection with future facilities
and expanded direct mail operations. The Company considers its relations with
its employees to be good.
As of December 31, 1997, various administrative and other services have been
performed for the Company by MC Management who had 118 employees, including 102
telemarketers involved in retail and wholesale direct mail operations. The
Company will be required to hire additional employees on a periodic basis, in
connection with the construction, and subsequent operation, of future facilities
and expanded direct mail operations.
Tobacco Industry Litigation
Regulation. The tobacco industry is subject to regulation in the United States
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
the scope and quantity 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 Congress
of the United States, including bills that would, if passed, (i) prohibit the
advertising and promotion of all tobacco products and/or restrict or eliminate
the deductibility of such advertising expenses; (ii) increase labeling
requirements on tobacco products to include, among other things, addiction
warnings and lists of additives and toxins; (iii) modify federal preemption of
state laws to allow state courts to hold tobacco manufacturers liable under
common law or state statutes; (iv) shift regulatory control of tobacco products
and advertisements from the United States Federal Trade Commission, ("FTC") to
the United States Food and Drug Commission, ("FDA"); (v) increase tobacco excise
taxes; and 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 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 were scheduled to go into effect on August
28, 1997 and August 28, 1998. The FDA has also announced that, at some future
point, it intends to apply additional requirements, potentially including
registration, listing, premarket notification and approval, record-keeping and
reporting requirements, and good manufacturing practices. All of these
requirements would represent substantial additional costs to the Company's
operations. 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 improve 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 has been appealed and no judgement has yet been rendered. 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. One
company has proposed, as an alternative to FDA regulation of tobacco products, a
more limited set of restrictions on cigarette sales and advertising aimed at
curbing youth smoking. The Company is unable to predict the effect on its
business and profitability of the FDA rules but, if upheld in court, such rules
could have a material adverse effect on the operations of the Company. Although
these regulations are not currently applicable to cigars and cigar products,
there can be no assurance that additional regulations will not be proposed in
the future cigars and cigar products.
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.
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. 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 that 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 United States Environmental Protection Agency (the "EPA") published a report
in January 1993 with respect to the respiratory health effects of passive
smoking (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. This study could
affect pending and future tobacco regulation and litigation.
Increased cigar consumption and the publicity that 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 exempt claims based on failure to warn consumers
about the health hazards of cigarette smoking, but does not exempt 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 compensatory damages.
Current tobacco litigation generally falls within one of three categories: class
actions, individual actions (which have been filed mainly in the State of
Florida) or actions brought by individual states generally to recover Medicaid
costs allegedly attributable to tobacco-related illnesses. The pending actions
allege a broad range of injuries resulting from the use of tobacco products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases, punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.
In May 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco,
et al. reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers. Notwithstanding
the dismissal, new class actions asserting claims similar to those in Castano
have recently been filed in certain states. To date, two pending class actions
against major cigarette manufacturers have been certified. The first case is
limited to Florida citizens allegedly injured by their addiction to cigarettes;
the other is limited to flight attendants allegedly injured through exposure to
secondhand smoke.
There can be no assurance that there will not be an increase in health-related
litigation involving tobacco and health issues against the cigarette industry or
similar litigation in the future against the cigar industry. The costs to the
Company of defending prolonged litigation and any settlement or successful
prosecution of any material health-related litigation against sellers of cigars,
cigarettes or smokeless tobacco or suppliers to the tobacco industry could have
a material adverse effect on the Company's business.
Item 2. Properties
The Company's executive and administrative offices are located in Whippany, New
Jersey in a 33,000 square foot building owned by the Company, which includes an
8,200 square foot upscale cigar store of which 1,200 square feet are allocated
to the El Rey del Mundo Cigar Bar acquired by the Company in 1998. 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. In
December of 1997, the Company purchased a 100,000 square foot facility in
Burlington, North Carolina, which is expected to be used as a discount outlet
store, warehouse and new corporate headquarters. This building is located on I
40/85, which is a major east/west interstate in North Carolina on 14 acres of
land. During, March 1998 the Company relocated its 219 Broadway store in New
York City to One Wall Street Court, an upscale store including a bar and lounge
located in the heart of the financial district. The Company also leases the
following retail properties:
Location Square Footage Lease Expiration Date
- -------- -------------- ---------------------
17 E. 45th St., New York, NY 3,000 December 31, 1999
1 Wall Street Court, New York, NY 8,000 June 22, 2007
Rt. 17N, Paramus, NJ 7,545 July 31, 2004
Newtowne Plaza, Statesville, NC 53,800 December 31, 2004
Northwestern Highway, Southfield, MI 3,000 Month to Month
1667 K. St., Washington, D.C. 850 March 31, 1999
Item 3. Legal Proceedings
The Company is not presently involved in any legal proceedings which,
if determined adversely to the Company, would have a material adverse effect on
the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since June 26, 1997, the Company's Common Stock has been quoted on the Nasdaq
National Market under the symbol "JRJR." The following table sets forth the high
and low sales price of the Common Stock on the Nasdaq National Market for the
period commencing with the listing of the Common Stock on the Nasdaq National
Market through December 31, 1997.
Quarter High Low
Third $37.00 $17.00
Fourth $38.75 $21.00
The Company's policy is to retain all available earnings for the development and
growth of its business; accordingly, it has not declared or paid any dividends
on its Common Stock since the completion of its initial public offering in June
1997 and does not intend to pay any cash dividends. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
- --Liquidity and Capital Resources." Declaration or payment of dividends, if any,
in the future, will be at the discretion of the Board of Directors and will
depend upon the Company's then current financial condition, results of
operations, capital requirements and other factors deemed relevant by the Board.
The approximate number of record holders of the Common Stock as of March 27,
1998 was 2221.
Item 6. Selected Financial Data
The following selected financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the accompanying Financial Statements and related
notes thereto.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Statement of Income Data:
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 74,581 $ 109,297 $ 152,695 $ 191,982 $ 240,348
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Cost of goods sold 62,660 91,588 130,645 158,007 190,886
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Gross profit 11,921 17,709 22,050 33,975 49,462
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Selling, general, and administrative expen9,714 14,450 18,768 20,954 24,715
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Income from operations 1,846 2,812 2,789 12,347 23,842
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Interest expense, (income) net 481 647 627 582 (14)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Other Expenses - 151 - (8) 58
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative 1,769t of chang2,556accounting2,312od 12,325 24,116
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 160 257 (74) 144 4,781
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Income before cumulative effect of change 1,609counting m2,299 2,386 12,181 19,335
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Cumulative effect of change in accounting for58ncome taxes - - - -
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Net income $ 1,667 $ 2,299 $ 2,386 $ 12,181 $ 19,335
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Pro forma earnings per share - basic (1) $ 0.73 $ 1.30
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Pro forma earnings per share - diluted (1) $ 0.73 $ 1.29
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Pro forma common shares outstanding - basic (1) 9,812 11,281
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Pro forma common shares outstanding - diluted (1) 9,812 11,374
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Balance Sheet Data:
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Working capital $ 9,014 $ 10,845 $ 8,914 $ 18,522 $ 55,213
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total assets 22,692 29,951 32,670 42,682 91,262
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total long-term debt, including current po6,153 8,955 7,129 8,279 20,833
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Total Stockholders' equity 7,405 9,704 12,090 23,476 61,176
- -----------------------------------------------------------------------------------------------------------
(1) See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This report contains certain "forward-looking statements." Those
statements appear in a number of places in this report and include statements
regarding the intent, belief or current expectations of the company, its
directors and 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 from the Initial Public 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.
