FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
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, USA
(973) 884-9555
Not applicable
(Former name, former address, and former fiscal year, if changed since last
report)
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 ____
(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.
Common Stock, $.01 par value - 12,670,500 shares as of September 30, 1998.
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Index to Form 10-Q
Part I - Financial Information
Item 1. Financial Statements Page
Consolidated Statements of Income for the Three-Month Periods
ended September 30, 1997 and 1998 (Unaudited) and the Nine-Month Periods
ended September 30, 1997 and 1998 (Unaudited)............................ 3
Consolidated Balance Sheets as of December 31, 1997 and September 30, 1998
(Unaudited).............................................................. 4
Consolidated Statements of Cash Flows for the Nine-Month Periods ended
September 30, 1997 and 1998 (Unaudited).................................. 5
Notes to Consolidated Financial Statements.................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................11
Part II - Other Information
Item 1. Legal Proceedings....................................................15
Item 2. Change in Securities and Use of Proceeds.............................15
Item 6. Exhibits and Reports on Form 8-K.....................................16
Signatures..................................................................17
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-month period Nine-month period
ended September 30 ended September 30
------------------------------------------------------
1998 1997 1998 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $73,177 $62,002 $205,414 $172,120
Cost of goods sold 58,274 49,131 164,266 137,819
------------------------------------------------------
Gross profit 14,903 12,871 41,148 34,301
Operating expenses:
Selling 1,522 1,285 4,332 3,660
General and administrative
expenses 5,896 4,540 16,225 13,936
Depreciation and amortization 350 219 1,135 601
------------------------------------------------------
Income from operations 7,135 6,827 19,456 16,104
Other income (expense):
Interest expense (311) (471) (1,019) (915)
Interest income 443 477 1,355 641
Rental income 42 51 125 152
Other, net 13 15 40 76
------------------------------------------------------
Income before income taxes 7,322 6,899 19,957 16,058
Provision for income taxes 2,987 2,815 8,152 1,476
------------------------------------------------------
Net income $ 4,335 $ 4,084 $ 11,805 $ 14,582
======================================================
Pro forma:
Historical income before
provision for income taxes $ 16,058
Pro forma adjustments other
than income taxes 977
-----------
Pro forma income before income taxes 17,035
Pro forma provision for income taxes 6,951
-----------
Pro forma net income $ 10,084
===========
Pro forma earnings per share $ .91
===========
Pro forma common shares outstanding 10,855
===========
Per share data
Earnings per share - basic $ .34 $ .32 $ .93
===================================
Earnings per share - diluted $ .34 $ .32 $ .92
===================================
Weighted average shares
outstanding - basic 12,733 12,750 12,744
===================================
Weighted average shares
outstanding - diluted 12,733 12,942 12,813
===================================
See accompanying notes.
</TABLE>
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
------------------------------
Assets (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 16,422 $16,572
Investments in marketable securities 12,482 14,981
Accounts receivable, net 3,453 2,313
Merchandise inventory 41,369 34,779
Prepaid expenses and other current assets 2,618 2,155
Loans receivable - affiliates and other associated
entities 414 603
Deferred tax asset 977 996
------------------------------
Total current assets 77,735 72,399
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization 23,365 18,518
Other assets 376 243
Deferred tax asset, net 90 102
------------------------------
$101,566 $91,262
==============================
Liabilities and stockholders' equity Current liabilities:
Current portion of distribution notes payable to
stockholders $ 7,933 $ 7,933
Accounts payable 12,117 7,157
Accrued expenses 2,485 2,096
------------------------------
Total current liabilities 22,535 17,186
Distribution notes payable to stockholders, less current
portion 6,950 12,900
------------------------------
Total liabilities 29,485 30,086
Commitments and contingencies
Stockholders' equity:
Common stock 128 128
Additional paid-in capital 52,716 52,716
Retained earnings 20,137 8,332
------------------------------
72,981 61,176
Less treasury stock, at cost (900) -
------------------------------
Total stockholders' equity 72,081 61,176
------------------------------
$101,566 $91,262
==============================
See accompanying notes.
