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 June 30, 1998
OR
| | 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 (Address of principal
executive offices) (Zip code)
(973) 884-9555
(Registrant's telephone number including area code)
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 - 12,750,000 shares as of August 10, 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 June 30, 1997 and 1998 and the Six-Month Periods ended
June 30, 1997 and 1998 (Unaudited)........................................3
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1998
(Unaudited)...............................................................4
Consolidated Statements of Cash Flows for the Six-Month Periods ended
June 30, 1997 and 1998 (Unaudited)........................................5
Notes to Consolidated Financial Statements (Unaudited)......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................12
Part II - Other Information
Item 2. Change in Securities and Use of Proceeds.............................14
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signatures.................................................................16
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-month period Six-month period
ended June 30 ended June 30
--------------------------------- --------------------------------
1998 1997 1998 1997
------------------------------------------------------------------
(Predecessor) (Predecessor)
<S> <C> <C> <C> <C>
Net sales $70,042 $60,435 $132,238 $110,118
Cost of goods sold 56,360 48,057 105,992 88,688
------------------------------------------------------------------
Gross profit 13,682 12,378 26,246 21,430
Operating expenses:
Selling 1,460 1,244 2,810 2,373
General and administrative expenses 5,363 5,715 10,329 9,396
Depreciation and amortization 418 198 785 385
-----------------------------------------------------------------
Income from operations 6,441 5,221 12,322 9,276
Other income (expense):
Interest expense (337) (271) (707) (444)
Interest income 512 74 911 164
Rental income 41 56 83 101
Other, net 14 53 27 61
------------------------------------------------------------------
Income before income taxes 6,671 5,133 12,636 9,158
Provision (credit) for income taxes 2,731 (1,480) 5,164 (1,339)
------------------------------------------------------------------
Net income $ 3,940 $ 6,613 $ 7,472 $ 10,497
==================================================================
Pro forma:
Historical income before provision
for income taxes $ 5,133 $ 9,158
Pro forma adjustments other than income taxes
1,251 977
----------------- -----------------
Pro forma income before income taxes 6,384 10,135
Pro forma provision for income taxes 2,605 4,135
----------------- -----------------
Pro forma net income $ 3,779 $ 6,000
================= =================
Pro forma earnings per share $ .38 $ .59
================= =================
Pro forma common shares outstanding 9,811 9,811
================= =================
Per share data
Earnings per share - basic $ .31 $ .59
================= =================
Earnings per share - diluted $ .31 $ .58
================= =================
Weighted average shares outstanding
- basic 12,750 12,750
================= =================
Weighted average shares outstanding
- diluted 12,833 12,854
================= =================
See accompanying notes.
</TABLE>
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
June December
30, 1998 31, 1997
------------------------------------
Assets (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $13,615 $16,572
Investments in marketable securities 18,306 14,981
Accounts receivable, net of allowance for doubtful
accounts of $78 at December 31, 1997 and June 30, 1998 2,957 2,313
Merchandise inventory 37,740 34,779
Prepaid expenses and other current assets 1,728 2,155
Loans receivable - affiliates and other associated entities 437 603
Deferred tax asset - current 986 996
------------------------------------
Total current assets 75,769 72,399
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization 21,226 18,518
Other assets 392 243
Deferred tax asset, net 91 102
------------------------------------
$97,478 $91,262
====================================
Liabilities and stockholders' equity Current liabilities:
Current portion of long-term debt $ 7,933 $ 7,933
Accounts payable 10,127 7,157
Accrued expenses 1,836 2,096
------------------------------------
Total current liabilities 19,896 17,186
Long-term debt, less current portion 8,933 12,900
------------------------------------
Total liabilities 28,829 30,086
Commitments and contingencies
Stockholders' equity:
Common stock 128 128
Additional paid-in capital 52,716 52,716
Retained earnings 15,805 8,332
------------------------------------
Total stockholders' equity 68,649 61,176
------------------------------------
$97,478 $91,262
====================================
See accompanying notes.