General.
The Company is one of the largest distributors and retailers of tobacco
and tobacco related products in North America. The Company operates in a large
and highly fragmented industry characterized by multiple and relatively
undeveloped channels of distribution. With its 27-year history in the cigar
industry, the Company has established itself as an important participant in the
movement of tobacco products from manufacturers to the customers. Manufacturers
value the Companys ability to perform distribution, credit, customer support and
marketing functions, which would otherwise be the responsibility of the
manufacturer. Customers value the Company's extensive variety of tobacco
products and rapid order fulfillment and benefit from advantageous pricing
derived through the Company's volume buying as a direct importer and
distributor. The Company's net sales have grown from $152.7 million in the year
ended December 31, 1995 to $192.0 million and $240.3 million, in the years ended
December 31, 1996 and December 31, 1997, respectively.
The Company markets it products through two principal channels of
distribution: retail, consisting of the Company's premium cigar direct mail
business, six specialty cigar stores, and two large discount outlet stores, and
wholesale consisting of the wholesale cigar mail order business and wholesale
cash and carry cigarette store 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,
1995 1996 1997
$ % $ % $ %
($ in millions)
Retail operations:
<S> <C> <C> <C> <C> <C> <C>
Direct mail cigars....... $26.4 17.3% $35.5 18.5% $52.9 22.0%
Cigar stores............. 10.5 6.9 16.2 8.4 23.0 9.6
Discount outlet stores... 52.1 34.1 59.7 31.1 63.6 26.5
Total retail sales..... 89.0 58.3 111.4 58.0 139.5 58.1
Wholesale operations:
Direct mail cigars....... 25.2 16.5 32.6 17.0 46.0 19.1
Cash-and-carry cigarettes* 38.5 25.2 48.0 25.0 54.8 22.8
Total wholesale sales.. 63.7 41.7 80.6 42.0 100.8 41.9
Total net sales............... $152.7 100.0% $192.0 100.0% $240.3 100.0%
- --------------------
*Also includes tobacco and other tobacco related products
</TABLE>
The Company has built its reputation with consumers as a retailer and
wholesaler of a wide selection of premium cigars. To leverage its premium cigar
business, the Company offers a variety of other tobacco products to the buying
public, including mass-market cigars, smokeless and pipe tobacco and
tobacco-related accessories. The Company is also a major 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,
1995 1996 1997
$ $ % % $ %
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Cigars/Tobacco*............... $65.5 42.9% $93.7 48.8% $135.2 56.3%
Cigarettes.................... 67.1 43.9 78.4 40.8 83.3 34.6
Fragrances.................... 8.1 5.3 7.2 3.8 7.5 3.1
Other merchandise............. 12.0 7.9 12.7 6.6 14.3 6.0
Total net sales.......... $152.7 100.0% $192.0 100.0% $240.3 100.0%
- --------------------
* Excludes Cigarettes
</TABLE>
Results of Operations
The following discussion should be read in conjunction with the
Financial Statements and related notes thereto appearing elsewhere herein. The
following table sets forth, as a percentage of net sales, certain items in the
Consolidated Statements of Income for the periods presented.
Year Ended December 31,
1995 1996 1997
Revenues:
Retail sales........................... 58.3% 58.0% 58.1%
Wholesale sales........................ 41.7 42.0 41.9
Net Sales.............................. 100.0 100.0 100.0
Cost of goods sold.......................... 85.6 82.3 79.0
Gross profit................................ 14.4 17.7 20.6
Selling, general and administrative expenses 12.3 10.9 10.3
Depreciation and amortization............... 0.3 0.4 0.4
Income from operations...................... 1.8 6.4 9.9
Other income(expense):
Interest (expense)..................... (0.5) (0.4) (0.5)
Other.................................. 0.2 0.4 0.6
Income before income taxes.................. 1.5 6.4 10.0
Provision (credit) for income taxes......... (0.1) 0.1 2.0
Net income.................................. 1.6% 6.3% 8.0%
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net sales were $240.3 million and $192.0 million for 1997 and 1996,
respectively, an increase of $48.3 million or 25.2%. Retail sales increased
25.2% to $139.5 million for 1997 from $111.4 for 1996. The increase in retail
sales was due primarily to a $17.4 million, or 49.0% increase in direct mail
cigar stores; a $6.8 million, or 42.0% increase in cigar store sales; and a $3.9
million or 6.5% increase in discount outlet store sales. Wholesale sales
increased 25.0% to $100.8 million for 1997 from $80.6 million over the same
period in the prior year. The increase in wholesale sales was due primarily to a
$13.4 million, or 41.1% increase in direct mail sales and a $6.8 million, or
14.2% increase in cash-and-carry cigarette sales. The overall increase in net
sales was primarily attributable to increases in the Company's retail and
wholesale products sales, and in particular the sale of premium cigars and
related products.
Gross profit was $49.5 million and $34.0 million for 1997 and 1996,
respectively, an increase of $15.5 million or 45.6%. The increase in gross
profit was due to the increase in cigar sales, which have higher profit margins
relative to other products. As a percentage of net sales, gross profit increased
to 20.6% for 1997 from 17.7% for 1996, primarily due to an increase in unit
volume and prices of higher margin, premium cigars.
Selling, general and administrative ("SG&A") expenses were $24.7
million and $21.0 million for 1997 and 1996, respectively, an increase of $3.7
million or 17.6%, primarily due to increased staffing, costs related to the
relocation of the Company's Bergen County, New Jersey model store, and the
payment of one-time signing bonuses of $1.5 million in connection with the
execution of long term service agreements. As a percentage of net sales, SG&A
expenses decreased to 10.3% for 1997 from 10.9% for 1996, due primarily to net
sales increasing at a greater rate than SG&A expenses.
Income from operations was $23.8 million and $12.3 million for 1997and
1996, respectively, an increase of $11.5 million. As a percentage of net sales,
income from operations increased to 9.9% for 1997 from 6.4% for 1996, primarily
due to increased sales of higher margin, premium cigars.
Interest expense increased to $1.3 million for 1997, from $.8 million
in 1996. The increase is attributable to the distribution notes (which amounts
represent cumulative undistributed S Corporation earnings of its subsidiaries
through June 30, 1997 on which income taxes had previously been paid by the
existing stockholders) issued to the former principals of the Company's
subsidiaries prior to their acquisition by the Company in a reorganization
transaction in June 1997. Other income was $1.5 million and $0.8 million for
1997 and 1996, respectively. The increase in 1997 was primarily due to
additional interest income from investing activities.
