FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 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: 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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:
Title of Securities: Common Stock, $.01 par value
Exchanges on which Registered: The Nasdaq National Market
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
The aggregate market value of Registrants' Common Stock held by
non-affiliates as of March 25, 1999 was $28,893,750 based on 3,450,000 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $8.375 as reported by the Nasdaq National Market.
The number of shares of Common Stock of the registrant outstanding at
March 29, 1999 was 12,750,000.
DOCUMENTS INCORPORATED BY REFERENCE
Notice and Proxy Statement for the 1999 Annual Meeting of Shareholders to be
held May 18, 1999.
Incorporation as to: Part III; Item 10, 11, 12 and 13.
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Index
Part I
Item 1. Business............................................................ 3
Item 2. Properties.......................................................... 13
Item 3. Legal Proceedings................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................. 14
Part II
Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters...................................................... 15
Item 6. Selected Financial Data............................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 17
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........... 24
Item 8. Financial Statements and Supplementary Data......................... 24
Item 9. Changed in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 24
Part III
Item 10. Directors and Executive Officers of the Registrant.................. 24
Item 11. Executive Compensation.............................................. 24
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 24
Item 13. Certain Relationships and Related Transactions...................... 25
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K... 25
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Item 1. Business
General
800-JR Cigar is one of the largest distributors and retailers of brand name
premium cigars in the United States. The Company's primary products consist of
premium cigars, mass market cigars and cigarettes, which are distributed to
retail and wholesale customers. The Company's highest gross margins are
generated from the sale of premium cigars (imported, hand-made and hand-rolled
cigars made with long filler and all natural tobacco leaf) and, as such, it has
targeted premium cigars as its primary growth vehicle. The Company's premium
cigars consist of approximately 150 brands of which 51 are the Company's
proprietary or licensed brands. Among the Company's proprietary and licensed
products are nationally recognized brand names such as Belinda(R), Bolivar(R),
Casa Blanca(R), El Rey del Mundo(R), Jose Marti(TM), J.R Alternative(R), J.R,
Ultimate(R), La Finca(R), Romeo y Julieta(TM), and Santa Clara(R). The Company
is the largest customer for each of the world's leading cigar manufacturers,
including Consolidated Cigar Holdings, Inc. ("Consolidated Cigar"), General
Cigar Holdings, Inc. ("General Cigar"), Swisher International, Inc. ("Swisher")
and Villazon & Company, Inc. ("Villazon").
800-JR Cigar, Inc. is a holding company owning 100% of the outstanding capital
stock of each of J.R. Tobacco of America, Inc., Santa Clara, N.A., Inc., J.N.R.
Grocery Corp., J.R. Tobacco NC, Inc., J&R Tobacco (New Jersey) Corp., J.R.
Tobacco Company of Michigan, Inc., J.R.-46th Street, Inc., J.R. Tobacco Outlet,
Inc., J.R. Statesville, Inc., JR Cigar (DC), Inc., J.R. Tobacco of Burlington,
Inc., and Casa Blanca Inc.
The Company is well known for its cigar business, principally the sale of
premium cigars, at discounted prices. Associated sales of other discount
products, including cigarettes, general merchandise, fragrances and other
tobacco related products, benefit from this recognition.
Marketing and Distribution
Retail Operations. The Company's retail operations are comprised of a premium
cigar direct mail operation through which the Company markets cigars and tobacco
related products, six stand alone cigar stores (four in the New York
metropolitan area, one outside Detroit, Michigan, and one in Washington, D.C.)
and three discount outlet stores in North Carolina.
Direct Mail. The Company markets a wide variety of premium cigars (including its
own brand names) and related tobacco products on a retail basis throughout the
United States by direct mail. For over 25 years, the Company has maintained an
extensive proprietary mail order list of regular customers. The Company's
average order size is approximately $103. Management utilizes its mail order
catalogs as its primary advertising vehicle. Each glossy, color catalog is
replete with humorous asides and anecdotes written by Lew Rothman, the Company's
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President and Chief Executive Officer, who views the retail catalog as a means
of personally communicating with the Company's established customer base. The
Company catalog frequently highlights the Company's proprietary cigars and
changes its product offerings and featured specials with each issue. On average,
each catalog offers 20 different brands of cigars from six different countries;
however, by dialing 1-800-JR-CIGAR, a customer can order any cigar or tobacco
accessory currently carried by the Company. In the event that the Company does
not have a particular product in stock, a customer may place an order to ship on
arrival, or knowledgeable telemarketers may direct the customer to similar
products by utilizing the Company's sophisticated database. The Company has
increased the frequency and circulation of its mail order catalog and updated
its website as an additional means of advertising. Retail mail order sales
increased 17.4% to $62.1 million in 1998, accounting for 21.7% of net sales,
compared to $52.9 million in 1997, representing 22.0% of net sales.
Cigar Stores. The Company currently maintains six specialty cigar stores. The
Company's strategy is to: (i) locate its stores in densely populated, highly
trafficed areas where demand for premium cigars is high; (ii) maintain
exceptional inventories of premium cigars; and (iii) maintain fully humidified
and climate-controlled stores to ensure freshness. In March 1998, the Company
relocated one of its New York stores to Wall Street. Sales generated by the
Company's cigar stores increased 11.3% to $25.6 million in 1998 accounting for
9.0% of the Company's net sales, compared to $23.0 million in 1997, accounting
for 9.6% of the net sales.
Discount Outlet Stores. The Company operates three large discount outlet stores.
The Company's strategy for discount outlet store success is to: (i)
strategically locate its stores on interstate highways; (ii) leverage the
Company's reputation for quality cigars and cigarettes at discount prices; and
(iii) offer a broad and changing product mix to encourage multiple purchases. An
important factor contributing to its success is its status as a licensed
cigarette distributor in North Carolina for the major U.S. cigarette
manufacturers. Each discount outlet store maintains on the premises a wholesale
cigarette cash-and-carry operation and a specialty cigar store. Sales generated
by the Company's discount outlet stores increased 6.9% to $68.0 million in 1998,
accounting for 23.7% of net sales, compared to $63.6 million in 1997,
representing 26.5% of net sales. The Burlington, North Carolina discount outlet
store commenced operations on October 28, 1998.
Cigar Bars. In January 1998, the Company purchased, for a nominal amount, Casa
Blanca Inc., an affiliated entity, which operates a discount liquor store and
cigar bar at the Whippany, New Jersey location. In March 1998, the Company began
operating a cigar bar at its Wall Street Court location.
Wholesale Operations
Wholesale activities are a major component of the Company's business, enabling
the Company to obtain favorable prices by giving it the ability to purchase
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tobacco products, particularly cigars and cigarettes in large quantities, and
the flexibility to determine the amount, timing and manner by which it will
satisfy demand in the marketplace. The Company attributes its competitive
advantage over other distributors to: (i) a large quantity and variety of
products; (ii) a policy of no minimum order; (iii) convenience through "one stop
shopping;" and (iv) competitive prices. Sales generated by the Company's
wholesale division grew 29.8% to $130.8 million in 1998, accounting for
approximately 45.6% of net sales, compared to $100.8 million in 1997, accounting
for 41.9% of net sales.
Catalog. The Company's wholesale mail order business is focused on the sale of
premium cigars. The Company's wholesale catalog consists of a comprehensive
price list of a wide selection of Company branded products as well as premium
and mass market cigars trademarked by others. The catalog is distributed to
approximately 8,000 smoke shops, fine restaurants, taverns, liquor stores and
other retail outlets throughout the United States. Wholesale catalog sales
increased 23.7% to $56.9 million in 1998, accounting for 19.8% of net sales,
compared to $46.0 million in 1997, accounting for 19.1% of net sales.
Cash-and-Carry. The Company's cash-and-carry wholesale operations are conducted
on a walk-in basis at its three North Carolina discount outlet stores. The
Company maintains a 5,000 square foot wholesale store within each of its three
discount outlet stores which serve wholesale customers. The Company obtains
substantially all of its cash-and-carry wholesale revenues at these locations
from the sale of a wide variety of premium cigarettes, generic cigarettes and
deep discount label cigarettes. The remainder of the Company's cash-and-carry
wholesale revenues are derived from mass-market cigars, smokeless tobacco
products and pipe tobaccos. The Company's cash-and-carry sales grew 34.9% to
$73.9 million in 1998, accounting for 25.8% of net sales, compared to $54.8
million in 1997, accounting for 22.8% of net sales.