</TABLE>
<PAGE>
800-J.R. Cigar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six-month period
ended June 30
---------------------------------
1998 1997
---------------------------------
(Predecessor)
Cash flows from operating activities
<S> <C> <C>
Net income $ 7,472 $10,497
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 785 385
Provision for uncollectible accounts 55
Deferred income taxes 21 (1,233)
Changes in operating assets and liabilities:
Accounts receivable (644) (274)
Merchandise inventory (2,961) (2,347)
Prepaid expenses and other current assets 427 (955)
Other assets (149) (106)
Accounts payable and accrued expenses 2,710 2,775
---------------------------------
Net cash provided by operating activities 7,661 8,797
Cash flows from investing activities
Purchase of marketable securities (3,325)
Purchase of property and equipment (3,492) (1,511)
Loans repaid by affiliates and other associated entities 166 74
Loans extended to stockholders (445)
---------------------------------
Net cash used in investing activities (6,651) (1,882)
Cash flows from financing activities
Expenses paid in connection with common stock offering (500)
Payments of long-term debt (1,050)
Payments on distribution notes (3,967)
Distribution to stockholders (7,189)
Payments of capital lease obligations (44)
--------------------------------
Net cash used in financing activities (3,967) (8,783)
--------------------------------
Net decrease in cash and cash equivalents (2,957) (1,868)
Cash and cash equivalents at beginning of period 16,572 6,056
--------------------------------
Cash and cash equivalents at end of period $13,615 $ 4,188
================================
Supplemental disclosures of cash flow information
Interest paid $ 659 $ 122
================================
Income taxes paid $ 5,067
================================
Noncash distribution to stockholders $ 2,959
================================
Distribution notes issued to stockholders $23,800
================================
See accompanying notes.
</TABLE>
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
June 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 June 30, 1997 and 1998, and six-month periods ended June 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 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").
For the period from January 1, 1998 through June 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.
<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)
All significant intercompany balances and transactions have been eliminated.
The financial statements of the Predecessor Entities are being presented on a
consolidated basis because of their common ownership. The financial statements
have been prepared as if the Predecessor Entities had operated as a single
consolidated group since their respective dates of organization. All significant
intercompany balances and transactions have been eliminated. After the
Reorganization, the Predecessor Entities became subsidiaries of 800-JR Cigar,
Inc.
Pro Forma Adjustments
The unaudited pro forma net income for the three- and six-month periods ended
June 30, 1997 reflects the Reorganization, the Offering and the following
adjustments as if they had occurred on January 1 of each period: a) a decrease
in aggregate compensation from $253 to $200 for the six-month period ended June
30, 1997 and from $127 to $100 for the three-month period ended June 30, 1997
for the two of the Company's executives pursuant to their new employment
agreements; b) an increase in interest expense of $798 for the six-month period
ended June 30, 1997 and $381 for the three-month period ended June 30, 1997
assuming the issuance of the Distribution Notes; c) a reduction in interest
expense of $328 for the six-month period ended June 30, 1997 and $155 for the
three-month period ended June 30, 1997 assuming the application of proceeds from
the Offering to repay all of the Company's indebtedness other than capital lease
obligations; d) a reduction in interest income of $106 for the six-month period
ended June 30, 1997 and $50 for the three-month period ended June 30, 1997
assuming the repayment to the Company of loans receivable from stockholders; e)
an increase of $1,500 for the three and six-month periods ended June 30, 1997,
related to signing bonuses paid in connection with the execution of long-term
service agreements; and f) an increase of $5,474 for the six-month period ended
June 30, 1997 and $4,085 for the three-month period ended June 30, 1997 for
income taxes based upon pro forma pre-tax income as if the Company had been
subject to federal and additional state income taxes.
<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
Pro forma earnings per share is based on 9,300,000 shares of common stock
outstanding prior to the Offering, increased by the sale of 511,658 shares of
common stock assuming an initial public offering price of $17.00 per share
($15.44, net of underwriting discounts and commissions and estimated offering
expenses), the proceeds of which would be necessary to pay approximately $7,900,
the current portion of the Distribution Notes. The net income used in the
calculation of pro forma earnings per share represents pro forma net income
decreased by the interest expense on debt of $155 ($92 on an after-tax basis)
for the three-month period ended June 30, 1997 and $328 ($194 on an after-tax
basis) for the six-month period ended June 30, 1997.
<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)
Supplementary pro forma earnings per share for the three-month period ended June
30, 1997 and six-month period ended June 30, 1997, are .37 and .58,
respectively, based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by (a) the sale of 511,658 shares of common stock at the
initial public offering price of $17.00 per share ($15.44, net of underwriting
discounts, commissions and offering expenses), the proceeds of which would be
necessary to pay approximately $7,900, the current portion of the Distribution
Notes, and (b) the sale of 467,896 shares of common stock at the initial public
offering price of $17.00 per share ($15.45, net of underwriting discounts,
commissions and offering expenses), the proceeds of which would be necessary to
repay approximately $7,229, the amount of outstanding debt at June 30, 1997. The
net income used in the calculation of supplementary pro forma earnings per share
is the pro forma net income of $3,779 and $6,000 for the three-month period
ended June 30, 1997 and the six-month period ended June 30, 1997.