</TABLE>
<PAGE>
November 12, 1998800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine-month period
ended September 30
1998 1997
--------------------------
Cash flows from operating activities
<S> <C> <C>
Net income $11,805 $14,582
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,135 604
Provision for uncollectible accounts 72 54
Deferred income taxes 31 (1,225)
Changes in operating assets and liabilities:
Accounts receivable (1,212) (1,287)
Merchandise inventory (6,590) (6,355)
Prepaid expenses and other current assets (463) (1,722)
Other assets (133) (85)
Accounts payable and accrued expenses 5,349 1,246
--------------------------
Net cash provided by operating activities 9,994 5,812
Cash flows from investing activities
Purchase of marketable securities - (4,922)
Proceeds from sales of marketable securities 2,499 -
Purchase of property and equipment (5,982) (3,227)
Loans repaid by affiliates and other associated entities 189 95
Loans extended to stockholders - (445)
--------------------------
Net cash used in investing activities (3,294) (8,499)
Cash flows from financing activities
Purchase of treasury stock (900) -
Proceeds from common stock offering - 54,545
Expenses paid in connection with common stock offering - (1,275)
Payments of long-term debt - (6,280)
Payments on distribution notes (5,950) (1,983)
Payments of capital lease obligations - (66)
Distributions to stockholders - (7,189)
--------------------------
Net cash (used in) provided by financing activities (6,850) 37,752
--------------------------
Net (decrease) increase in cash and cash equivalents (150) 35,065
Cash and cash equivalents at beginning of period 16,572 6,056
--------------------------
Cash and cash equivalents at end of period $16,422 $41,121
==========================
Supplemental disclosures of cash flow information
Interest paid $ 937 $ 520
==========================
Income taxes paid $ 7,552 $ 2,653
==========================
Noncash distribution to stockholders $ - $ 2,959
==========================
Distribution notes issued to stockholders $ - $23,800
==========================
See accompanying notes.
</TABLE>
<PAGE>
November 12, 1998
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
September 30, 1998
1. Unaudited Financial Statements
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnote disclosures
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles. For further information, such as
significant accounting policies followed by the Company, refer to the notes to
the Company's audited consolidated financial statements.
In the opinion of management, the unaudited financial statements include all
necessary adjustments (consisting of normal, recurring accruals) for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. The results of operations for the three-month
periods ended September 30, 1997 and 1998 and nine-month periods ended September
30, 1997 and 1998, are not necessarily indicative of the operating results to be
expected for a full year.
2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies
Basis of Presentation
800-JR Cigar, Inc. ("800-JR Cigar") was incorporated in Delaware in March 1997.
In connection with 800-JR Cigar's initial public offering of stock (the
"Offering") on June 26, 1997, the former principals of the predecessor group of
companies contributed to 800-JR Cigar all of the outstanding stock in the
entities that comprise the predecessor group of companies, in exchange for
9,300,000 shares of common stock of 800-JR Cigar (the "Reorganization"). The
accompanying financial statements include the results of operations for the
period from January 1, 1997 to June 26, 1997 of J. R. Tobacco of America, Inc.,
J.N.R. Grocery Corp., J&R Tobacco (New Jersey) Corp., J. R. Tobacco Company of
Michigan, Inc., Cigars by Santa Clara N.A., Inc., J. R. Tobacco Outlet, Inc., J.
R.-46th Street, Inc., J. R. Tobacco NC, Inc., J. R. Statesville, Inc. and JR
Cigar (DC), Inc. (together, the "Company" or the "Predecessor Entities").
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
For the period from June 27, 1997 through September 30, 1998, the accompanying
consolidated financial statements include the results of operations of 800-JR
Cigar, as well as all companies that were included in the Predecessor Entities.