Products
Cigars and Other Tobacco Products
Sales of premium and mass market cigars and other tobacco products increased
13.2% to $153.1 million for the year ended December 31, 1998, accounting for
53.4% of net sales, compared to $135.2 million for the year ended December 31,
1997, representing 56.3% of net sales.
Premium Cigars. Premium cigars are generally imported, 100% hand-made or
hand-rolled cigars made with long filler and all natural tobacco leaf.
Approximately 90% of the cigars sold by the Company in terms of dollars are
premium cigars.
The Company sells approximately 150 brands of premium cigars, of which over 50
are the Company's proprietary brands. Sales of the Company's proprietary cigars
represent approximately 45% of the Company's total gross dollar premium cigar
sales. The Company offers most of its cigars at discounts ranging from
approximately 20% to 60% off of manufacturers' suggested retail prices.
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The Company believes that its proprietary product offerings are unmatched in the
marketplace for superior quality at affordable prices. The Company's premium
cigars are handmade and are principally produced in five countries, including
Honduras, the Dominican Republic, Nicaragua, Mexico and Jamaica. While premium
cigars generally sell at price points ranging up to $27.50 per cigar, the
Company's branded premium cigars are typically sold at prices ranging between
$1.75 to $5.00 per cigar with J.R Alternatives selling at price points ranging
from $.75 to $1.50 per cigar. In addition, the Company holds exclusive licenses
to distribute additional brands of premium cigars for certain periods of time.
The Company has the right to market the El Rey del Mundo(R) and Belinda(R) brand
names exclusively through the year 2012. Among the Company's premium brands,
several have received from Cigar Aficionado magazine the highest ratings of
cigars sold, including, among others El Rey del Mundo, La Finca, Belinda, Casa
Blanca and Santa Clara.
In July of 1998, the Company obtained the exclusive rights to distribute Romeo Y
Julieta, one of the world's best-known premium cigar brands.
The following premium cigars are either trademarks or pending trademarks of the
Company or brands exclusively licensed to the Company:
Honduras: Belinda, Chivis, Consuegra, Honduran Specials, J.R
Alternatives, J.R Ultimate, Jose Marti, La Finca, La Rosa Especiales,
Lew's Smokers, Maria Mancini, Mocha, Mocha Supreme, Rey del Mundo, Tena
Y Vega, Vintage Hondurans.
Dominican Republic: Bolivar, Casa Blanca, Casa Blanca Reserve,
Dominican Estates, Five Star, Five Star Seconds, J.R Alternatives, J.R
Special Caribbean, J.R Special Corona, J.R Special Jamaicans, Jose
Marti, Matasa 2nds, Quorum, Romeo Y Julieta, Royal Dominicana.
Nicaragua: Jose Marti, La Finca, Rosa Cuba, Villar y Villar, Remedios,
Flor de Farach, Mantequilla
Mexico: Mocambo, Santa Clara, Shane
Jamaica: J.R Alternatives, Whitehall.
Philippines: Harrows.
Ireland: Mocambo Cigarillos.
Mass Market Cigars. Mass market cigars generally are domestic, machine-made
cigars that use less expensive short filler tobacco and are made with
homogenized tobacco binders and either homogenized sheet wrappers or natural
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leaf wrappers. The Company sells approximately 75 mass-market large cigars, as
well as four proprietary brands of mass-market cigars. The Company's proprietary
mass-market cigars sell at prices as low as $.50 per cigar. These products are
manufactured for the Company in the United States and are sold under the brand
names Garcia Grande, Henry IV, J.R. Famous and Mr. B.
Smokeless Tobacco Products and Pipe Tobacco. The Company sells moist snuff,
loose leaf chewing tobacco, and dry snuff in each of its retail stores,
including its three discount outlet stores in North Carolina. Smokeless tobacco
products are made from tobacco that has been cured, aged, fermented and then
dried and flavored. In addition to cigars and smokeless tobacco products, the
Company sells pipe tobaccos of various types, grades, countries or origin and
crop years.
Tobacco Accessories. The Company also sells a wide variety of tobacco
accessories, including, among other things, humidors, cutters, pipes, disposable
lighters, cigar cases and ashtrays. Although sales of such products represent a
small component of the Company's overall business, the Company believes that
their inclusion among the Company's product mix enhances the look of the
Company's retail catalog and rounds out the range of products offered by the
Company.
New Product Development. The Company is continually engaging in new product
development, and expects to launch two new premium cigar brands during 1999:
Montiquia which will be produced in Nicaragua, and Rosa Especiales, which will
be produced in Honduras.
Cigarettes
The Company purchases its cigarettes from major manufacturers for resale in its
discount outlet stores and from distributors for resale in certain of its cigar
stores, including brands such as Marlboro and Winston and discount labels such
as Basic and GPC. The availability of discount cigarettes generates substantial
customer traffic at the Company's discount outlet stores. In 1998, the Company
grossed approximately $108.2 million from cigarette sales in its North Carolina
discount outlet stores. Overall cigarette sales grew 30.4% to $108.6 million in
1998, accounting for 37.9% of net sales, compared to $83.3 million in 1997,
accounting for 34.6% of net sales.
Fragrances and Other Merchandise.
The Company believes that diversification in its product mix encourages
increased retail sales. The Company purchases a wide variety of designer
fragrances and specialty goods from distributors for resale exclusively in its
discount outlet stores and, to a lesser extent, other Company retail stores.
Such specialty goods include, among other things, books, collectibles, gift
items, toys, household items, jewelry, jeans and other clothing items. The
Company offers all such products at significantly reduced prices, with
fragrances frequently sold at prices ranging from 20% to 75% off the suggested
retail price. The Company believes that diversification in its product mix
encourages customers to purchase more than one type of item and contributes to
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increased sales. Although the majority of such products are sold from the
Company's two discount outlet stores, the Company is able to ship inventory to
its other retail stores at targeted times, such as the Christmas holiday season,
to maximize sales at these stores. Sales of fragrances and other merchandise
grew 13.8 % to $24.8 million in 1998, accounting for 8.7% of net sales, compared
to $21.8 million in 1997, accounting for 9.1% of net sales.
Sources of Supply
The Company believes that the quality and strength of its business relationships
with the world's leading manufacturers developed over a 25-year period have
positioned it to obtain an adequate supply of merchandise. As the world's
largest premium cigar customer, the Company is able to purchase its products at
a preferential basis.
An important factor in the success of the Company's discount outlet stores has
been its status as a licensed cigarette distributor in the State of North
Carolina for virtually every major U.S. cigarette manufacturer. As a direct
buying account the Company is eligible to participate in various goal oriented
promotions and to receive display allowances, which enables it to pass
substantial savings onto its customers. Another important factor in the
Company's discount store growth has been the Company's experience in purchasing
general merchandise directly from manufacturers and other vendors at prices
substantially below those generally paid by conventional vendors. The Company
regularly purchases overstocked or overproduced items from manufacturers and
other retailers, including end-of-season, out-of-season and end-of-run
merchandise and manufacturers' slight irregulars. As a result of the Company's
relationships, experience and reputation for prompt payment, many suppliers
offer special purchase opportunities to the Company prior to attempting to
dispose of merchandise through other channels.
Seasonality
The Company historically has experienced and expects to continue to experience
certain seasonal fluctuations in its sales and net income. The Company generally
has experienced relatively lower sales for the first half of the calendar year,
and a substantial increase in sales from the summer vacation season through the
Christmas holiday season. The Company expects this trend to continue for the
foreseeable future. The Company's quarterly results of operations may also
fluctuate as a result of a variety of factors, including the timing of store
renovations and net store openings and the net sales contributed by such stores.
Sales and Advertising
The Company has relied successfully upon the strength of its reputation and word
of mouth to achieve steadily increasing sales during years of industry decline
as well as industry prosperity, and believes that 25% of the nation's premium
cigar smoking public represents its customer base. The Company's Chief Executive
Officer, Lew Rothman, is a well-known figure in the world of cigars and the
Company's products are widely reputed to be of high quality at affordable
prices. As such, the Company is frequently featured in articles printed by such
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publications as Cigar Aficionado, Smoke and the Tobacconist and numerous
newspapers. Consequently, the Company has not been required to maintain a sales
force (except for retail store staff) or to expend substantial amounts of money
to promote its image or its products. The Company believes that the lack of
significant marketing expenditures enables it to fulfill its mission to provide
quality and affordability.
