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 March 31, 1999
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: 0-22675
800-JR Cigar, Inc.
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 - 12,752,146 shares as of
May 13, 1999.
<PAGE>
800-JR 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 March 31, 1999 and 1998 (Unaudited).................................3
Consolidated Balance Sheets as of March 31, 1999 (Unaudited) and
December 31, 1998 ........................................................4
Consolidated Statements of Cash Flows for the Three-Month Periods ended
March 31, 1999 and 1998 (Unaudited).......................................5
Notes to Consolidated Financial Statements..................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................10
Part II - Other Information
Item 1. Legal Proceedings....................................................12
Item 2. Change in Securities and Use of Proceeds.............................13
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signatures.................................................................14
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three-month period
ended March 31
1999 1998
--------------------------------
<S> <C> <C>
Net sales $ 72,821 $62,196
Cost of goods sold 59,994 49,632
--------------------------------
Gross profit 12,827 12,564
Operating expenses:
Selling 1,956 1,350
General and administrative expenses 6,216 4,966
Depreciation and amortization 489 367
--------------------------------
Income from operations 4,166 5,881
Other income (expense):
Interest expense (255) (370)
Interest income 244 399
Rental income 40 42
Other, net (71) 13
--------------------------------
Income before income taxes 4,124 5,965
Provision for income taxes 1,678 2,433
================================
Net income $ 2,446 $ 3,532
================================
Per share data
Earnings per share - basic $ .19 $ .28
================================
Earnings per share - diluted $ .19 $ .27
================================
Weighted average shares outstanding - basic 12,600 12,750
================================
Weighted average shares outstanding - diluted 12,600 12,873
================================
See accompanying notes.
</TABLE>
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
March December
31, 1999 31, 1998
-------------------------------
Assets (Unaudited) (Audited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,932 $ 12,759
Short-term investments 1,849 5,719
Accounts receivable, net 3,038 2,568
Merchandise inventory 48,552 49,056
Prepaid expenses and other current assets 4,556 4,712
Loans receivable - affiliates and other
associated entities 1,035 685
Deferred tax asset 1,183 1,183
-------------------------------
Total current assets 71,145 76,682
Property, equipment and improvements, at cost,
net of accumulated
depreciation and amortization 27,654 27,614
Other assets 376 376
===============================
Total assets $ 99,175 $ 104,672
===============================
Liabilities and stockholders' equity Current liabilities:
Current portion of distribution notes payable to
stockholders $ 7,933 $ 7,933
Notes payable 2,000 -
Accounts payable 9,902 16,238
Accrued expenses 2,084 1,864
-------------------------------
Total current liabilities 21,919 26,035
Distribution notes payable to stockholders, less current
portion 2,983 4,967
-------------------------------
Total liabilities 24,902 31,002
Commitments and contingencies
Stockholders' equity:
Common stock 128 128
Additional paid-in capital 52,752 52,751
Retained earnings 24,512 22,066
-------------------------------
77,392 74,945
Less treasury stock, at cost (3,119) (1,275)
-------------------------------
Total stockholders' equity 74,273 73,670
-------------------------------
Total liabilities and stockholders' equity $ 99,175 $ 104,672
===============================
See accompanying notes.
</TABLE>
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three-month period
ended March 31
1999 1998
----------------------------------
Cash flows from operating activities
<S> <C> <C>
Net income $ 2,446 $ 3,532
Adjustments to reconcile net income to net cash
(used in) provided by
operating activities:
Depreciation and amortization 489 367
Provision for uncollectible accounts 30 -
Deferred income taxes - 11
Gain on sale of short-term investments (25) -
Changes in operating assets and liabilities:
Accounts receivable (500) (2,003)
Merchandise inventory 504 (3,906)
Prepaid expenses and other current assets 156 301
Other assets - (155)
Accounts payable and accrued expenses (6,116) 6,541
----------------------------------
Net cash (used in) provided by operating activities (3,016) 4,688
Cash flows from investing activities
Purchase of short-term investments (931) (3,779)
Proceeds from sales of short-term investments 4,826 -
Purchase of property and equipment (529) (1,882)
Loans (extended to) repaid by affiliates and other
associated entities (350) 183
----------------------------------
Net cash provided by (used in) investing activities 3,016 (5,478)
Cash flows from financing activities
Purchase of treasury stock (1,844) -
Proceeds from issuance of Common Stock 1 -
Proceeds from short-term borrowings 2,000 -
Payments on distribution notes (1,984) (1,983)
----------------------------------
Net cash used in financing activities (1,827) (1,983)
----------------------------------
Net decrease in cash and cash equivalents (1,827) (2,773)
Cash and cash equivalents at beginning of period 12,759 16,572
----------------------------------
Cash and cash equivalents at end of period $ 10,932 $ 13,799
==================================
Supplemental disclosures of cash flow information
Interest paid $ 211 $ 347
==================================
Income taxes paid $ 566 $ 297
==================================
See accompanying notes.