All significant intercompany balances and transactions have been eliminated.
The financial statements of the Predecessor Entities are being presented on a
consolidated basis because of their common ownership. The financial statements
have been prepared as if the Predecessor Entities had operated as a single
consolidated group since their respective dates of organization. All significant
intercompany balances and transactions have been eliminated. After the
Reorganization, the Predecessor Entities became subsidiaries of 800-JR Cigar,
Inc.
Pro Forma Adjustments
The unaudited pro forma net income for the nine-month period ended September 30,
1997 reflects the Reorganization, the Offering and the following adjustments as
if they had occurred on January 1, 1997: a) a decrease in aggregate compensation
from $253 to $200 for the nine-month period ended September 30, 1997 for two of
the Company's executives pursuant to their new employment agreements; b) an
increase in interest expense of $798 for the nine-month period ended September
30, 1997 assuming the issuance of the Distribution Notes; c) a reduction in
interest expense of $328 for the nine-month period ended September 30, 1997
assuming the application of proceeds from the Offering to repay all of the
Company's indebtedness other than capital lease obligations; d) a reduction in
interest income of $106 for the nine-month period ended September 30, 1997 and
assuming the repayment to the Company of loans receivable from stockholders; e)
an increase of $1,500 for the nine-month period ended September 30, 1997,
related to signing bonuses paid to an officer of the Company and to MC
Management in connection with the execution of long-term service agreements; and
f) an increase of $5,475 for the nine-month period ended September 30, 1997 for
income taxes based upon pro forma pre-tax income as if the Company had been
subject to federal and additional state income taxes.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
On June 6, 1997, the Company issued Distribution Notes to the former principal
stockholders of the Predecessor Entities in the amount of $23,800, representing
estimated undistributed cumulative S Corporation earnings through the date of
the Offering which were taxable to those stockholders. These notes bear interest
at the rate of 7.0% per annum, and are payable on a quarterly basis over the
three-year period following the Offering.
On June 6, 1997, the Predecessor Entities also 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. The Additional Notes mature on June 1, 2000 and bear
interest at the rate of 7% per annum.
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 conform to Statement 128 requirements.
Pro Forma Earnings Per Share
The 10,854,752 pro forma common shares outstanding for the nine-month period
ended September 30, 1998, is based on a weighted average calculation derived by
using 12,942,257, the weighted average common shares outstanding for the
three-month period ended September 30, 1997, and 9,811,327, the pro forma common
shares outstanding for the six-month period ended June 30, 1997. The net income
used in the calculation of pro forma per share information for the nine-month
period ended September 30, 1997 consists of the pro forma net income of $6,000
for the six-month period ended June 30,
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
2. Basis of Presentation, Pro Forma Adjustments and Summary of Accounting
Policies (continued)
1997 reduced by interest expense on debt of $328 ($194 on an after-tax basis)
for the six-month period ended June 30, 1997, plus net income of $4,084 for the
three-month period ended September 30, 1997.
Supplementary pro forma earnings per share for the nine-month period ended
September 30, 1997 is .90 based on a weighted average of the 10,279,233 pro
forma shares of common stock outstanding for the six-month period ended June 30,
1997, and 12,942,257, the weighted average shares outstanding for the
three-month period ended September 30, 1997. The net income used in the
calculation of supplementary pro forma earnings per share is the pro forma net
income of $6,000 for the six-month period ended June 30, 1997, increased by the
net income of $4,084 for the three-month period ended September 30, 1997.