As a result of the foregoing, the Company had net income of $19.3
million in 1997, compared to $12.2 million in 1996, an increase of 58.7% or $7.1
million.
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 net
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 from $63.7 million in 1995. The increase in
wholesale sales was due primarily to a $7.4 million, or 29.4% increase in direct
mail sales and a $9.5 million, or 24.7% increase in cash-and-carry cigarette
sales. The overall increase in net sales was a result of increased sales of
premium cigars and related products, higher levels of cigarette sales and, to a
lesser extent, general merchandise.
Gross profit was $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 for 1996 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 increased to 17.7% in 1996 from 14.4% in
1995, primarily due to the impact of greater sales of lower-margin wholesale
cigarettes.
SG&A expenses were $21.0 million and $18.8 million in 1996 and 1995,
respectively, an increase of $2.2 million or 11.6%, primarily due to costs
related to the improvement of and relocation to the Company's Whippany, New
Jersey specialty cigar store and administrative offices. SG&A expenses decreased
as a percentage of net sales to 10.9% in 1996 from 12.3% in 1995, however,
primarily due to net sales increasing at a greater rate than SG&A expenses.
Included in SG&A expenses for 1995 are legal fees and settlement costs in
connection with certain litigation with a former licensee in the amount of $1.0
million.
Income from operations increased to $12.3 million in 1996 from $2.8
million in 1995. As a percentage of net sales, income from operations increased
to 6.4% in 1996 from 1.8% in 1995, primarily due to higher sales of premium
cigars.
Interest expense remained unchanged at $0.8 million in 1996. Other
income was $0.8 million and $0.3 million in 1996 and 1995. The increase was
primarily due to an insurance settlement.
As a result of the foregoing, the Company had net income of $12.2
million in 1996, compared to $2.4 million in 1995.
Seasonality
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 relatively lower sales for the first half of
the calendar year, and a substantial increase in sales and net income from the
summer vacation season through the Christmas holiday season. The Company expects
this trend 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 renovations and net 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 its principal stockholders.
The Company's net cash provided by operating activities was $.3 million for
1997. Net cash used in investing activities during such period was $23.5
million, of which $15.0 million was invested in short term investments and $8.5
million was used for capital expenditures. Net cash provided by financing
activities was $33.7 million for 1997, representing cash from the initial public
offering of approximately $53.3 million offset by distributions to stockholders
and funds used to repay long term debt and a portion of the Distribution Notes.
As of December 31, 1997 net proceeds of approximately $53.3 million the
Company's initial public offering were used for the following purposes: (i) to
repay outstanding indebtedness of $7.3 million, (ii) $3.3 million for the
relocation and design of specialty stores, (iii) $4.0 million for the purchase
of land and building for a new discount outlet store and warehouse distribution
center, (iv) the quarterly principal payment of distribution notes of $4.0
million, (v) $1.5 million for the payment of signing bonuses to an officer and
to MC Management in connection with long-term service agreements, (vi) $1.6
million for the upgrade of the Company's information systems, (vii) interest
payments of $.8 million on the Distribution Notes and (viii) $14.9 million for
working capital and general corporate purposes. The remaining proceeds of $15.9
million are expected to be used for the following purposes: (I) $6.0 million for
a new discount outlet store and warehouse distribution center, (ii) $5.0 million
for the expansion of retail selling space at existing discount outlet stores,
(iii) $4.0 million for the payment of Distribution Notes, (iv) $.6 million for
the interest payments on Distribution Notes and (v) $.3 million for the upgrade
of information technology systems.
The Company's net cash flow provided by operating activities was $9.2
million for 1996. Net cash used in investing activities was $4.1 million during
such period, relating to capital expenditures at the Company's Whippany
location. Net cash used in financing activities was $2.2 million in 1996,
primarily for repayment of debt.
At December 31, 1997, the Company had working capital of $55.2 million
compared to $18.5 million at December 31, 1996. The amount for 1997 includes
cash, cash equivalents and short-term investments of $31.6 million, accounts
receivable of $2.3 million, $34.8 million of inventory and $9.3 million of
accounts payable and accrued expenses.
As of December 31, 1997, the Company also had available under a credit
agreement a $15.0 million line of credit, with borrowings thereunder accruing
interest at the bank's base rate less 0.5% or the London Interbank Offered Rate
("LIBOR") plus 1.5%. At December 31, 1997, the Company had no borrowings under
this line of credit, which expires on May 31, 1998.
At December 31, 1997 the Company had outstanding Distribution Notes in
the amount of $19.8 million which were issued to the former principal
stockholders of the Company's subsidiaries prior to their acquisition by the
Company on June 6, 1997. These notes represented estimated undistributed
accumulative S Corporation earnings through June 26, 1997, the date of the
initial public offering. These notes bear interest at the rate of 7.0% per annum
and are payable on a quarterly basis until June 1, 2000. In addition, the
Company has outstanding Distribution Notes totaling $1.0 million bearing
interest at the rate of 7.0% per annum payable on June 1, 2000.
Capital expenditures, primarily for computers, office furniture,
leasehold improvements and the purchases of the Burlington, North Carolina
property were $8.5 million and $2.9 million in 1997 and 1996, respectively.
The Company anticipates that it will be able to satisfy its ongoing
cash requirements for the foreseeable future, primarily with cash flow from
operations, and cash and short-term investments on hand, supplemented by
borrowings under its current credit agreement.
During 1995, the Company purchased versions of its principal
information technology software packages, which have been certified as Year 2000
compliant by the respective software vendors. The Company has developed a plan
to modify non-critical data processing systems to prepare for Year 2000. The
Company expects that by early 1999 it will complete modifications of
non-critical data processing systems and does not expect the total costs
associated with these products will be significant.
Impact of Recently Issued Accounting Standards
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The Statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This Statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. The Company does not expect to be
significantly impacted by the adoption of this Statement.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
("Statement No. 131"). Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and, therefore,
the Company will adopt the new requirements retroactively in 1998. Management
has not completed its review of Statement 131, but anticipates that the adoption
of this Statement will increase the number of reported segments.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-26 annexed hereto. The schedule required under
Regulation S-X is included herein on page S-1
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
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 statements 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.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Officers of the Company which is
called for by this Item 10 is incorporated by reference to the information set
forth under the heading "Election of Directors" in the Company's Proxy Statement
relating to its 1997 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A (the "Company's 1997 Proxy Statement").
Item 11. Executive Compensation
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" in the
Company's 1997 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 1997
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors," "Employment
Arrangements," and "Certain Relationships and Related Transactions" in the
Company's 1997 Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: - See "Index to Financial Statements"
2. Financial Statement Schedule: - See "Index to Financial Statements"
3. Exhibits: - See "Exhibit Index"
(b) Reports on Form 8-K - None.