The Company does, however, conduct a limited amount of advertising in local
newspapers catering to the Company's retail communities and on highway
billboards located within a 20 to 90 mile radius surrounding the Company's North
Carolina discount outlet stores. The Company spends approximately 1% of its net
sales annually in advertising. In 1998 the Company issued eight catalogs and
plans to distribute eight during 1999.
Information Systems
Over the past several years, the Company has made a substantial investment in
its information systems in order to manage its inventory and monitor sales on a
real time basis.
Approximately 85% of the Company's purchased inventory is bar-coded by the
manufacturer, and the Company uses alpha numeric coding to identify its
remaining inventory, consisting principally of premium cigars. The Company's
headquarters and warehouse are electronically linked to each discount outlet and
cigar store location, enabling the Company's senior management to monitor daily
sales and inventory levels at each location by SKU. As a result, the Company is
able to identify the best selling items and forecast product demand by SKU. In
addition, the Company's software is able to identify low stock situations and to
communicate product re-orders directly to its North Carolina warehouse, thus
greatly reducing out-of-stock situations in its retail outlets.
MC Management, the Company's telemarketing provider, has access to the Company's
information systems, and is able to obtain in-stock product information on a
real time basis, as well as access a variety of information regarding any cigar
in which a customer may be interested, as well as a list of comparable cigars to
be recommended if the desired cigar is out of stock. In addition, because the
Company's systems are on-line with all major credit cards, the Company is able
to obtain instant authorization prior to the release of an order, thereby
reducing the Company's bad debt experience.
Competition
The Company operates in a large and highly fragmented industry characterized by
multiple and relatively undeveloped channels of distribution. The Company
believes that no single corporation competes against the Company in all of the
Company's lines of business, although several companies compete against the
Company in one or more of its market segments. The Company faces retail
competition from numerous small smoke shops. Likewise, the Company's cash and
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carry wholesale stores face price competition from Sam's Clubs, a division of
Wal-mart Stores, Inc., in its local markets. Sam's Clubs has substantially
greater resources than the Company and is better able to sustain prolonged price
competition.
Intellectual Property
The Company markets a number of cigar brand names which are registered
trademarks of the Company: Quorum(R), 5 Star Seconds(R), J.R Ultimate(R),
Mocambo(R), Maria Mancini(R), Consuegra(R), La Finca(R), Whitehall(R), Garcia y
Garcia(R), Rey del Rey(R), Mocha(R), Farach(R), Casa Blanca(R), Santa Clara(R),
Robustos de Manuel Zavalla(R), Jose Marti(R), Villar y Villlar(R) and El Secreto
del Rio Jagua(R). The Company has also registered the J.R(R) mark, which
precedes Company brand names such as J.R Special Jamaica, J.R Special Corona,
and J.R Special Caribbean. The J.R Alternative(R) brand name, which is used to
market cigars that are manufactured for the Company in Jamaica, the Dominican
Republic, Nicaragua and Honduras, is also a registered trademark of the Company.
Trademark applications are pending for LaguitoTM, and La MecaTM brand names. In
addition to the foregoing, the Company holds trademarks for the following:
1-800-JR-CIGARTM , Remedios(R), Principales(R), Clemenceau(R), Reynitas(R) and
Jeroboam(R) and trademark applications are pending for the RectangulareTM
Habana2000TMand ValentinosTM. Each of the aforementioned trademarks are valid
for ten years from the date of registration with the U.S. Patent and Trademark
Office and are subject to renewals. The Company also possess 49 internet domain
names including: 1800jr.com, 1800jrcigars.com, 1-800-jrtobacco.com, 1888jr.com,
1888jrcigars.com, 1888jrtobacco.com, elreydelmundo.com, jrcharutos.com,
jrcigares.com, jrcigarros.com, jrcigars.com, jrsigari.com, jrzigarren.com and
santaclaracigars.com.
Employees
As of December 31, 1998, the Company had 942 employees, of whom 416 were engaged
in sales, 24 in finance and administration, 242 in operations and 260 in various
part-time and temporary capacities. The Company will be required to hire
additional employees on a periodic basis in connection with future facilities
and expanded direct mail operations. The Company considers its relations with
its employees to be good.
As of December 31, 1998, various administrative and other services have been
performed for the Company by MC Management who had 115 employees, including 91
telemarketers involved in retail and wholesale direct mail operations. The
Company will be required to hire additional employees on a periodic basis, in
connection with the construction, and subsequent operation, of future facilities
and expanded direct mail operations.
Tobacco Industry Litigation
Regulation. The tobacco industry is subject to regulation at federal, state and
local levels. Federal law has recently required states, in order to receive full
funding for federal substance abuse block grants, to establish a minimum age of
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18 years for the sale of tobacco products, together with an appropriate
enforcement program. The recent trend is toward increasing regulation of the
tobacco industry, and the increase in popularity of cigars could lead to an
increase in regulation of cigars.
In August 1996, the Food and Drug Administration (the "FDA") determined that
nicotine is a drug and that it had jurisdiction over cigarettes and smokeless
tobacco products, as nicotine-delivering medical devices, and therefore,
promulgated regulations restricting and limiting the sale, distribution and
advertising of cigarette and smokeless tobacco products. Cigars were not
included in the FDA's regulations. The prohibition on retailers from selling
cigarettes, cigarette tobacco or smokeless tobacco to persons under the age of
18 and requiring retailers to check the photographic identification of every
person under the age of 27 became effective on February 28, 1997.
Additional efforts by the FDA to increase regulation over tobacco and
tobacco-related products have been forestalled by a recent decision in the
Fourth Circuit of the U.S. Court of Appeals. In August 1998, that court ruled
that the FDA lacks jurisdiction to regulate tobacco products and struck down all
the provisions of the FDA's 1996 regulations. Brown & Williamson v. FDA, 153
f.3d 155 (4th Cir. 1998). The Fourth Circuit denied a U.S. Department of Justice
petition for rehearing by the Panel or en banc.
On January 19, 1999, the Solicitor General filed a petition for a writ of
certiorari requesting the U.S. Supreme Court review the August 1998 decision of
the Fourth Circuit. A ruling on the petition is expected in the near future. The
FDA's age and identification regulations will remain in effect pending the
outcome of this litigation.
The U.S. Department of Health and Human Services (the "HHS") Inspector General
issued a report in February 1999, urging the Federal Trade Commission to require
cigars to carry warning labels similar to those contained on cigarette packages.
This report marks the first time that cigars have specifically been identified
for increased regulatory oversight by a federal heath agency.
While the cigar industry has not been subject to federal regulatory efforts to
date, there can be no assurance that there will not be an increase in federal
regulation in the future against cigar manufacturers or distributors. The HHS
report indicates that federal regulatory effort directed toward cigar
manufacturers and distributors may be increasingly likely. The costs to 800-JR
Cigar, Inc. of increased government regulations could have a material adverse
effect on the Company's business and results of operation.
In addition, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations. Numerous proposals also have been
considered at the state and local level restricting smoking in certain public
areas, regulating point of sale placement and promotion and requiring warning
labels.
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Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although there is no federal law currently
requiring that cigars or pipe tobacco carry such warnings, California has
enacted legislation requiring that "clear and reasonable" warnings be given to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. Although similar
legislation has been introduced in other states, no action has been taken. There
can be no assurance that such legislation introduced in other states will not be
passed in the future or that other states will not enact similar legislation.
Consideration at both the federal and state level also has been given to
consequences of tobacco smoke on others that are not presently smoking
(so-called "second-hand" smoke). There can be no assurance that regulations
relating to second-hand smoke will not be adopted or that such regulations or
related litigation would not have a material adverse effect on the Company's
results of operations or financial condition.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of second-hand
smoke, which concluded that widespread exposure to environmental tobacco smoke
presents a serious and substantial public health concern. Issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal Science reported that a chemical found in
cigarette smoke has been found to cause genetic damage in lung cells that is
identical to damage observed in many malignant tumors of the lung and, thereby,
directly links lung cancer to smoking. The study and these reports could affect
pending and future tobacco regulation and litigation.