3. Initial Public Offering
Effective June 26, 1997, the Company sold 3,450,000 shares of its common stock
at a price of $17 per share in an initial public offering. Net proceeds of the
Offering, after deducting underwriting discounts and commissions, and
professional fees aggregated $53,270. As of September 30, 1998, proceeds of the
Offering were used for the following purposes: (i) to repay outstanding
indebtedness of $7,300, (ii) $6,000 for the relocation and design of specialty
stores, (iii) $6,700 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 $7,900 through June 30, 1998, (v) payment of
signing bonuses in connection with long-term service agreement, (vi) $2,200 for
the upgrade of the Company's information systems, (vii) interest payments of
$1,400 through June 30, 1998 on the Distribution Notes, and (viii) $14,900 for
working capital and general corporate purposes. The remaining proceeds of $5,400
are expected to be used for the completion of the new discount outlet store and
warehouse distribution center, and for the expansion of retail selling space.
4. Revolving Credit Facility
The Company entered into a new $20 million revolving Credit Facility through May
31, 1999. Borrowings under this facility are unsecured and bear interest at the
bank's prime rate minus 1/2% or, at the option of the Company, 1.5% over the
London Interbank Offered Rate (LIBOR). No amounts were outstanding under this
facility at September 30, 1998.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
5. Historical and Pro Forma Income Taxes
The historical income tax provision for the nine-month period ended September
30, 1997 principally reflects the S Corporation tax provision of approximately
$361, for the period from January 1, 1997 through June 26, 1997; federal and
state income tax benefit of $491, for the period from June 27, 1997 to June 30,
1997, which period includes $1,500 of expenses related to signing bonuses and a
tax benefit of $1,209 for the deferred tax asset recorded in accordance with the
provisions of SFAS No. 109, and a federal and state income tax provision at
$2,815 for the three-month period ended September 30, 1997.
The entities in the Predecessor Company were corporations that had elected to be
taxed as S Corporations pursuant to the Internal Revenue Code. In connection
with the Offering, the Company has become subject to federal and additional
state income tax. The pro forma provision for income taxes represents the income
tax provisions that would have been reported had the Company been subject to
federal and additional state income taxes.
Concurrent with becoming subject to federal and additional state income taxes,
the Company recorded a deferred tax asset and a corresponding tax benefit in the
statement of income in accordance with the provisions of SFAS No. 109. The
deferred tax asset recorded on the date of the Offering was $1,209.
The pro forma provision for income taxes for the nine-month period ended
September 30, 1997 includes a provision for federal, state and local taxes of
$6,951 at an effective rate of approximately 41%. This amount is comprised of
current expense of $7,295 and a deferred benefit of $344 for the nine-month
period.
6. Acquisitions
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.
7. Stock Repurchase Plan
On August 25, 1998, the Board of Directors approved the repurchase of up to $10
million of the Company's common stock from time to time subject to market
conditions. Purchases can be made in the open market or in privately negotiated
transactions. At September 30, 1998, the Company had purchased 79,500 shares at
a cost of $900.
<PAGE>
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 of the Offering by the Company; (v) the Company's
ability to identify and address Year 2000 issues; and (vi) 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. Over its 28-year history in the cigar
industry, the Company has established itself as an important participant in the
movement of products from manufacturers to the customers. Manufacturers benefit
from the Company's ability to perform a number of functions, such as
distribution, credit, customer support and marketing, which would otherwise be
the responsibility of the manufacturer. Customers benefit from the Company's
extensive variety of tobacco products, rapid order fulfillment and advantageous
pricing derived through the Company's volume buying as a direct importer and
distributor.
Three-month Period Ended September 30, 1998 Compared to Three-Month Period Ended
September 30, 1997
Net sales were $73.2 million and $62.0 million for the third quarters
of 1998 and 1997, respectively, an increase of $11.2 million or 18.0%. Retail
sales increased 18.2% to $41.7 million for the third quarter of 1998 from $35.2
million for the third quarter of 1997. The increase in retail sales was due
primarily to a $4.2 million, or 30.8% increase in direct mail cigar sales.
Wholesale sales increased 17.8% to $31.5 million for the third quarter of 1998
from $26.8 million over the same period in the prior year. The increase in
wholesale sales was due to a $3.2 million, or 26.8% increase in direct mail
cigar sales and to a $1.5 million, or 10.4% increase in cash-and-carry cigarette
sales. The total increase in net sales was primarily attributable to increases
in unit volume for cigars and to a lesser extent to wholesale cigarette sales.