21
<PAGE>
800-JR CIGAR, Inc.
Index to Financial Statements
and Financial Statement Schedule
Reports of Independent Auditors..............................................F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1997.................F-4
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1996 and 1997..........................................F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1995, 1996 and 1997..........................................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997..........................................F-7
Notes to Consolidated Financial Statements...................................F-8
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts...............................S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
<PAGE>
Report of Independent Auditors
To the Board of Directors 800-JR CIGAR, Inc.
We have audited the accompanying consolidated balance sheet of 800-JR CIGAR,
Inc. as of December 31, 1997 and the related consolidated statements of income,
stockholders' equity and cash flows for the year then ended. We have also
audited the combined balance sheet of 800-JR CIGAR, Inc. as of December 31, 1996
and the related combined statements of income, stockholders' equity and cash
flows for the year then ended. Our audits also included the financial statement
schedule listed in the index at Item 14(a). These financial statements and
schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 800-JR CIGAR, Inc.
as of December 31, 1997, and the consolidated results of their operations and
their cash flows for the year then ended, and the combined financial position of
800-JR CIGAR, Inc. as of December 31, 1996, and the combined results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/S/ ERNST & YOUNG LLP
MetroPark, New Jersey
February 27, 1998
<PAGE>
Report of Independent Public Accountants
To the Board of Directors 800-JR CIGAR, Inc.
We have audited the accompanying consolidated statement of income, stockholders'
equity and cash flows of 800-JR CIGAR, INC. AND SUBSIDIARIES for the year ended
December 31, 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 audit.
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 combined 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 consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
800-JR CIGAR, INC. AND SUBSIDIARIES for the year ended December 31, 1995, in
conformity with generally accepted accounting principles.
Our audit referred to above included Schedule II as of and for the year ended
December 31, 1995 which presents fairly, when read in conjunction with the
consolidated financial statements, the information required to be set forth
therein.
/S/ J.H. COHN LLP
Roseland, New Jersey
May 21, 1996
<PAGE>
F-2
Consolidated Balance Sheets
(Dollars in thousands)
December 31
1996 1997
-------------------------------
Assets
Current assets:
Cash and cash equivalents $ 6,056 $16,572
Short-term investments - 14,981
Accounts receivable, net of allowance for
doubtful accounts of $118 and $78 at
December 31, 1996 and 1997, respectively 1,703 2,313
Merchandise inventory 19,616 34,779
Prepaid expenses and other current assets 700 2,155
Loans receivable - affiliates and other
associated entities 1,070 603
Loans receivable - stockholders 2,471 -
Deferred tax assets - current - 996
-------------------------------
Total current assets 31,616 72,399
Property, equipment and improvements, at cost, net
of accumulated depreciation and amortization 10,876 18,518
Other assets 165 243
Deferred tax assets 25 102
===============================
Total assets $42,682 $91,262
===============================
Liabilities and stockholders' equity Current liabilities:
Current portion of long-term debt $ 2,167 $ -
Current portion of distribution notes payable
to stockholders - 7,933
Current portion of capital lease obligations 89 -
Accounts payable 8,947 7,157
Accrued expenses 1,891 2,096
-------------------------------
Total current liabilities 13,094 17,186
Long-term debt, less current portion 6,112 -
Distribution notes payable to stockholders,
less current portion - 12,900
-------------------------------
Total liabilities 19,206 30,086
Commitments and contingencies
Stockholders' equity:
Common stock of predecessor 21 -
Preferred stock, $.01 par value, 5,000,000
shares authorized, no shares issued and outstanding
Common stock, $.01 par value, 40,000,000 shares
authorized, 12,750,000 issued and outstanding - 128
Additional paid-in capital 28 52,716
Retained earnings 23,845 8,332
-------------------------------
23,894 61,176
Less treasury stock, at cost (418) -
-------------------------------
Total stockholders' equity 23,476 61,176
===============================
Total liabilities and stockholders' equity $42,682 $91,262
===============================
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Year ended December 31
1995 1996 1997
---------------------------------------------
Net sales $152,695 $191,982 $240,348
Cost of goods sold 130,645 158,007 190,886
---------------------------------------------
Gross profit 22,050 33,975 49,462
Operating expenses:
Selling 3,977 3,946 5,192
General and administrative 14,791 17,008 19,523
Depreciation and amortization 493 674 905
---------------------------------------------
Income from operations 2,789 12,347 23,842
Other income (expense):
Interest expense (785) (789) (1,269)
Interest income 158 207 1,283
Rental income 150 195 202
Insurance settlement - 373 -
Other, net - (8) 58
---------------------------------------------
Income before income taxes 2,312 12,325 24,116
Provision (credit) for income taxes (74) 144 4,781
=============================================
Net income $ 2,386 $ 12,181 $ 19,335
=============================================
Pro forma - unaudited
Historical income before provision for income taxes $ 12,325 $ 24,116
Pro forma adjustments other than income taxes 580 977
-------------------------------
Pro forma income before income taxes 12,905 25,093
Pro forma provision for income taxes 5,262 10,255
---------------
===============================
Pro forma net income $ 7,643 $ 14,838
===============================
Pro forma earnings per share - basic $ .73 $ 1.30
===============================
Pro forma earnings per share - diluted $ .73 $ 1.29
===============================
Pro forma common shares outstanding - basic 9,812 11,281
===============================
Pro forma common shares outstanding - diluted 9,812 11,374
===============================
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION> 800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Common
Stock of Additional
Predecessor Common Stock Paid-in Retained Treasury
----------------------------
Entities Shares Amount Capital Earnings Stock Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 $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 19,335 19,335
Reorganization (21) 9,300,000 $ 93 (547) 57 418 -
Issuance of common stock 3,450,000 35 53,235 53,270
Issuance of distribution notes (23,800) (23,800)
Issuance of additional
distribution notes (1,000) (1,000)
Distribution to stockholders (10,105) (10,105)
-------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - 12,750,000 $128 $52,716 $ 8,332 $ - $ 61,176
=================================================================================================
See accompanying notes.