Increased cigar consumption and the publicity that such increase has received
may increase the risk of additional regulation. There can be no assurance as to
the ultimate content, timing, or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
Litigation. Historically, the cigar industry has experienced less health-related
litigation than the cigarette and smokeless tobacco industries have experienced.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. In 1992, the United States Supreme Court in
Cippollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts claims based on failure to warn
consumers about the health hazards of cigarette smoking, but does not preempt
claims based on express warranty, misrepresentation, fraud, or conspiracy. To
date, individual cigarette smokers' claims against the cigarette industry have
been generally unsuccessful. A jury in Florida, however, recently determined
that a cigarette manufacturer was negligent in the production and sale of its
cigarettes and sold a product that was unreasonably dangerous and defective,
awarding the plaintiffs a total of $750,000 in compensatory damages.
<PAGE>
Current tobacco litigation generally falls within one of three categories: class
actions, individual actions (which have been filed mainly in the State of
Florida) or actions brought by individual states generally to recover Medicaid
costs allegedly attributable to tobacco-related illnesses. The pending actions
allege a broad range of injuries resulting from the use of tobacco products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases, punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.
In May 1996, the Fifth Circuit Court of Appeals in Castano v. American Tobacco,
et al. Reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers. Notwithstanding
the dismissal, new class actions asserting claims similar to those in Castano
have recently been filed in certain states. To date, two pending class actions
against major cigarette manufacturers have been certified. The first case is
limited to Florida citizens allegedly injured by their addiction to cigarettes;
the other is limited to flight attendants allegedly injured through exposure to
second-hand smoke.
The tobacco industry recently negotiated settlements totaling more that $240
billion with the states seeking reimbursement for expenditures by state-funded
medical programs for treatment of tobacco related illnesses.
Recent reports indicate that the federal government intends to sue the tobacco
industry seeking reimbursement for billions of dollars spent by government held
programs to treat smoking-related illnesses. A federal government task force has
been formed to make a recommendation to the U.S. Justice Department on when and
where to file the lawsuit. Furthermore, the inability of the federal government
to obtain a portion of the funds from the state settlements with the tobacco
industry may increase the likelihood of federal government litigation against
the industry. The litigation could have a material adverse affect on the
profitability of tobacco and tobacco related products.
While the cigar industry has not been subject to similar health-related
litigation to date, there can be no assurance that there will not be an increase
in health-related litigation in the future against cigar manufacturers or
distributors. The costs to the Company of defending prolonged litigation and an
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business and results of operation.
Item 2. Properties
The Company's executive and administrative offices are located in Whippany, New
Jersey in a 33,000 square foot building owned by the Company. Included at this
location is an 8,200 square foot upscale cigar store of which 1,200 square feet
are allocated to the El Rey del Mundo Cigar Bar acquired by the Company in 1998.
<PAGE>
The Company owns a 50,000 square foot discount outlet store and a 6,000 square
foot specialty cigar store located on nine acres in Selma, North Carolina. The
Company also owns a 128,000 square foot facility in Burlington, North Carolina
of which 28,000 square feet are used as a discount outlet store and 100,000
square feet are used as a warehouse, mail order distribution facility and
wholesale cash and carry outlet.
The Company leases the following retail properties:
Location Square Footage Lease Expiration Date
- - -------- -------------- ---------------------
17 E. 45th St., New York, NY 3,000 December 31, 1999*
1 Wall Street Court, New York, NY 8,000 June 22, 2007
Rt. 17N, Paramus, NJ 7,545 July 31, 2004
Newtowne Plaza, Statesville, NC 53,800 December 31, 2004
Northwestern Highway, Southfield, MI 3,000 Month to Month
1667 K. St., Washington, D.C. 850 March 31, 1999**
* The Company intends to move this specialty store to a larger, more visible
location in Manhattan and is currently considering two retail spaces: one on
Madison Avenue and the other on Fifth Avenue. The Company believes that both of
the potential locations will be sufficient to replace the Company's existing
store and will afford the Company greater exposure to the public.
** The Company intends to relocate this store within the Washington market and
currently is negotiating with the landlord of Washington Square, located at the
cross section of Connecticut and L Streets. The Company believes that this
location is both prestigious and highly visible retail space for the Washington
market. The selected space is 1,500 square feet; approximately 180% the size of
the existing store.
In both instances the Company will be replacing older stores, built 15 and 20
years ago respectively, with modern facilities capable of displaying the
expanded number of products the Company now sells.
Item 3. Legal Proceedings
The Company is not presently involved in any legal proceedings, which, if
determined adversely to the Company, would have a material affect on the
Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since June 26, 1997, the Company's Common Stock has been quoted on the Nasdaq
National Market under the symbol "JRJR." The following table sets forth the high
and low sales price of the Common Stock on the Nasdaq National Market for the
period commencing with the listing of the Common Stock on the Nasdaq National
Market through December 31, 1998.
1997 1998
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First - - $29.25 $19.25
Second - - $24.25 $17.75
Third $37.00 $17.00 $22.75 $10.25
Fourth $38.75 $21.00 $23.25 $9.44
The Company's policy is to retain all available earnings for the development and
growth of its business; accordingly, it has not declared or paid any dividends
on its Common Stock since the completion of its initial public offering in June
1997 and does not intend to pay any cash dividends. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations
- - --Liquidity and Capital Resources." Declaration or payment of dividends, if any,
in the future, will be at the discretion of the Board of Directors and will
depend upon the Company's then current financial condition, results of
operations, capital requirements and other factors deemed relevant by the Board.
The approximate number of record holders of the common stock as of March 29,
1999 was 1,887.
<PAGE>
Item 6. Selected Financial Data
The following selected financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and the accompanying Financial Statements and related
notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands, except per share amounts)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 109,297 $ 152,695 $ 191,982 $ 240,348 $ 286,512
Cost of goods sold 91,588 130,645 158,007 190,886 233,717
------ ------- ---- -------- ---- -------- ---- -------- ---- -------
Gross profit 17,709 22,050 33,975 49,462 52,795
Selling, general, and administrative expenses 14,450 18,768 20,954 24,715 28,767
Income from operations 2,812 2,789 12,347 23,842 22,451
Interest (expense), income net (647) (627) (582) 239
14
Other income (expenses)
151 - (8) 58 550
Income before income taxes 2,556 2,312 12,325 24,116 22,928
Provision (benefit) for income taxes 4,781 9,194
257 (74) 144
Net income $ 2,299 $ 2,386 $ 12,181 $ 19,335 $ 13,734
Earnings per share - basic $ 1.08
- - - -
Earnings per share - diluted $ 1.08
- - - -
Weighted average shares outstanding - basic 12,719
- - - -
Weighted average shares outstanding - diluted 12,771
- - - -
Pro forma earnings per share - basic (1) $ 0.73 $ 1.30
- - -
Pro forma earnings per share - diluted (1) $ 0.73 $ 1.29
- - -
Pro forma common shares outstanding - basic (1) 9,812 11,281
- - -
Pro forma common shares outstanding - diluted (1) 9,812 11,374
- - -
December 31,
---------------------------------------------------------------------------
---------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(dollars in thousands)
Balance Sheet Data:
Working capital $ 10,845 $ 8,914 $ 18,522 $ 55,213 $ 50,647
Total assets 29,951 32,670 42,682 91,262 104,672
Total long-term debt, including current portion 8,955 7,129 8,279 20,833 12,900
Total Stockholders' equity 9,704 12,090 23,476 61,176 73,670
(1) See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.
</TABLE>
<PAGE>
Item 7. 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 business and
growth strategies; (iii) the use of the proceeds to the Company from the Initial
Public Offering; (iv) the Company's ability to identify and address Year 2000
issues; and (v) the declaration and payment of dividends. Prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors.
General.
The Company is one of the largest distributors and retailers of tobacco and
tobacco related products in North America. The Company operates in a large and
highly fragmented industry characterized by multiple and relatively undeveloped
channels of distribution. With its 28-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. The Company's net sales have grown from $192.0 million in the year
ended December 31, 1996 to $240.3 million and $286.5 million, in the years ended
December 31, 1997 and December 31, 1998, respectively.