</TABLE>
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
March 31, 1999
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 March 31, 1999 and 1998, are not necessarily indicative of the
operating results to be expected for a full year.
2. 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 a 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.
All significant intercompany balances and transactions have been eliminated.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per share amounts)
March 31, 1999
3. Computation of Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three-month period
ended March 31
1999 1998
------------------------------------
Numerator:
<S> <C> <C>
Net income $ 2,446 $ 3,532
====================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 12,600 12,750
Effect of dilutive securities - stock options - 123
------------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversion
12,600 12,873
====================================
Basic earnings per share $ .19 $ .28
====================================
Diluted earnings per share $ .19 $ .27
====================================
</TABLE>
4. 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 March 31, 1999, 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) $10,500 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) $3,000 for the upgrade of the Company's
information systems, (vii) interest payments of $1,400 through June 30, 1998 on
the Distribution Notes, (viii) $200 for the expansion of retail selling space,
and (ix) $14,900 for working capital and general corporate purposes. The
remaining proceeds of $570 are expected to be used for the expansion of retail
selling space within the Company's existing retail stores.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
5. Revolving Credit Facility
The Company has a $20 million revolving Credit Facility which expires on 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). At March 31, 1999, $2 million was
outstanding under this facility.
6. 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 March 31, 1999, the Company had purchased 322,500 shares at a
cost of $3,119.
7. Segment Reporting
The Company has two segments determined by type of customer and made up of
retail and wholesale operations. The Company's retail division sells cigars,
tobacco products, cigarettes, fragrances and other merchandise to the general
public through direct mail order, cigar stores, and discount outlet stores. The
Company's wholesale division sells cigars and cigarettes to wholesale
distributors through the wholesale mail order and wholesale cigarette operations
located within the Company's discount outlet stores. The Company operates only
throughout the United States.
The reportable segments are each managed separately because the Company markets
these segments of the business separately. Although revenues of the retail and
wholesale divisions are further monitored based upon marketing and distribution
channel, overall profitability is measured only at the retail/wholesale level.
The Company evaluates performance based on profit or loss. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. The accounting for the assets of
each segment is the same as in consolidation.
<PAGE>
800-JR Cigar, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited) (continued)
(In thousands, except per share amounts)
March 31, 1999
7. Segment Reporting (continued)
The Company's operations by business segments for the three months ended March
31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three-month period
ended March 31
1999 1998
------------------------------------
Net sales
<S> <C> <C>
Retail $36,338 $32,286
Wholesale 36,483 29,910
====================================
Total consolidated net sales $72,821 $62,196
====================================
Segment net income
Retail $ 1,493 $ 786
Wholesale 1,220 2,798
------------------------------------
Total segment net income 2,713 3,584
Reconciling item
Corporate net loss (267) (52)
====================================
Total consolidated net income $ 2,446 $ 3,532
====================================
</TABLE>
There has been no material change in total assets by segment from the amount
disclosed in the annual report on Form 10-K at December 31, 1998.
8. Subsequent Event
On April 26, 1999, the Company commenced sales on its internet web site
jrcigars.com which allows customers in the United States to order cigars via the
internet.
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operation
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. With its 29-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
Company's 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.
Three-month Period Ended March 31, 1999 Compared to Three-Month Period Ended
March 31, 1998
Net sales were $72.8 million and $62.2 million for the first quarters of 1999
and 1998, respectively, an increase of $10.6 million or 17.1%. Retail sales
increased 12.5 % to $36.3 million for the first quarter of 1999 from $32.3
million for the first quarter of 1998. The increase in retail sales was due
primarily to a $4.8 million, or 40.1% increase in discount outlet store
operations resulting from the opening of the Burlington, North Carolina discount
outlet store which commenced operations during the fourth quarter of 1998.
Wholesale sales increased 22.1 % to $36.5 million for the first quarter of 1999
from $29.9 million over the same period in the prior year. The increase in
wholesale sales was due to a $7.1 million, or 42.7% increase in cash-and-carry
cigarette sales. The retail and wholesale sales increases were partially offset
by a reduction in direct mail cigar sales resulting from price reductions due to
the current market conditions for cigar sales, although the Company experienced
an increase in unit volume of cigars sold.