</TABLE>
<PAGE>
Year ended December 31
1995 1996 1997
----------------------------------
Cash flows from operating activities
Net income $ 2,386 $12,181 $19,335
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 493 674 905
Provision for uncollectible accounts 33 191 55
Deferred income taxes 57 (5) (1,073)
Other (17) (8) -
(Gain) loss on sale of assets (8) 28 -
Changes in operating assets and liabilities:
Accounts receivable 501 (549) (665)
Merchandise inventory 56 (2,894) (15,163)
Prepaid expenses and other current assets (3) (460) (1,455)
Other assets 2 (36) (78)
Accounts payable and accrued expenses 1,053 68 (1,585)
----------------------------------
Net cash provided by operating activities 4,553 9,190 276
Cash flows from investing activities
Purchase of short-term investments - - (14,981)
Purchase of property and equipment (3,176) (2,929) (8,547)
Loans repaid by (extended to) affiliates and other
associated entities 113 (240) 467
Proceeds from sale of assets 75 - -
Loans extended to stockholders - (938) (445)
----------------------------------
Net cash used in investing activities (2,988) (4,107) (23,506)
Cash flows from financing activities
(Repayments) proceeds of borrowings under revolving
line of credit 950 500 -
Proceeds from Common Stock offering - - 54,545
Expenses paid in connection with Common Stock offering - - (1,275)
Payments of distribution notes - - (3,967)
Payments of long-term debt (1,575) (1,850) (8,279)
Payments of capital lease obligations (78) (84) (89)
Payments of loans payable - stockholders (1,164) - -
Distribution to stockholders - (795) (7,189)
----------------------------------
Net cash (used in) provided by financing activities (1,867) (2,229) 33,746
----------------------------------
Net (decrease) increase in cash and cash equivalents (302) 2,854 10,516
Cash and cash equivalents, beginning of period 3,504 3,202 6,056
------------
=======================
Cash and cash equivalents, end of period $ 3,202 $ 6,056 $ 16,572
==================================
Supplemental disclosure of cash flow data
Income taxes paid $ 325 $ 37 $ 6,053
=======================
==================================
Interest paid $ 874 $ 775 $ 397
==================================
Supplemental disclosure of noncash investing and financing activities
Line of credit refinanced with note payable $ - $3,000 $ -
Non-cash distribution to stockholders - - 2,916
Distribution notes issued to stockholders - - 24,800
See accompanying notes.
<PAGE>
1. Basis of Presentation and Significant Accounting Policies
Business
800-JR CIGAR, Inc. and subsidiaries ("800-JR CIGAR" or 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.
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 (the "Offering"). Net
proceeds of the Offering, after deducting underwriting discounts and
commissions, and professional fees aggregated $53,270. As of December 31, 1997
proceeds of the Offering were used for the following purposes: (i) to repay
outstanding indebtedness of $7,300, (ii) $3,300 for the relocation and design of
specialty stores, (iii) $4,000 for the purchase of land and building for a new
discount outlet store and warehouse distribution center, (iv) the quarterly
principal payment of distribution notes of $4,000, (v) payment of signing
bonuses to an officer and to MC Management in connection with long-term service
agreements, (vi) $1,600 for the upgrade of the Company's information systems,
(vii) interest payments of $800 on the Distribution Notes and (viii) $14,900 for
working capital and general corporate purposes. The remaining proceeds of
$15,870 are expected to be used for the following purposes: (i) $6,000 for a new
discount outlet store and warehouse distribution center, (ii) $5,000 for the
expansion of retail selling space at existing discount outlet stores, (iii)
$4,000 for the payment of distribution notes, (iv) $600 for the interest
payments on distribution notes and (v) $270 for the upgrade of information
technology systems.
Basis of Presentation
800-JR CIGAR was incorporated in Delaware in March 1997. Concurrent with the
completion of 800-JR CIGAR's Offering, the former principals of the predecessor
group of companies contributed to 800-JR CIGAR all of the outstanding stock in
the entities listed below that comprise the predecessor group of companies, in
exchange for 9,300,000 shares of common stock of 800-JR CIGAR (the
"Reorganization").
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
The accompanying financial statements include the results of operations for
1995, 1996 and the period 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., and J.R.
Statesville, Inc. (together, the "Company" or the "Predecessor Entities").
The Predecessor Entities are corporations that had elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and local
tax regulations through June 26, 1997.
After the Reorganization, the Predecessor Entities became subsidiaries of 800-JR
CIGAR. Because 800-JR CIGAR and the Predecessor Entities were commonly owned,
the Reorganization has been accounted for in a manner similar to a pooling of
interests and, accordingly, the historical carrying values of the assets and
liabilities of the Predecessor Entities were not affected by the Reorganization.
800-JR CIGAR conducted no business prior to the Reorganization and, accordingly,
it was not included in the results of operations of the Predecessor Entities.
For the period from June 27, 1997 through December 31, 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 principal stockholders of the Predecessor Entities were Lewis Rothman and
LaVonda Rothman, each of whom owned 50% of the Predecessor Entities, except for
J.R. Statesville, Inc., which was 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.
Amounts included for common stock on the accompanying consolidated balance sheet
and statements of stockholders' equity prior to the Reorganization, represent
the combined par or stated value of the outstanding shares of the corporations
included in the Predecessor Entities.
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
Statement of Income Presentation
The statement of income of the Company for the year ended December 31, 1997
reflects the results of operations of the Predecessor Entities for the period
January 1, 1997 through June 26, 1997 and the results of the Company from June
27, 1997 (the date of the consummation of the Offering) through December 31,
1997.
Selected statement of income data for the year ended December 31, 1997 are as
follows:
January 1 June 27 to Year ended
to June December December
26, 1997 31, 1997 31, 1997
----------------------------------------------------
(Predecessor) (Company) (Consolidated)
Net revenues $107,782 $132,566 $240,348
====================================================
Gross profit $ 20,975 $ 28,487 $ 49,462
====================================================
Operating income $ 10,481 $ 13,361 $ 23,842
Other (expense) income (118) 392 274
----------------------------------------------------
Income before provision for income taxes 10,363 13,753 24,116
Provision for income taxes 361 4,420 4,781
====================================================
Net income $ 10,002 $ 9,333 $ 19,335
====================================================
Pro Forma Adjustments (Unaudited)
The unaudited pro forma net income for the years ended December 31, 1996 and
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 1996 and from $253 to $200 for 1997 for two
of the Company's executives pursuant to their new employment agreements; b) an
increase in interest expense of $1,458 for 1996 and $798 for 1997 assuming the
issuance of the Distribution Notes; c) a reduction in interest expense of $789
for 1996 and $328 for 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 1996 and $106 for
1997 assuming the repayment to the Company of loans receivable from
stockholders; e) an increase of $1,500 for 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 $5,118 for 1996
and $5,474 for 1997
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
for income taxes based upon pro forma pre-tax income as if the Company had been
subject to federal and additional state income taxes.
On June 6, 1997, the Company issued Distribution Notes to the principal
stockholders of the Predecessor Entities in the amount of $23,800, representing
estimated undistributed cumulative S Corporation earnings through the date of
the Offering which were taxable to those stockholders. The Distribution Notes
are net of loans receivable from the stockholders of $2,916, which were
outstanding prior to the Offering, and additional distributions of $7,189 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
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 issued additional distribution
notes (the "Additional Notes") to the principal stockholders of the Predecessor
Entities, for a nominal amount. At December 31, 1997, the initial principal
amount of the additional notes was increased to $1 million, the maximum
allowable. Such increase represents the amount by which the final S Corporation
earnings of the Predecessor Entities exceeded the principal amount of the
Distribution Notes (as discussed above). The Additional Notes mature on June 1,
2000 and bear interest at the rate of 7% per annum.