The Company markets it products through two principal channels of distribution:
retail, consisting of the Company's premium cigar direct mail business, six
specialty cigar stores, and three large discount outlet stores, and wholesale
consisting of the wholesale cigar mail order business and wholesale cash and
carry cigarette store located within the Company's discount outlet stores. The
following table sets forth the Company's sales at the retail and wholesale level
by dollar amount and as a percentage of net sales.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
$ % $ % $ %
- - - - - -
($ in millions)
Retail operations:
<S> <C> <C> <C> <C> <C> <C>
Direct mail cigars............. $35.5 18.5 % $52.9 22.0 % $62.1 21.7 %
Cigar stores................... 16.2 8.4 23.0 9.6 25.6 9.0
Discount outlet stores......... 59.7 31.1 63.6 26.5 68.0 23.7
-----------------------------------------------------------------
Total retail sales........... 111.4 58.0 139.5 58.1 155.7 54.4
------------------------------------------------------------------
Wholesale operations:
Direct mail cigars............. 32.6 17.0 46.0 19.1 56.9 19.8
Cash-and-carry cigarettes*.....48.0 25.0 54.8 22.8 73.9 25.8
--------------------------------------------------------------
Total wholesale sales........ 80.6 42.0 100.8 41.9 130.8 45.6
-----------------------------------------------------------------
Total net sales..................... $192.0 100.0 % $240.3 100.0 % $286.5 100.0 %
=====================================================================
- - --------------------
*Also includes tobacco and other tobacco related products
</TABLE>
The Company has built its reputation with consumers as a retailer and wholesaler
of a wide selection of premium cigars. To leverage its premium cigar business,
the Company offers a variety of other tobacco products to the buying public,
including mass-market cigars, smokeless and pipe tobacco and tobacco-related
accessories. The Company is also a major distributor and retailer of cigarettes.
In addition, the Company sells fragrances and general merchandise primarily
through its North Carolina discount outlet stores. The following table sets
forth the Company's sales per product category by dollar amount and as a
percentage of net sales.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
$ % $ % $ %
- - - - - -
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Cigars/Tobacco*..................... $93.7 48.8 % $135.2 56.3 % $153.1 53.4 %
Cigarettes.......................... 78.4 40.8 83.3 34.6 108.6 37.9
Fragrances.......................... 7.2 3.8 7.5 3.1 7.6 2.7
Other merchandise................... 12.7 6.6 14.3 6.0 17.2 6.0
-----------------------------------------------------------------
Total net sales................ $192.0 100.0 % $240.3 100.0 % $286.5 100.0 %
=====================================================================
- - --------------------
* Excludes Cigarettes
</TABLE>
<PAGE>
Results of Operations
The following discussion should be read in conjunction with the Financial
Statements and related notes thereto appearing elsewhere herein. The following
table sets forth, as a percentage of net sales, certain items in the
Consolidated Statements of Income for the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1997 1998
---- ---- ----
Revenues:
<S> <C> <C> <C>
Retail sales........................... 58.0 % 58.1 % 54.4 %
Wholesale sales........................ 42.0 41.9 45.6
-----------------------------------------------------------------
Net Sales.............................. 100.0 100.0 100.0
Cost of goods sold.......................... 82.3 79.0 81.6
-----------------------------------------------------------------
Gross profit................................ 17.7 20.6 18.4
Selling, general and administrative expenses 10.9 10.3 10.0
Depreciation and amortization............... 0.4 0.4 0.6
-----------------------------------------------------------------
Income from operations...................... 6.4 9.9 7.8
Other income (expense):
Interest (expense), net................ (0.4) (0.5) 0.1
Other.................................. 0.4 0.6 0.3
-----------------------------------------------------------------
Income before income taxes.................. 6.4 10.0 8.0
Provision for income taxes.................. 0.1 2.0 3.2
-----------------------------------------------------------------
Net income.................................. 6.3 % 8.0 % 4.8 %
===================================================================
</TABLE>
Year Ended December 31, 1998 compared to Year Ended December 31, 1997
Net sales were $286.5 million and $240.3 million for 1998 and 1997,
respectively, an increase of $46.2 million or 19.2%. Retail sales increased
11.6% to $155.7 million for 1998 from $139.5 for 1997. The increase in retail
sales was due primarily to a $9.2 million, or 17.4% increase in direct mail
cigar sales; a $2.6 million, or 11.3% increase in cigar store sales; and a $4.4
million or 6.9% increase in discount outlet store sales. Wholesale sales
increased 29.8% to $130.8 million for 1998 from $100.8 million in 1997. The
increase in wholesale sales was due primarily to a $10.9 million, or 23.7%
increase in direct mail sales and a $19.1 million, or 34.9% increase in
cash-and-carry cigarette sales. The overall increase in net sales was primarily
attributable to volume increases in the Company's retail and wholesale products
sales, and in particular the sale of premium cigars and related products.
Gross profit was $52.8 million and $49.5 million for 1998 and 1997,
respectively, an increase of $3.3 million or 6.7%. The increase in gross profit
was due to the increase in sales volume. As a percentage of net sales, gross
profit decreased to 18.4% for 1998 from 20.6% for 1997, primarily due to greater
sales of lower margin cigarettes and unanticipated slackening in the demand for
premium cigars.
<PAGE>
Selling, general and administrative ("SG&A") expenses were $28.8 million and
$24.7 million for 1998 and 1997, respectively, an increase of $4.1 million or
16.6%, primarily due to increased staffing costs related to the opening and
relocation of the Company's warehouse operations from Statesville to Burlington,
North Carolina. SG&A for 1997 included one-time signing bonuses of $1.5 million
in connection with the execution of long term service agreements. As a
percentage of net sales, SG&A expenses decreased to 10.0% for 1998 from 10.3%
for 1997, due primarily to net sales increasing at a greater rate than SG&A
expenses.
Depreciation expense was $1.6 million and $0.9 million for 1998 and 1997,
respectively, an increase of $0.7 million primarily due to the opening of three
new stores, Paramus, New Jersey in July 1997, Wall Street, New York in May 1998
and Burlington, North Carolina in October 1998.
Income from operations was $22.5 million and $23.8 million for 1998 and 1997,
respectively, a decrease of $1.3 million. As a percentage of net sales, income
from operations decreased to 7.8% for 1998 from 9.9% for 1997, primarily due to
increased sales of lower margin cigarettes and increasingly competitive prices
on premium cigars.
Interest expense was $1.3 million for 1998, the same as in 1997. This expense is
attributable to the interest paid on the notes ("the distribution notes", which
amounts represent cumulative undistributed S Corporation earnings of its
subsidiaries through June 30, 1997 on which income taxes had previously been
paid by the existing stockholders) issued to the former principals of the
Company's subsidiaries prior to their acquisition by the Company in a
reorganization transaction in June 1997. Other income was $1.8 million and $1.5
million for 1998 and 1997, respectively. The increase in 1998 was primarily due
to a gain of $0.4 million on the sale of short-term investments.
The provision for income taxes in 1998 was $9.2 million, as compared to $4.8
million in 1997. Prior to the offering, the Predecessor Entities were
corporations that elected to be taxes as S Corporation pursuant to the Internal
Revenue Code. For the period of January 1, 1997 to June 26, 1997, no provision
was made for federal and certain state and local income taxes. In connection
with the offering, the Company became subject to federal and additional state
income taxes.
As a result of the foregoing, the Company had net income of $13.7 million in
1998, compared to $19.3 million in 1997, a decrease of 29.0% or $5.6 million.
Year Ended December 31, 1997 compared to Year Ended December 31, 1996
Net sales were $240.3 million and $192.0 million for 1997 and 1996,
respectively, an increase of $48.3 million or 25.2%. Retail sales increased
25.2% to $139.5 million for 1997 from $111.4 for 1996. The increase in retail
sales was due primarily to a $17.4 million, or 49.0% increase in direct mail
cigar stores; a $6.8 million, or 42.0% increase in cigar store sales; and a $3.9
million or 6.5% increase in discount outlet store sales. Wholesale sales
increased 25.0% to $100.8 million for 1997 from $80.6 million in 1997. The
increase in wholesale sales was due primarily to a $13.4 million, or 41.1%
<PAGE>
increase in direct mail sales and a $6.8 million, or 14.2% increase in
cash-and-carry cigarette sales. The overall increase in net sales was primarily
attributable to increases in the Company's retail and wholesale products sales,
and in particular the sale of premium cigars and related products.
Gross profit was $49.5 million and $34.0 million for 1997 and 1996,
respectively, an increase of $15.5 million or 45.6%. The increase in gross
profit was due to the increase in cigar sales, which have higher profit margins
relative to other products. As a percentage of net sales, gross profit increased
to 20.6% for 1997 from 17.7% for 1996, primarily due to an increase in unit
volume and prices of higher margin premium cigars.