Gross profit was $14.9 million and $12.9 million for the third quarters
of 1998 and 1997, respectively, an increase of $2.0 million or 15.8%. The
increase in gross profit was due to an increase in sales. As a percentage of net
sales, gross profit decreased slightly to 20.4% for the third quarter of 1998
from 20.8% for the third quarter of 1997, because lower margin cigarette sales
represent a greater percentage of total sales in 1998.
<PAGE>
Selling, general and administrative ("S, G & A") expenses were $7.4
million and $5.8 million for the third quarters of 1998 and 1997, respectively,
an increase of $1.6 million or 27.3%. As a percentage of net sales, S, G & A
expenses increased to 10.1% for the third quarter of 1998 from 9.4% for the
third quarter of 1997 primarily due to increased staffing and other costs
associated with the opening of new retail stores.
Income from operations was $7.1 million and $6.8 million for the third
quarters of 1998 and 1997, respectively, an increase of $0.3 million or 4.5%. As
a percentage of net sales, income from operations decreased to 9.8% for the
third quarter of 1998 from 11.0% for the third quarter of 1997, primarily due to
the increased S, G & A expenses discussed above.
Interest expense was $0.3 and $0.5 million for the third quarters of
1998 and 1997, respectively. Other income, primarily interest, remained
unchanged at $0.5 million for the third quarters of 1998 and 1997, respectively.
Income before income taxes was $7.3 million and $6.9 million for the
third quarters of 1998 and 1997, respectively, an increase of $0.4 million or
6.1%.
The provision for income taxes was $3.0 million and $2.8 million for
the third quarter of 1998 and 1997, respectively, an increase of $0.2 million or
6.1%.
As a result of the foregoing, the Company had net income of $4.3
million in the third quarter of 1998, compared to net income of $4.1 million for
the third quarter of 1997, an increase of $0.2 million or 6.1%.
Nine-month Period Ended September 30, 1998 Compared to Nine-Month Period Ended
September 30, 1997
Net sales were $205.4 million and $172.1 million for the first
nine-months of 1998 and 1997, respectively, an increase of $33.3 million or
19.3%. Retail sales increased 13.4% to $111.2 million for the first nine-months
of 1998 from $98.1 million for the first nine-months of 1997. The increase in
retail sales was due primarily to a $10.1 million, or 27.5% increase in direct
mail cigar sales. Wholesale sales increased 27.3% to $94.2 million for the first
nine-months of 1998 from $74.0 million over the same period in the prior year.
The increase in wholesale sales was due to a $9.2 million, or 27.5% increase in
direct mail cigar sales and to a $11.0 million, or 27.3% increase in
cash-and-carry cigarette sales. The total increase in net sales was attributable
to increases in unit volumes for cigars and wholesale cigarette sales.
Gross profit was $41.1 million and $34.3 million for the first
nine-months of 1998 and 1997, respectively, an increase of $6.8 million or
20.0%. The increase in gross profit was primarily due to an increase in cigar
and tobacco sales. As a percentage of net sales, gross profit increased to 20.0%
for the first nine-months of 1998 from 19.9% for the first nine-months of 1997,
primarily due to an increase in higher margin cigar sales.
<PAGE>
Selling, general and administrative ("S, G & A") expenses were $20.6
million and $17.6 million for the first nine-months of 1998 and 1997,
respectively, an increase of $3.0 million or 16.8%. The increase in S,G&A
expenses was related to increased staffing and other costs associated with the
opening of new retail stores. As a percentage of net sales, S,G&A expenses
decreased to 10.0% for the first nine-months of 1998 from 10.2% for the first
nine-months of 1997. S,G & A expenses for the nine-months ended September 30,
1997 include a one time $1.5 million expense related to signing bonuses paid in
connection with the execution of long-term service agreements.