Pro Forma Earnings Per Share (Unaudited)
Pro forma basic and diluted earnings per share for the year ended December 31,
1996 is based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by the sale of 511,658 shares of common stock at an initial
public offering price of $17.00 per share ($15.44, net of underwriting discounts
and commissions and estimated offering expenses), the proceeds of which would be
necessary to pay approximately $7,900, the current portion of the Distribution
Notes. The net income used in the calculation of pro forma earnings per share
for the year ended December 31, 1996 represents pro forma net income decreased
by the interest expense on debt of $789 ($467 on an after-tax basis).
The 11,280,829 pro forma common shares outstanding used in the calculation of
basic pro forma earnings per share is based on a weighted average calculation
derived by using 12,750,000 common shares outstanding subsequent to the offering
and 9,811,658, the pro forma common shares outstanding prior to the Offering.
<PAGE>
1. Basis of Presentation and Significant Accounting Policies (continued)
The 11,373,900 pro forma common shares outstanding, used in the calculation of
diluted pro forma earnings per share, for the year ended December 31, 1997 is
based on a weighted average calculation derived by using 12,936,143, the
weighted average common shares outstanding subsequent to the Offering and
9,811,658, the pro forma common shares outstanding prior to the Offering, as
calculated above. The net income used in the calculation of pro forma per share
information for the year ended December 31, 1997 consists of the pro forma
income of $14,838 reduced by interest expense on debt of $328 ($194 on an
after-tax basis).
Supplementary pro forma basic and diluted earnings per share for the year ended
December 31, 1996, is $.74 based on 9,300,000 shares of common stock outstanding
prior to the Offering, increased by (a) the sale of 511,658 shares of common
stock at an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to pay approximately $7,900, the current
portion of the Distribution Notes and (b) the sale of 467,896 shares of common
stock at an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to repay approximately $7,229, the amount
of outstanding debt at the date of the offering. The net income used in the
calculation of supplementary pro forma earnings per share is the pro forma net
income of $7,643 for the year ended December 31, 1996.
Supplementary pro forma basic earnings per share for the year ended December 31,
1997 is $.78. The common shares outstanding used in the calculation of
supplementary basic pro forma earnings per share is based on a weighted average
calculation derived by using 12,750,000 common shares outstanding subsequent to
the offering and 10,279,554, the supplementary pro forma common shares
outstanding, prior to the offering.
Supplementary pro forma diluted earnings per share for the year ended December
31, 1997 is $1.28 based on a weighted average of the 10,279,554 shares of common
stock outstanding for the six-month period ended June 30 1997 (prior to the
Offering) and 12,936,143 shares outstanding for the six-month period ended
December 31, 1997 (subsequent to the Offering).
The net income used in the calculation of supplementary pro forma basic and
diluted earnings per share is the pro forma net income of $14,838.
<PAGE>
2. Summary of Significant Accounting Policies
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.
Short-Term Investments
Short-term investments consist of U.S. Treasury obligations and commercial paper
which mature within one year. Such short-term investments are carried at cost,
which approximates fair value, due to the short period of time to maturity.
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, short-term investments, and trade accounts receivable. The Company
places its temporary cash investments and short-term investments in government
obligations and commercial paper of high credit quality corporations to limit
its credit exposure. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base, their dispersion across different geographic areas and
generally short payment terms.
Merchandise Inventory
Merchandise inventory is stated at the lower of cost (determined by the
first-in, first-out method) or market; market represents the lower of
replacement cost or estimated net realizable value. Merchandise inventory
consists of goods held for re-sale.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation and
amortization of assets, including those under capital lease, is computed using
the straight-line and accelerated methods over the lesser of the estimated
useful lives of the related assets or the lease term. These lives range from 3
to 31 years.
Advertising
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotion costs amounted to $1,892, $1,129 and $1,605 for the
years ended December 31, 1995, 1996 and 1997, respectively.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Income Taxes
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.
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.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock option plans because, the alternative fair
value accounting provided for under FASB Statement No. 123, "Accounting for
Stock-Based Compensation" (FASB 123), requires use of option valuation models
that were not developed for use in valuing employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals the
fair market value of the underlying common stock on the date of the grant, no
compensation expense is recognized.
Earnings per Share
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is calculated similar to fully diluted earnings per share.
Pro forma earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
<PAGE>
2. Summary of Significant Accounting Policies (continued)
Comprehensive Income
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
The Statement established standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. This Statement requires that all items that are required
to be recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. This Statement is effective for fiscal
years beginning after December 15, 1997. The Company does not expect to be
significantly impacted by the adoption of this Statement.
Disclosures About Segments of an Enterprise and Related Information
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
("Statement No. 131"). Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. Statement 131 is effective for financial
statements for fiscal years beginning after December 15, 1997 and, therefore,
the Company will adopt the new requirements retroactively in 1998. Management
has not completed its review of Statement 131, but anticipates that the adoption
of this Statement will increase the number of reported segments.
3. Property, Equipment and Improvements
Property, equipment and improvements consist of the following:
December 31
1996 1997
--------------------------
Land $ 1,593 $ 1,593
Building and improvements 5,860 11,003
Machinery and equipment 1,453 2,979
Furniture and fixtures 1,769 1,754
Leasehold improvements 3,480 5,283
Automobiles 135 174
--------------------------
14,290 22,786
Less accumulated depreciation and amortization 3,414 4,268
==========================
$10,876 $18,518
==========================
<PAGE>
4. Long-Term Debt and Line of Credit
Long-term debt is comprised as follows:
December 31
1996 1997
------------------------
Distribution Notes payable to stockholders, due in
quarterly installments, with interest at 7.0% through
June 1, 2000 $19,833
Additional Distribution Notes payable to stockholders, due
June 1, 2000, with interest at 7.0% 1,000
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
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 $2,664 at December 31, 1996) 475
Note payable - bank, due in monthly installments with
interest at 6.6% through August 25, 1998 1,680
Note payable - bank, due in monthly installments with
interest at 8.25% through September 18, 1999 1,255
Note payable - bank, due in monthly installments with
interest at 7.5% through May 23, 2003 2,750
Notes payable - former stockholder, due in monthly
installments of $7,500 plus interest at 12% through
April 30, 1998 119
------------------------
8,279 20,833
Less current portion 2,167 7,933
========================
Long-term debt $6,112 $12,900
========================
The Company used a portion of the proceeds from the Offering to repay all debt
which was outstanding as of the date of the Offering, with the exception of the
Distribution Notes.
During 1997, the Company entered into a new $15,000 line of credit with a bank,
which expires on May 31, 1998. Borrowings under this facility are unsecured and
bear interest at the bank's prime rate less 0.5% or the London Inter-Bank
Offering Rate ("LIBOR") plus 1.5%.