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 (the "Offering"). Net
proceeds of the Offering, after deducting underwriting discounts and
commissions, and professional fees aggregated $53,270. As of June 30, 1998
proceeds of the Offering were used for the following purposes: (i) to repay
outstanding indebtedness of $7,300, (ii) $5,900 for the relocation and design of
specialty stores, (iii) $4,600 for the purchase of land and building for a new
discount outlet store and warehouse distribution center, (iv) the quarterly
principal payments of distribution notes of $7,900, (v) payment of signing
bonuses in connection with long-term service agreements, (vi) $2,000 for the
upgrade of the Company's information systems, (vii) interest payments of $1,400
on the Distribution Notes, and (viii) $14,900 for working capital and general
corporate purposes. The remaining proceeds of $7,770 are expected to be used for
the following purposes: (i) $2,770 for a new discount outlet store and warehouse
distribution center, and (ii) $5,000 for the expansion of retail selling space
at existing discount outlet stores.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
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 June 30, 1998.
5. Historical and Pro Forma Income Taxes
The historical income tax provision for the six-month period ended June 30, 1997
principally reflects the S Corporation tax provision of approximately $361, for
the period from January 1, 1997 through June 26, 1997; a federal and state
income tax benefit of $491, for the period from June 27, 1997 to June 30, 1997,
which period includes $1,500 of expenses related to signing bonuses and a tax
benefit of $1,209 for the deferred tax asset recorded in accordance with the
provisions of SFAS No. 109. The income tax benefit of $1,480 for the three
months ended June 30, 1997 represents taxes provided by the predecessor
companies for state and local governments at "S" corporation rates of
approximately $229, a deferred tax benefit of $1,209 recorded concurrent with
becoming subject to federal and additional state income taxes and a tax benefit
of $500 for the loss for the period from June 27 to June 30, 1997, when the
Company was subject to federal and additional state income taxes.
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 three- and six-month periods
ended June 30, 1997 includes a provision for federal, state and local taxes of
$2,605 and $4,135, respectively, at an effective rate of approximately 41%. This
amount is comprised of current expense of $2,875 and $4,479, respectively, and a
deferred benefit of $270 and $344 for the three- and six-month periods,
respectively.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
6. Acquisitions
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.
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>
Item 2. 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 of the Offering by the Company; 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. 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 June 30, 1998 Compared to Three-Month Period Ended
June 30, 1997
Net sales were $70.0 million and $60.4 million for the second quarters
of 1998 and 1997, respectively, an increase of $9.6 million or 15.9%. Retail
sales increased 9.1% to $37.1 million for the second quarter of 1998 from $34.0
million for the second quarter of 1997. The increase in retail sales was due
primarily to a $2.3 million, or 17.2% increase in direct mail cigar sales.
Wholesale sales increased 24.6% to $32.9 million for the second quarter of 1998
from $26.4 million over the same period in the prior year. The increase in
wholesale sales was due to a $2.3 million, or 19.7% increase in direct mail
cigar sales and to a $4.4 million, or 30.4% increase in cash-and-carry cigarette
sales. The total increase in net sales was primarily attributable to increases
in unit volume for cigars and cigar-related products and to a lesser extent to
cigarette price increases.
Gross profit was $13.7 million and $12.4 million for the second
quarters of 1998 and 1997, respectively, an increase of $1.3 million or 10.5%.
The increase in gross profit was due to an increase in sales. As a percentage of
net sales, gross profit decreased to 19.5% for the second quarter of 1998 from
20.5% for the second quarter of 1997, because cigarette sales were a greater
percentage of total sales in 1998.
Selling, general and administrative ("S, G & A") expenses were $6.8
million and $7.0 million for the second quarters of 1998 and 1997, respectively,
a decrease of $0.2 million or 2.0%. As a percentage of net sales, S, G & A
expenses decreased to 9.7% for the second quarter of 1998 from 11.5% for the
second quarter of 1997 primarily because of increased sales. S,G & A expenses
for the second quarter of 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 $6.4 million and $5.2 million for the second
quarters of 1998 and 1997, respectively, an increase of $1.2 million or 23.3%.
As a percentage of net sales, income from operations increased to 9.2% for the
second quarter of 1998 from 8.6% for the second quarter of 1997, primarily
because of an increase in sales.
Interest expense was unchanged at $0.3 million for the second quarters
of 1998 and 1997, respectively. Other income, primarily interest, was $0.6
million and $0.2 million for the second quarters of 1998 and 1997, respectively.
<PAGE>
Income before income taxes was $6.7 million and $5.1 million for
the second quarters of 1998 and 1997, respectively, an increase of $1.6 million
or 30.0%.
The provision for income taxes of $2.7 million for the three-month
period ended June 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 benefit of $1.5 million for the three-months ended June 30, 1997
represents taxes provided by the predecessor companies for state and local
governments at "S" corporation rates, a deferred tax benefit of $1.2 million
recorded concurrent with becoming subject to federal and additional state income
taxes, and a tax benefit for the loss for the period from June 27 to June 30,
1997 when the Company was subject to federal and additional state income taxes.