SG&A expenses were $24.7 million and $21.0 million for 1997 and 1996,
respectively, an increase of $3.7 million or 17.6%, primarily due to increased
staffing costs related to the relocation of the Company's Bergen County, New
Jersey model store, and the payment of one-time signing bonuses of $1.5 million
in connection with the execution of long term service agreements. As a
percentage of net sales, SG&A expenses decreased to 10.3% for 1997 from 10.9%
for 1996, due primarily to net sales increasing at a greater rate than SG&A
expenses.
Income from operations was $23.8 million and $12.3 million for 1997 and 1996,
respectively, an increase of $11.5 million. As a percentage of net sales, income
from operations increased to 9.9% for 1997 from 6.4% for 1996, primarily due to
increased sales of higher margin, premium cigars.
Interest expense increased to $1.3 million for 1997, from $.8 million in 1996.
The increase is attributable to the interest paid on the Distribution Notes
issued to the former principals of the Company's subsidiaries prior to their
acquisition by the Company in a reorganization transaction in June 1997. Other
income was $1.5 million and $0.8 million for 1997 and 1996, respectively. The
increase in 1997 was primarily due to additional interest income from investing
activities.
As a result of the foregoing, the Company had net income of $19.3 million in
1997, compared to $12.2 million in 1996, an increase of 58.7% or $7.1 million.
Liquidity and Capital Resources
Prior to the offering, the Company historically financed its business through
internally generated funds, bank debt and loans from certain of its principal
stockholders. Subsequent to the offering, the Company has financed its business
from the initial public offering proceeds and through internally generated
funds. The Company's net cash provided by operating activities was $6.5 million
for 1998 principally representing net income for the year ended December 31,
1998 and an increase in accounts payable and accrued expenses of $8.8 million,
offset by an increase in inventory of $14.3 million. Net cash used in investing
activities during such period was $1.1 million. Net cash used in financing
activities was $9.2 million for 1998, representing a reduction in the
distribution notes outstanding by $7.9 million and the purchase of treasury
stock in the amount of $1.3 million.
<PAGE>
Net proceeds of approximately $53.3 million from the Company's initial public
offering were used for the following purposes through December 31, 1998: (i) to
repay outstanding indebtedness of $7.3 million, (ii) $6.0 million for the
relocation and design of specialty stores, (iii) $10.5 million for the
construction and development of a new discount outlet store and warehouse
distribution center, (iv) the quarterly principal payment of distribution notes
of $7.9 million through June 30, 1998, (v) $1.5 million for the payment of
signing bonuses to an officer and to MC Management in connection with long-term
service agreements, (vi) $3.0 million for the upgrade of the Company's
information systems, (vii) interest payments of $1.4 million through June 30,
1998 on the Distribution Notes and (viii) $14.9 million for working capital and
general corporate purposes. The remaining proceeds of $0.8 million are expected
to be used for the expansion of retail selling space at existing discount outlet
stores.
The Company's net cash flow provided by operating activities was $0.3 million
for 1997. Net cash used in investing activities was $23.5 million during such
period, relating to purchases of short-term investments and capital expenditures
at the Company's Burlington location. Net cash provided by financing activities
was $33.7 million in 1997, representing cash from the initial public offering,
offset by distributions to stockholders and funds used to repay long-term debt
and a portion of the Distribution Notes.
At December 31, 1998, the Company had working capital of $50.6 million compared
to $55.2 million at December 31, 1997. The amount for 1998 includes cash, cash
equivalents and short-term investments of $18.5 million, accounts receivable of
$2.6 million, $49.1 million of inventory and $18.1 million of accounts payable
and accrued expenses.
As of December 31, 1998, the Company also had available under a credit agreement
a $20.0 million line of credit, with borrowings thereunder accruing interest at
the bank's base rate less 0.5% or the London Interbank Offered Rate ("LIBOR")
plus 1.5%. At December 31, 1998, the Company had no borrowings under this line
of credit, which expires on May 31, 1999.
At December 31, 1998 the Company had outstanding Distribution Notes in the
amount of $11.9 million which were issued to the former principal stockholders
of the Company's subsidiaries prior to their acquisition by the Company on June
6, 1997. These notes represented estimated undistributed accumulative S
Corporation earnings through June 26, 1997, the date of the initial public
offering. These notes bear interest at the rate of 7.0% per annum and are
payable on a quarterly basis until June 1, 2000. In addition, the Company has
outstanding Distribution Notes totaling $1.0 million bearing interest at the
rate of 7.0% per annum payable on June 1, 2000.
Capital expenditures, primarily for computers, discount outlet store, office
furniture, and leasehold improvements were $10.7 million and $8.5 million in
1998 and 1997, respectively. Included in capital expenditures were improvements
<PAGE>
at the Company's Whippany location during 1997 and the purchase, improvement and
furnishing of the Burlington, North Carolina facility in 1998.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flow from
operations, and cash and short-term investments on hand, supplemented by
borrowings under its current credit agreement.
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.
Impact of Recently Issued Accounting Standards
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This Statement requires that all derivatives
be recorded in the balance sheet as either an asset or liability measured at its
fair value and that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. This
statement is effective for fiscal years beginning after June 15, 1999. The
provisions of this statement shall not be applied retroactively to financial
statements of prior periods. The Company is in the process of evaluating this
statement and has not yet determined the future impact on its consolidated
financial statements.
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company invests its available cash in short-term U.S. Treasury Obligations
and commercial paper. Although the rate of interest paid on short-term U.S.
Treasury Obligations and commercial paper may fluctuate over time based on
changes in the general level of U.S. interest rates, the Company believes that
its exposure to market risk fluctuation for these investments is not material
due to the fact that all investments have a maturity of less than one year.
The Company purchases its tobacco products from third party manufacturers, and
therefore, does not believe that it has exposure to commodity price risk with
respect to its tobacco inventories.
Item 8. Financial Statements and Supplementary Data
See pages F-1 through F-27 annexed hereto. The schedule required under
Regulation S-X is included herein on page S-1
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable
Item 10. Directors and Executive Officers of the Registrant
Information with respect to the Directors and Officers of the Company which is
called for by this Item 10 is incorporated by reference to the information set
forth under the heading "Election of Directors" in the Company's Proxy Statement
relating to its 1998 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A (the "Company's 1998 Proxy Statement").
Item 11. Executive Compensation
Information called for by this Item 11 is incorporated by reference to the
information set forth under the heading "Executive Compensation" in the
Company's 1998 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this Item 12 is incorporated by reference to the
<PAGE>
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 1998
Proxy Statement.
Item 13. Certain Relationships and Related Transactions
Information called for by this Item 13 is incorporated by reference to the
information set forth under the headings "Election of Directors," "Employment
Arrangements," and "Certain Relationships and Related Transactions" in the
Company's 1998 Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements: See "Index to Financial Statements"
2. Financial Statement Schedule: See "Index to Financial Statements"
3. Exhibits: See "Exhibit Index"
(b) Reports on Form 8-K: None.
<PAGE>
800-JR CIGAR, Inc.
Index to Financial Statements
and Financial Statement Schedule
Reports of Independent Auditors..............................................F-2
Financial Statements
Consolidated Balance Sheets as of December 31, 1997 and 1998.................F-3
Consolidated Statements of Income for the Years Ended
December 31, 1996, 1997 and 1998..........................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1997 and 1998..........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998..........................................F-6
Notes to Consolidated Financial Statements...................................F-7
Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts...............................S-1
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE>
Report of Independent Auditors
To the Board of Directors 800-JR CIGAR, Inc.