The fair value of the Company's long-term debt approximates its carrying value
as the interest rates are substantially the same as are currently available to
the Company for similar debt instruments.
<PAGE>
4. Long-Term Debt and Line of Credit (continued)
The Distribution Notes and Additional Notes payable to stockholders will mature
as follows:
1998 $7,933
1999 7,933
2000 4,967
============
$20,833
============
5. Employee Benefit Plans and Stock Option Plans
401(k) Plan
During 1997, the Company adopted a defined contribution plan (401(k)) for all
eligible employees. The plan provides for discretionary contributions by the
Company based on the performance of the Company. The Company made no
contributions to the plan in 1997.
1997 Employee Stock Purchase Plan
During 1997, 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 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.
1997 Long-Term Incentive Plan
Prior to the Offering, the Board of Directors ("Board") and the 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
<PAGE>
5. Employee Benefit Plans and Stock Option Plans (continued)
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.
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,
employees of MC Management, other employees and consultants of the Company. 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.
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.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
FASB 123 requires pro forma information regarding net income and earnings per
share as if the Company has accounted for its employee stock options granted
under the fair value method of FASB 123. The fair value of these equity awards
was estimated at the date of
<PAGE>
5. Employee Benefit Plans and Stock Option Plans (continued)
grant using a Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997: risk-free interest rates of 5.73%
in 1997; expected volatility of 73%; expected option life of 10 years and an
expected dividend yield of 0%. The weighted average grant fair value of options
granted during 1997 was $14.02 per share. The total compensation related to
stock-based compensation awards, net of related income tax benefits, under FASB
123 for 1997 would have been approximately $613.
For purposes of pro forma disclosures, the estimated fair value of the equity
awards is amortized to expense over the options' vesting period. The Company's
pro forma information, for the year ended December 31, 1997, is as follows:
Pro forma net income $14,225
Pro forma diluted net income per share of common stock $1.23
A summary of stock option activity relating to the Company's stock options are
as follows:
Long-Term Non-Employee
Incentive Plan Directors Plan
----------------------------------------------------------
Weighted Weighted
Average Number Average Number
Exercise Price of Exercise Price of
Shares Shares
--------------------------------------------------------
Outstanding at January 1, 1997 - -
Granted 17.00 450,000 17.00 20,000
Exercised - -
Canceled 17.00 (35,000) 25.38 10,000
==========================================================
Outstanding at December
31, 1997 17.00 415,000 19.79 30,000
==========================================================
The weighted average fair value of options issued at fair market value in 1997
was $14.02 per share. There were no options exercisable at December 31, 1997.
<PAGE>
5. Employee Benefit Plans and Stock Option Plans (continued)
Stock options outstanding at December 31, 1997 are summarized as follows:
Weighted Average
Outstanding Remaining
Options at Contractual Life
December
Range of Exercise Price 31, 1997
- ----------------------------------------------------------------------------
$17.00 per share 435,000 10 years
$25.38 per share 10,000 10 years
==================
$17.00 to $25.38 per share 445,000
==================
6. Related Party Transactions
From time to time, the Company made or received cash advances from the
stockholders. Such advances bore interest at 9% and had no established due
dates. Net interest (expense) income amounted to $78, $169 and $44 in 1995, 1996
and 1997, respectively.
During 1997, the Company purchased cigars from an affiliated company aggregating
approximately $7.6 million. The affiliated entity is owned 50% by an
officer/director and 50% by another director of the Company.
7. Commitments and Contingencies
Employment Agreements
Effective upon consummation of the Offering, the Company entered into three year
employment agreements with three executives of the Company. The agreements
provide for aggregate annual base salaries of $505, plus employment benefits and
bonuses, which shall be determined at the discretion of the Board of Directors.
In connection with entering into an employment agreement, one of the executives
received a signing bonus of $500.
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.
<PAGE>
7. Commitments and Contingencies (continued)
Future minimum lease payments for operating leases as of December 31, 1997 are
as follows:
Operating
Leases
-----------------
1998 $ 795
1999 801
2000 599
2001 620
2002 620
Thereafter 1,662
-----------------
=================
Total minimum lease payments $5,097
=================
Rental expense under operating leases amounted to $774, $817 and $922 in 1995,
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 $79 and $-0-, net of accumulated depreciation, at December
31, 1996 and 1997, 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 1995,
1996 and 1997 amounted to $2,792, $3,071 and $4,132, respectively. In addition,
the management company paid rent to the Company in the amount of $120, $146 and
$146 in 1995, 1996 and 1997, respectively. In consideration for entering into a
long-term agreement with the management company, the Company paid a signing
bonus of $1 million to the management company subsequent to the Offering.
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.
<PAGE>
7. Commitments and Contingencies (continued)
Self-Insurance
Effective April 25, 1994, the Company established the Pyramid Insurance Trust
Fund (the "Trust") to provide health and welfare benefits to eligible employees.
Contributions to the Trust by the Company shall be in amounts sufficient to pay
all costs and expenses of the Trust, including, but not limited to, the cost of
self-insured benefit claim payments, a reserve for self-insured benefit claims
and premiums for any fully insured benefit coverage. Contributions to the Trust,
all of which were charged to operations, amounted to $517, $619 and $642 in
1995, 1996 and 1997, respectively.
8. Income Taxes
The Predecessor Entities were corporations that elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and local
tax regulations. Therefore, for the years ended December 31, 1995 and 1996 and
for the period January 1, 1997 to June 26, 1997 (the period prior to the
Offering), 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. In connection with the Offering, the Company became
subject to federal and additional state income taxes.
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.
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. The
deferred tax asset recorded on the date of the offering was $1,209.
<PAGE>
8. Income Taxes (continued)
The provision (credit) for income taxes consists of the following:
Year ended
December 31
1995 1996 1997
-----------------------------------
Current income taxes:
Federal taxes $ - $ - $ 4,186
State and local taxes (129) 149 1,668
Deferred income taxes 55 (5) (1,073)
-----------------------------------
$ 74 $144 $ 4,781
===================================
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 income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax asset as of December 31, 1996 and 1997 are as follows:
Year ended December 31
1996 1997
-----------------------
Book over tax depreciation $23 $ 102
Allowance for doubtful accounts 2 32
Inventory capitalization and reserves 485
Other book accruals 479
-----------------------
=======================
$25 $1,098
=======================
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 years ended December 31, 1996 and 1997.
The pro forma income tax provision has been prepared according to SFAS No. 109.