Income from operations was $19.5 million and $16.1 million for the
first nine-months of 1998 and 1997, respectively, an increase of $3.4 million or
20.8%. As a percentage of net sales, income from operations was 9.5% for the
first nine-months of 1998 and 9.4% for the first nine-months of 1997,
respectively.
Interest expense was $1.0 million and $0.9 for the first nine-months of
1998 and 1997, respectively. Other income, primarily interest, was $1.5 million
and $0.9 million for the first nine-months of 1998 and 1997, respectively.
Income before income taxes was $20.0 million and $16.1 million for
the first nine-months of 1998 and 1997, respectively, an increase of $3.9
million or 24.3%
The provision for income taxes of $8.2 million for the nine-month
period ended September 30, 1998, represents federal and state income taxes
provided at corporate rates, since the Company became a "C" corporation
effective with the initial public offering of the Company's common stock on June
26, 1997. The income tax provision of $1.5 million for the nine-months ended
September 30, 1997, represents taxes of $0.4 million provided by the predecessor
companies at "S" corporation rates, a deferred tax benefit of $1.2 million
recorded concurrent with becoming subject to federal and additional state income
taxes, a tax benefit of $0.5 million for the loss for the period from June 27 to
June 30, 1997 and a federal and state income tax provision of $2.8 million for
the three-month period ended September 30, 1997.
As a result of the foregoing, the Company had net income of $11.8
million in the first nine-months of 1998, compared to pro forma net income of
$10.1 million for the first nine-months of 1997, an increase of $1.7 million or
17.1%.
Liquidity and Capital Resources
The Company prior to its Initial Public Offering has financed its
business through internally generated funds, bank debt and loans from certain
shareholders. The Company's net cash provided by operating activities was $10.0
million for the nine-month period ended September 30, 1998. Net cash used in
investing activities during such period was $3.3 million and net cash used in
financing activities was $6.9 million.
<PAGE>
As of September 30, 1998, the Company had working capital of $55.2
million, the same amount it had at December 31, 1997. Working capital as of
September 30, 1998 is comprised primarily of cash and cash equivalents of $16.4
million, short-term investments of $12.5 million, accounts receivable of $3.5
million and $41.4 million of inventory offset by $14.6 million of accounts
payable and accrued expenses and $7.9 million, the current portion of the
distribution notes.
At September 30, 1998, the Company had no funded indebtedness.
The Company has available a short term, unsecured line of credit in the
amount of $20.0 million through May 31, 1999 with interest at either the bank's
base rate minus 50 basis points or an increment over LIBOR, at the Company's
option. The Company intends to renew such line of credit upon its expiration. No
amounts were outstanding under this facility at September 30, 1998.
On June 6, 1997, the Company issued notes in the aggregate amount of
$23.8 million to shareholders of the predecessor companies, representing the
estimated cumulative undistributed earnings of the predecessor companies which
operated under Subchapter "S" of the Internal Revenue Service code. The notes
have a fixed interest rate of 7.0% and require quarterly payments in aggregate
of $2.0 million plus interest through June 1, 2000. The first payment of
principal and interest was made effective September 1, 1997. In addition, on
June 6, 1997, the Predecessor Companies also issued additional Distribution
Notes to shareholders of the Predecessor Companies for a nominal amount. On
December 31, 1997, the initial principal amount was increased to $1.0 million,
the maximum allowable. The additional Distribution Notes mature on June 1, 2000
and bear interest at the rate of 7.0% per annum. The holders of the notes have
agreed to subordinate payment of principal and interest to senior lenders if
required by credit agreements. The existing credit agreement does not require
subordination in the event of a default under the terms and conditions of the
agreement.
The repurchase of up to $10.0 million of the Company's common stock was
approved by the Board of Directors subject to market conditions. In the quarter
ended September 30, 1998 the Company repurchased 79,500 shares of its
outstanding common shares at an average price of $11.32.