We have audited the accompanying consolidated balance sheets of 800-JR CIGAR,
Inc. as of December 31, 1997 and 1998 and the related consolidated statements of
income, stockholders' equity and cash flows for the years then ended. We have
also audited the combined statements of income, stockholders' equity and cash
flows of 800-JR CIGAR, Inc. for the year ended December 31, 1996. Our audits
also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of 800-JR CIGAR, Inc.
as of December 31, 1997 and 1998, and the consolidated results of its operations
and its cash flows for the years then ended, and the combined results of
operations and cash flows of 800-JR CIGAR, Inc. for the year ended December 31,
1996 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
MetroPark, New Jersey
March 10, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
December 31
1997 1998
------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $16,572 $ 12,759
Short-term investments 14,981 5,719
Accounts receivable, net of allowance for doubtful accounts of $78 and $145
at December 31, 1997 and 1998, respectively 2,313 2,568
Merchandise inventory 34,779 49,056
Prepaid expenses and other current assets 2,155 4,712
Loans receivable - affiliates and other associated entities 603 685
Deferred tax assets 996 1,183
------------------------------------
Total current assets 72,399 76,682
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization 18,518 27,614
Other assets 243 376
Deferred tax assets 102 -
====================================
Total assets $91,262 $104,672
====================================
Liabilities and stockholders' equity Current liabilities:
Current portion of distribution notes payable to stockholders $ 7,933 $ 7,933
Accounts payable 7,157 16,238
Accrued expenses 2,096 1,864
------------------------------------
Total current liabilities 17,186 26,035
Distribution notes payable to stockholders, less current portion 12,900 4,967
------------------------------------
Total liabilities 30,086 31,002
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares
issued and outstanding
Common stock, $.01 par value, 40,000,000 shares authorized, 12,750,000 and
12,752,000 issued and outstanding at
December 31, 1997 and 1998, respectively 128 128
Additional paid-in capital 52,716 52,751
Retained earnings 8,332 22,066
------------------------------------
61,176 74,945
Less 114,500 shares of treasury stock, at cost - (1,275)
------------------------------------
Total stockholders' equity 61,176 73,670
====================================
Total liabilities and stockholders' equity $91,262 $104,672
====================================
See accompanying notes.
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Year ended December 31
1996 1997 1998
------------------------------------------------------
<S> <C> <C> <C>
Net sales $191,982 $240,348 $286,512
Cost of goods sold 158,007 190,886 233,717
------------------------------------------------------
Gross profit 33,975 49,462 52,795
Operating expenses:
Selling 3,946 5,192 6,271
General and administrative 17,008 19,523 22,496
Depreciation and amortization 674 905 1,577
------------------------------------------------------
Income from operations 12,347 23,842 22,451
Other income (expense):
Interest expense (789) (1,269) (1,295)
Interest income 207 1,283 1,056
Rental income 195 202 166
Insurance settlement 373 - -
Other, net (8) 58 550
------------------------------------------------------
Income before income taxes 12,325 24,116 22,928
Provision for income taxes 144 4,781 9,194
======================================================
Net income $ 12,181 $ 19,335 $ 13,734
======================================================
Per share data:
Earnings per share - basic $ 1.08
===================
===================
Earnings per share - diluted $ 1.08
===================
===================
Weighted-average shares outstanding - basic 12,719
===================
===================
Weighted-average shares outstanding - diluted 12,771
===================
Pro forma - unaudited
Historical income before provision for income taxes $ 12,325 $ 24,116
Pro forma adjustments other than income taxes 580 977
------------------------------------
Pro forma income before income taxes 12,905 25,093
Pro forma provision for income taxes 5,262 10,255
====================================
Pro forma net income $ 7,643 $ 14,838
====================================
Pro forma earnings per share - basic $ .73 $ 1.30
====================================
Pro forma earnings per share - diluted $ .73 $ 1.29
====================================
Pro forma common shares outstanding - basic 9,812 11,281
====================================
Pro forma common shares outstanding - diluted 9,812 11,374
====================================
See accompanying notes.
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Common
Stock of Common Stock Additional
Predecessor ---------------------------- Paid-in Retained Treasury
Entities Shares Amount Capital Earnings Stock Total
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 21 - $ - $ 28 $ 12,459 $ (418) $ 12,090
Net income 12,181 12,181
Distribution to stockholders (795) (795)
----------------------------------------------------------------------------------------------
Balance at December 31, 1996 21 - - 28 23,845 (418) 23,476
Net income 19,335 19,335
Reorganization (21) 9,300,000 93 (547) 57 418 -
Issuance of common stock 3,450,000 35 53,235 53,270
Issuance of distribution notes (23,800) (23,800)
Issuance of additional
distribution notes (1,000) (1,000)
Distribution to stockholders (10,105) (10,105)
----------------------------------------------------------------------------------------------
Balance at December 31, 1997 - 12,750,000 128 52,716 8,332 - 61,176
Net income 13,734 13,734
Issuance of common stock 2,000 35 35
Purchase of treasury stock (1,275) (1,275)
----------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ - 12,752,000 $128 $52,751 $ 22,066 $(1,275) $ 73,670
==============================================================================================
See accompanying notes.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended December 31
1996 1997 1998
----------------------------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $12,181 $19,335 $ 13,734
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 674 905 1,577
Provision for uncollectible accounts 191 55 209
Deferred income taxes (5) (1,073) (85)
Other (8) - -
Gain on sale of short-term investments - - (399)
Loss on sale of assets 28 - -
Changes in operating assets and liabilities:
Accounts receivable (549) (665) (464)
Merchandise inventory (2,894) (15,163) (14,277)
Prepaid expenses and other current assets (460) (1,455) (2,557)
Other assets (36) (78) (133)
Accounts payable and accrued expenses 68 (1,585) 8,849
----------------------------------
Net cash provided by operating activities 9,190 276 6,454
Cash flows from investing activities
Purchase of short-term investments - (14,981) (25,158)
Proceeds from sale of short-term investments - - 34,819
Purchase of property and equipment (2,929) (8,547) (10,673)
Loans (extended to) repaid by affiliates and other associated entities (240) 467 (82)
Loans extended to stockholders (938) (445) -
----------------------------------
Net cash used in investing activities (4,107) (23,506) (1,094)
Cash flows from financing activities
Proceeds of borrowings under revolving line of credit 500 - -
Proceeds from issuance of Common Stock - 54,545 35
Expenses paid in connection with Common Stock offering - (1,275) -
Payments of distribution notes - (3,967) (7,933)
Payments of long-term debt (1,850) (8,279) -
Payments of capital lease obligations (84) (89) -
Purchase of treasury stock - - (1,275)
Distribution to stockholders (795) (7,189) -
----------------------------------
Net cash (used in) provided by financing activities (2,229) 33,746 (9,173)
----------------------------------
Net increase (decrease) in cash and cash equivalents 2,854 10,516 (3,813)
Cash and cash equivalents, beginning of period 3,202 6,056 16,572
----------------------------------
Cash and cash equivalents, end of period $ 6,056 $ 16,572 $ 12,759
==================================
Supplemental disclosure of cash flow data
Income taxes paid $ 37 $ 6,053 $ 11,021
==================================
Interest paid $ 775 $ 1,177 $ 1,180
==================================
Supplemental disclosure of noncash investing and financing activities
Line of credit refinanced with note payable $3,000 $ $ -
-
Non-cash distribution to stockholders - 2,916 -
Distribution notes issued to stockholders - 24,800 -
See accompanying notes.
</TABLE>
F-6
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
December 31, 1998
1. Basis of Presentation
Business
800-JR CIGAR, Inc. and subsidiaries ("800-JR CIGAR" or the "Company") is
primarily engaged in the retail/wholesale distribution of tobacco and tobacco
related products throughout the United States.
The Company's business is impacted by the general seasonal trends that are
characteristic of the retail industry, and it generally experiences lower net
revenues and net income in the first half of each fiscal year compared to the
second half of the fiscal year.
Initial Public Offering
Effective June 26, 1997, the Company sold 3,450,000 shares of its common stock
at a price of $17 per share in an initial public offering (the "Offering"). Net
proceeds of the Offering, after deducting underwriting discounts and
commissions, and professional fees aggregated $53,270. As of December 31, 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) $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 to an officer
and to MC Management (see Note 8) in connection with long-term service
agreements, (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 (see Note 5) and (viii) $14,900 for working capital and general corporate
purposes. The remaining proceeds of $770 are expected to be used for the
expansion of retail selling space.
Basis of Presentation
800-JR CIGAR was incorporated in Delaware in March 1997. Concurrent with the
completion of 800-JR CIGAR's Offering, the former principals of the predecessor
group of companies contributed to 800-JR CIGAR all of the outstanding stock in
the entities listed below that comprise the predecessor group of companies, in
exchange for 9,300,000 shares of common stock of 800-JR CIGAR (the
"Reorganization").
F-7
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation (continued)
The accompanying financial statements include the results of operations for 1996
and the period from January 1, 1997 to June 26, 1997 of J.R. Tobacco of America,
Inc., J.N.R. Grocery Corp., J&R Tobacco (New Jersey) Corp., J.R. Tobacco Company
of Michigan, Inc., cigars by Santa Clara, N.A., Inc., J.R. Tobacco Outlet, Inc.,
J.R.-46th Street, Inc., J.R. Tobacco NC, Inc., and J.R. Statesville, Inc.