<PAGE>
8. Income Taxes (continued)
The pro forma income tax provision consists of the following (in thousands):
Year ended December 31
1996 1997
------------------------------------
Current income taxes:
Federal taxes $4,234 $ 8,624
State and local taxes 1,356 2,658
------------------------------------
5,590 11,282
Deferred income tax benefit (328) (1,027)
-------------------
====================================
$5,262 $10,255
====================================
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:
1996 1997
--------------------------
Federal statutory rate 34.3% 34.4%
State and local taxes, net of federal tax benefits 6.5 6.5
==========================
Effective tax rate 40.8% 40.9%
==========================
<PAGE>
9. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
1997 and 1996 (dollars in thousands, except per share amounts):
Quarter Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------
1997
Net sales $49,683 $60,435 $62,002 $68,228
Gross profit 9,052 12,378 12,871 15,161
Net income 3,884 6,614(1) 4,084(1) 4,753(1)
Pro forma or net income per share data:
Earnings per share - basic .40 .67 .32 .37
Earnings per share - diluted .40 .67 .32 .37
Weighted-average number of
common shares outstanding - basic 12,750 12,750 12,750 12,750
Weighted-average or pro forma
weighted-average number of common
shares outstanding - diluted 9,812 9,812 12,942 12,934
1996
Net sales $39,896 $46,530 $50,856 $54,700
Gross profit 7,009 8,150 8,890 9,926
Net income 2,721 2,845 2,839 3,776
(1) Net income reflects an income tax provision for federal and additional
state income taxes subsequent to the Offering, and the recording of an
additional deferred tax benefit at the time of the Offering. Prior to the
Offering, the entities in the combined group elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and
local tax regulations.
10. Subsequent Events
On January 27, 1998, the Board of Directors approved the purchase of the stock
of Nicaraguan America Tobacco Inc. ("NATCO"), the exclusive importer of all
cigars produced by Nicaragua American Tobacco S.A. ("NATSA"), a manufacturer of
hand made cigars in Nicaragua. NATCO is owned 50% by an officer/director and 50%
by another director of the Company, and 49% and 36% of NATSA is owned by these
same individuals. The purchase price is based on a predetermined multiple of
earnings of NATCO for the year ended December 31, 1997.
<PAGE>
10. Subsequent Events (continued)
On January 27, 1998, the Company purchased for a nominal amount Casa Blanca,
Inc. ("Casa Blanca"), the owner/operator of the El Rey del Mundo Smokers Bar and
Lounge within one of the Company's retail outlets. Casa Blanca was owned by an
officer/ director of the Company.
<PAGE>
S-1
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In thousands)
Charged Charged
Beginning to Cost and to Other Ending
Description Balance Expense Accounts Deductions Balance
- ------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $118 $55 $ - $ 95 $ 78
=========================================================================
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
=========================================================================
</TABLE>
<PAGE>
EXHIBIT LIST
Exhibit No. Description of Document
3.1 Certificate of Incorporation of the Company. Filed as
Exhibit 3.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401)and hereby incorporated by
reference.
3.2 By-Laws of the Company. Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
4.1 Form of Certificate for Common Stock of the Company. Filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
10.1 The Company's 1997 Long-Term Incentive Plan. Filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-23401) and hereby incorporated by
reference.
10.2 The Company's 1997 Non-Employee Directors' Stock Plan. Filed
as Exhibit 10.2 to the Company's Registration Statement on
Form S-1 (Registration No. 333-23401) and hereby incorporated
by reference.
10.3 The Company's Employee Stock Purchase Plan. Filed as Exhibit
10.3 to the Company's Registration Statement on Form S-1
(Registration No. 333-23401) and hereby incorporated by
reference.
10.4 1997 Employee Bonus Pool Plan. Filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
10.5 Employment Agreement, dated March 13, 1997 between the Company
and Lewis I. Rothman. Filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.6 Employment Agreement, dated March 13, 1997 between the Company
and LaVonda M. Rothman. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.7 Employment Agreement, dated March 13, 1997 between the Company
and Jane Vargas. Filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.8 Management Agreement, dated March 13, 1997 by and between MC
Management and the Company. Filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.9 Form of Indemnification Agreement. Filed as Exhibit 10.9 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
10.10 Agreement dated March 13, 1997 by and between Cigars by Santa
Clara, N.A., Nicaraguan American Tobacco Company, ("Natco").
Filed as Exhibit 10.12 to the Company's Registration Statement
on Form S-1 (Registration No. 333-23401) and hereby
incorporated by reference.
10.11 Agreement dated March 13, 1997 by and between Natco and
Nicaraguan-American Tobacco Sociedad Anomima, S.A. Filed as
Exhibit 10.13 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
10.12 Agreement dated March 13, 1997 by and between Cigars by Santa
Clara, N.A., and Tabacalera Nacional Dominicana, S.A. Filed as
Exhibit 10.14 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
10.13 Lease Agreement dated July 19, 1993 by and between J.R.
Tobacco of American, Inc., and Interstate Development Co.,
Inc. as amended by First Amendment to Lease, dated November 2,
1993, by and between J.R. Tobacco of America, Inc. and
Interstate Development Company. Filed as Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.14 Lease Agreement, dated March 1, 1996 by and between J.R.
Outlet, Inc. and Casa Blanca, Inc. Filed as Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
16.1 Letter regarding change in certifying accountant. Filed as
Exhibit 16.1 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
21.1 List of Subsidiaries of the Company. Filed as Exhibit 21.1 to
the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
27.1 Financial Data Schedule. Filed as Exhibit 27.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
99.1 Consent of Cigar Aficionado. Filed as Exhibit 99.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 27, 1998 By:___________/s/ Lew Rothman__________________
Lew Rothman, Chairman of the Board, President, Chief Executive
Officer, "Principal Executive Officer"
March 27, 1998 By:___________/s/ Michael E. Colleton__________
Michael E. Colleton, Chief Financial Officer, "Principal
Financial and Accounting Officer"
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 27, 1998 By:___________/s/ LaVonda M. Rothman___________
LaVonda M. Rothman, Secretary and Director
March 27, 1998 By:___________/s/ Jane Vargas__________________
Jane Vargas, Vice President and Director
March 27, 1998 By:___________/s/ Maureen Colleton_____________
Maureen Colleton, Director
March 27, 1998 By:___________/s/ Stephen Bloom________________
Stephen Bloom, Director
March 27, 1998 By:___________/s/ John Oliva___________________
John Oliva, Director
March 27, 1998 By:___________/s/ John F. Barry, Jr.___________
John F. Barry, Jr., Director
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001035507
<NAME> 800-JR CIGAR, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,572
<SECURITIES> 14,981
<RECEIVABLES> 2,313
<ALLOWANCES> 78
<INVENTORY> 34,779
<CURRENT-ASSETS> 72,399
<PP&E> 18,518
<DEPRECIATION> 4,268
<TOTAL-ASSETS> 91,262
<CURRENT-LIABILITIES> 17,186
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 61,048
<TOTAL-LIABILITY-AND-EQUITY> 91,262
<SALES> 240,348
<TOTAL-REVENUES> 240,348
<CGS> 190,886
<TOTAL-COSTS> 216,506
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,269
<INCOME-PRETAX> 24,116
<INCOME-TAX> 4,781
<INCOME-CONTINUING> 23,842
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,335
<EPS-PRIMARY> 1.30
<EPS-DILUTED> 1.29
</TABLE>