As a result of the foregoing, the Company had net income of $3.9
million in the second quarter of 1998, compared to pro forma net income of $3.8
million for the second quarter of 1997, an increase of $0.1 million or 4.3%.
Six-month Period Ended June 30, 1998 Compared to Six-Month Period Ended June 30,
1997
Net sales were $132.2 million and $110.1 million for the first
six-months of 1998 and 1997, respectively, an increase of $22.1 million or
20.1%. Retail sales increased 10.8% to $69.6 million for the first six-months of
1998 from $62.8 million for the first six-months of 1997. The increase in retail
sales was due primarily to a $5.6 million, or 24.1% increase in direct mail
cigar sales. Wholesale sales increased 32.3% to $62.6 million for the first
six-months of 1998 from $47.3 million over the same period in the prior year.
The increase in wholesale sales was due to a $6.1 million, or 28.9% increase in
direct mail cigar sales and to a $9.5 million, or 37.1% increase in
cash-and-carry cigarette sales. The total increase in net sales was attributable
to increases in unit volumes and wholesale cigarette sales.
Gross profit was $26.2 million and $21.4 million for the first
six-months of 1998 and 1997, respectively, an increase of $4.8 million or 22.5%.
The increase in gross profit was primarily because of an increase in cigar and
tobacco sales. As a percentage of net sales, gross profit increased to 19.8% for
the first six-months of 1998 from 19.5% for the first six-months of 1997,
primarily because of an increase in unit volume sales.
Selling, general and administrative ("S, G & A") expenses were $13.1
million and $11.8 million for the first six-months of 1998 and 1997,
respectively, an increase of $1.3 million or 11.6%. The increase in S,G&A
expenses was related to increased staffing and other costs. As a percentage of
net sales, S,G&A expenses decreased to 9.9% for the first six-months of 1998
from 10.7% for the first six-months of 1997. S,G & A expenses for the six-months
ended June 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 $12.3 million and $9.3 million for the first
six-months of 1998 and 1997, respectively, an increase of $3.0 million or 32.8%.
As a percentage of net sales, income from operations increased to 9.3% for the
first six-months of 1998 from 8.4% for the first six-months of 1997, primarily
because of an increase in unit volume sales.
Interest expense was $0.7 million and $0.4 for the first six-months of
1998 and 1997, respectively. Other income, primarily interest, was $1.0 million
and $0.3 million for the first six-months of 1998 and 1997, respectively.
Income before income taxes was $12.6 million and $9.2 million for the
first six-months of 1998 and 1997, respectively, an increase of $3.4 million or
38.0%
The provision for income taxes of $5.2 million for the six-month period
ended June 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 benefit of $1.3 million for the six-months ended June 30, 1997,
represents taxes provided by the predecessor companies to state and local
governments at "S" corporation rates, a deferred tax benefit of $1.2 million
recorded concurrent with becoming subject to federal and additional state income
taxes, and a tax benefit for the loss for the period from June 27 to June 30,
1997 when the Company was subject to federal and additional state income taxes.
<PAGE>
As a result of the foregoing, the Company had net income of $7.5
million in the first six-months of 1998, compared to pro forma net income of
$6.0 million for the first six-months of 1997, an increase of $1.5 million or
24.5%.
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 $7.7
million for the six-month period ended June 30, 1998. Net cash used in investing
activities during such period was $6.7 million and net cash used in financing
activities was $4.0 million.
As of June 30, 1998, the Company had working capital of $55.9 million
compared to $55.2 million at December 31, 1997. Working capital as of June 30,
1998 is comprised primarily of cash and cash equivalents of $13.6 million,
short-term investments of $18.3 million, accounts receivable of $3.0 million and
$37.7 million of inventory offset by $12.0 million of accounts payable and
accrued expenses and $7.9 million of the current portion of the distribution
notes.
At June 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 June 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.
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.
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. Change 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.
<PAGE>
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 June 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 $4,600
Relocation and design of specialty stores 5,900
Upgrade of information systems and graphics 2,000
Reduction of bank debt and mortgages 7,300
Payment of Distribution Notes and interest 9,300
Payment of signing 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.
As June 30, 1998, the status of proceeds pending final application are
as follows:
Temporary investment of proceeds in marketable securities $7,770
Item 6. Exhibits and Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
three-months ended June 30, 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: August 11, 1998 By: /s/ Lewis I. Rothman
-------------------------------------------
Lewis I. Rothman, Chairman and President
Date: August 11, 1998 By: /s/ Michael E. Colleton
-------------------------------------------
Michael E. Colleton, Chief Financial Officer
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