<PAGE>
Gross profit was $12.8 million and $12.6 million for the first quarters of 1999
and 1998, respectively, an increase of $0.3 million or 2.1%. As a percentage of
net sales, gross profit decreased to 17.6% for the first quarter of 1999 from
20.2% for the first quarter of 1998, primarily due to an increase in lower
margin cigarette sales and unanticipated slackening in the demand for premium
cigars.
Selling, general and administrative ("S, G & A") expenses were $8.2 million and
$6.3 million for the first quarters of 1999 and 1998, respectively, an increase
of $1.9 million or 29.4%. As a percentage of net sales, S, G & A expenses
increased to 11.2% for the first quarter of 1999 from 10.1% for the first
quarter of 1998 primarily due to increased staffing and other costs associated
with the Company's new discount outlet store and warehouse in Burlington, North
Carolina and the expansion of retail stores.
Income from operations was $4.2 million and $5.9 million for the first quarters
of 1999 and 1998, respectively, a decrease of $1.7 million or 29.2%. As a
percentage of net sales, income from operations decreased to 5.7% for the first
quarter of 1999 from 9.5% for the first quarter of 1998, primarily due to the
increased S, G & A expenses discussed above, increased sales of lower margin
cigarettes and increasingly competitive prices on premium cigars.
Interest expense was $0.3 and $0.4 million for the first quarters of 1999 and
1998, respectively, a decrease of $0.1 million. Other income, primarily
interest, was $0.2 million and $0.5 million for the first quarters of 1999 and
1998, respectively. The decrease in other income was primarily due to a decrease
in interest income which resulted from a reduction in short-term investments.
Income before income taxes was $4.1 million and $6.0 million for the first
quarters of 1999 and 1998, respectively, a decrease of $1.9 million or 29.8%.
As a result of the foregoing, the Company had net income of $2.4 million in the
first quarter of 1999, compared to net income of $3.5 million for the first
quarter of 1998, a decrease of $1.1 million or 30.7%.
Liquidity and Capital Resources
As of March 31, 1999, the Company had working capital of $49.2 million compared
to $50.6 million at December 31, 1998. Working capital as of March 31, 1999 is
comprised primarily of cash and cash equivalents of $10.9 million, short-term
investments of $1.8 million, accounts receivable of $3.0 million, $48.6 million
of inventory and $6.8 million of other current assets offset by $12.0 million of
accounts payable and accrued expenses, $2.0 million of short-term borrowings and
$7.9 million of the current portion of the distribution notes.
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. As of
March 31, 1999, $2.0 million was outstanding under this facility. In April 1999,
the Company repaid the entire outstanding balance of $2.0 million.
<PAGE>
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. During the quarter ended
March 31, 1999, the Company repurchased 208,000 shares of its outstanding common
shares at an average price of $8.87 raising the total shares repurchased to
322,500 at an average cost of $9.67 as of March 31, 1999.
Year 2000
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 and other data sensitive equipment to
prepare for Year 2000. The Company expects that by mid 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 made inquiries of 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.
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.
<PAGE>
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.
<PAGE>
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.
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 March 31, 1999, 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 $10,500
Relocation and design of specialty stores 6,000
Upgrade of information systems and graphics 3,000
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
Expansion of retail selling space 200
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 March 31, 1999, the status of proceeds pending final application are as
follows:
Temporary investment of proceeds in short-term investments $570
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
March 31, 1999.
<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: May 14, 1999 By:_/s/ Lewis I. Rothman_________________________
--------------------
Lewis I. Rothman, Chairman and President
Date: May 14, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,932
<SECURITIES> 1,849
<RECEIVABLES> 3,038
<ALLOWANCES> 173,000
<INVENTORY> 48,552
<CURRENT-ASSETS> 71,145
<PP&E> 33,999
<DEPRECIATION> 6,345
<TOTAL-ASSETS> 99,175
<CURRENT-LIABILITIES> 21,919
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 74,145
<TOTAL-LIABILITY-AND-EQUITY> 99,175
<SALES> 72,821
<TOTAL-REVENUES> 72,821
<CGS> 59,994
<TOTAL-COSTS> 59,994
<OTHER-EXPENSES> 8,661
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (255)
<INCOME-PRETAX> 4,124
<INCOME-TAX> 1,678
<INCOME-CONTINUING> 2,446
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,446
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