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.
The Company has also mailed letters to its significant vendors and
service providers to determine the extent to which interfaces with such entities
are vulnerable to Year 2000 issues. Most of those contacted have indicated that
they have begun implementing Year 2000 readiness programs. The Company is
continuing to follow-up with significant vendors and service providers that did
not initially respond, or whose responses were deemed unsatisfactory.
<PAGE>
Based upon its current state of readiness, the Company believes that
the Year 2000 issue will not pose significant operational problems for the
Company. However, if all Year 2000 issues are not properly identified, there can
be no assurance that the Year 2000 issue will not materially adversely impact
the Company's results of operations or adversely affect the Company's
relationships with customers, vendors, or others. Additionally, there can be no
assurance that the Year 2000 issues of other entities will not have a material
adverse impact on the Company's systems or results of operations.
Part II. Other Information
Item 1. Legal Proceedings
The Company is not presently involved in any legal proceedings, which,
if determined adversely to the Company, would have a material effect on the
Company.
Item 2. Changes in Securities and Use of Proceeds
Securities Act Rule 229.463 ("Rule 463") required issuers to report on Form SR
their use of proceeds, following an initial public offering, within ten days of
the first three months following the effective date of the registration
statement, and every six months thereafter, until the application of all such
proceeds was complete. Effective September 2, 1997, pursuant to Release No.
34-38850, the Securities and Exchange Commission ("SEC") amended Rule 463 to
eliminate Form SR and now requires a first-time registrant to report the
application of proceeds in each of its periodic Exchange Act reports until the
application of such proceeds is complete.
The information provided below represents a reasonable estimate of the
cumulative application, through September 30, 1998, of the net proceeds of
$53,270 which were received following the Company's initial public offering on
June 26, 1997:
New warehouse and discount outlet store $6,700
Relocation and design of specialty stores 6,000
Upgrade of information systems and graphics 2,200
Reduction of bank debt and mortgages 7,300
Payment of Distribution Notes and interest 9,300
Payment of employment bonuses` 1,500
Working capital and general corporate use 14,900
Except for payments described in the following sentence, the cumulative
application of the net offering proceeds listed above represent direct payments
to others. Except for the payment of the Distribution Notes to shareholders of
Predecessor Companies referred to in the table above, no payments were made to
directors or officers or to their associates except for payments made in the
ordinary course of business which include, but may not be limited to, the
payment of officer salaries and bonuses, fringe benefits, and expenses
reimbursements or compensation paid to directors for their attendance at board
meetings or for their service provided to the Company under consulting
arrangements, if any.
<PAGE>
As September 30, 1998, the status of proceeds pending final application
are as follows:
Temporary investment of proceeds in marketable securities $5,400
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three-months ended September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
800-JR Cigar, Inc.
Date: November 12, 1998 By: /s/ Lewis I Rothman
Lewis I. Rothman, Chairman and President
Date: November 12, 1998 By: /s/ Michael E. Colleton
Michael E. Colleton, Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001035507
<NAME> 800-JR CIGAR, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-30-1998
<CASH> 16,422
<SECURITIES> 12,482
<RECEIVABLES> 3,453
<ALLOWANCES> 0
<INVENTORY> 41,369
<CURRENT-ASSETS> 77,735
<PP&E> 28,769
<DEPRECIATION> 5,404
<TOTAL-ASSETS> 101,566
<CURRENT-LIABILITIES> 22,535
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 71,953
<TOTAL-LIABILITY-AND-EQUITY> 101,566
<SALES> 205,414
<TOTAL-REVENUES> 206,934
<CGS> 164,266
<TOTAL-COSTS> 21,692
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,019
<INCOME-PRETAX> 19,957
<INCOME-TAX> 8,152
<INCOME-CONTINUING> 11,805
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,805
<EPS-PRIMARY> .93
<EPS-DILUTED> .92
</TABLE>