(together, the "Company" or the "Predecessor Entities"). The Predecessor
Entities are corporations that had elected to be taxed as S Corporations
pursuant to the Internal Revenue Code and certain state and local tax
regulations through June 26, 1997.
After the Reorganization, the Predecessor Entities became subsidiaries of 800-JR
CIGAR. Because 800-JR CIGAR and the Predecessor Entities were commonly owned,
the Reorganization has been accounted for in a manner similar to a pooling of
interests and, accordingly, the historical carrying values of the assets and
liabilities of the Predecessor Entities were not affected by the Reorganization.
800-JR CIGAR conducted no business prior to the Reorganization and, accordingly,
it was not included in the results of operations of the Predecessor Entities.
For the period from June 27, 1997 through December 31, 1997, the accompanying
consolidated financial statements include the results of operations of 800-JR
CIGAR, as well as all companies that were included in the Predecessor Entities.
All significant intercompany balances and transactions have been eliminated.
The principal stockholders of the Predecessor Entities were Lewis Rothman and
LaVonda Rothman, each of whom owned 50% of the Predecessor Entities, except for
J.R. Statesville, Inc., which was owned 26% by Lewis Rothman, 26% by LaVonda
Rothman and 12% by each of the Shane Rothman Trust, the Luke Rothman Trust, the
Marni Rothman Trust and the Samantha Rothman Trust. As consideration for the
contribution of their interests in the Predecessor Entities, each of Lewis
Rothman, LaVonda Rothman, the Shane Rothman Trust, the Luke Rothman Trust, the
Marni Rothman Trust and the Samantha Rothman Trust received 4,387,920,
4,387,920, 131,040, 131,040, 131,040 and 131,040 shares of common stock,
respectively, of 800-JR CIGAR, Inc., for an aggregate 9,300,000 shares.
F-8
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation (continued)
Statement of Income Presentation
The statement of income of the Company for the year ended December 31, 1997
reflects the results of operations of the Predecessor Entities for the period
January 1, 1997 through June 26, 1997 and the results of the Company from June
27, 1997 (the date of the consummation of the Offering) through December 31,
1997.
<TABLE>
<CAPTION>
Selected statement of income data for the year ended December 31, 1997 are as
follows:
January 1 June 27 to Year ended
to June December December
26, 1997 31, 1997 31, 1997
----------------------------------------------------
(Predecessor) (Company) (Consolidated)
<S> <C> <C> <C>
Net revenues $107,782 $132,566 $240,348
====================================================
Gross profit $ 20,975 $ 28,487 $ 49,462
====================================================
Operating income $ 10,481 $ 13,361 $ 23,842
Other (expense) income (118) 392 274
----------------------------------------------------
Income before provision for income taxes 10,363 13,753 24,116
Provision for income taxes 361 4,420 4,781
====================================================
Net income $ 10,002 $ 9,333 $ 19,335
====================================================
</TABLE>
Pro Forma Adjustments (Unaudited)
The unaudited pro forma net income for the years ended December 31, 1996 and
1997 reflects the Reorganization, the Offering and the following adjustments as
if they had occurred on January 1 of each period: a) a decrease in aggregate
compensation from $1,818 to $400 for 1996 and from $253 to $200 for 1997 for two
of the Company's executives pursuant to their new employment agreements; b) an
increase in interest expense of $1,458 for 1996 and $798 for 1997 assuming the
issuance of the Distribution Notes; c) a reduction in interest expense of $789
for 1996 and $328 for 1997 assuming the application of proceeds from the
Offering to repay all of the Company's indebtedness other than capital lease
obligations; d) a reduction in interest income of $169 for 1996 and $106 for
1997 assuming the repayment to the Company of loans receivable from
stockholders; e) an increase of $1,500 for 1997, related to signing bonuses paid
to an officer of the Company and to MC Management in connection with the
execution of long-term service agreements, and f) an increase of $5,118 for 1996
and $5,474 for 1997 for income taxes based upon pro forma pre-tax income as if
the Company had been subject to federal and additional state income taxes.
F-9
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation (continued)
On June 6, 1997, the Company issued Distribution Notes to the principal
stockholders of the Predecessor Entities in the amount of $23,800, representing
estimated undistributed cumulative S Corporation earnings through the date of
the Offering which were taxable to those stockholders. The Distribution Notes
are net of loans receivable from the stockholders of $2,916, which were
outstanding prior to the Offering, and additional distributions of $7,189 made
prior to the consummation of the Offering to enable the stockholders to pay
income taxes on their allocable portions of the 1996 and 1997 undistributed S
Corporation estimated earnings through the date of the Offering. These notes
bear interest at the rate of 7.0% per annum, and are payable on a quarterly
basis over the three-year period following the Offering.
On June 6, 1997, the Predecessor Entities also issued additional distribution
notes (the "Additional Notes") to the principal stockholders of the Predecessor
Entities, for a nominal amount. At December 31, 1997, the initial principal
amount of the additional notes was increased to $1 million, the maximum
allowable. Such increase represents the amount by which the final S Corporation
earnings of the Predecessor Entities exceeded the principal amount of the
Distribution Notes (as discussed above). The Additional Notes mature on June 1,
2000 and bear interest at the rate of 7% per annum.
Pro Forma Earnings Per Share (Unaudited)
Pro forma basic and diluted earnings per share for the year ended December 31,
1996 is based on 9,300,000 shares of common stock outstanding prior to the
Offering, increased by the sale of 511,658 shares of common stock at an initial
public offering price of $17.00 per share ($15.44, net of underwriting discounts
and commissions and estimated offering expenses), the proceeds of which would be
necessary to pay approximately $7,900, the current portion of the Distribution
Notes. The net income used in the calculation of pro forma earnings per share
for the year ended December 31, 1996 represents pro forma net income decreased
by the interest expense on debt of $789 ($467 on an after-tax basis).
The 11,280,829 pro forma common shares outstanding used in the calculation of
basic pro forma earnings per share for the year ended December 31, 1997 is based
on a weighted-average calculation derived by using 12,750,000 common shares
outstanding subsequent to the offering and 9,811,658, the pro forma common
shares outstanding prior to the Offering.
F-10
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation (continued)
The 11,373,900 pro forma common shares outstanding, used in the calculation of
diluted pro forma earnings per share, for the year ended December 31, 1997 is
based on a weighted average calculation derived by using 12,936,143, the
weighted average common shares outstanding subsequent to the Offering and
9,811,658, the pro forma common shares outstanding prior to the Offering, as
calculated above. The net income used in the calculation of pro forma per share
information for the year ended December 31, 1997 consists of the pro forma
income of $14,838 reduced by interest expense on debt of $328 ($194 on an
after-tax basis).
Supplementary pro forma basic and diluted earnings per share for the year ended
December 31, 1996, is $.74 based on 9,300,000 shares of common stock outstanding
prior to the Offering, increased by (a) the sale of 511,658 shares of common
stock at an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to pay approximately $7,900, the current
portion of the Distribution Notes and (b) the sale of 467,896 shares of common
stock at an initial public offering price of $17.00 per share ($15.44, net of
underwriting discounts and commissions and estimated offering expenses), the
proceeds of which would be necessary to repay approximately $7,229, the amount
of outstanding debt at the date of the offering. The net income used in the
calculation of supplementary pro forma earnings per share is the pro forma net
income of $7,643 for the year ended December 31, 1996.
Supplementary pro forma basic earnings per share for the year ended December 31,
1997 is $.78. The common shares outstanding used in the calculation of
supplementary basic pro forma earnings per share is based on a weighted average
calculation derived by using 12,750,000 common shares outstanding subsequent to
the offering and 10,279,554, the supplementary pro forma common shares
outstanding, prior to the offering.
Supplementary pro forma diluted earnings per share for the year ended December
31, 1997 is $1.28 based on a weighted average of the 10,279,554 shares of common
stock outstanding for the six-month period ended June 30 1997 (prior to the
Offering) and 12,936,143 shares outstanding for the six-month period ended
December 31, 1997 (subsequent to the Offering).
The net income used in the calculation of supplementary pro forma basic and
diluted earnings per share for the year ended December 31, 1997, is the pro
forma net income of $14,838.
F-11
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of three months or less when acquired. The carrying
amount reported for cash equivalents approximates fair value.
Short-Term Investments
Short-term investments consist of U.S. Treasury obligations and commercial paper
which mature within one year. Such short-term investments are carried at cost,
which approximates fair value, due to the short period of time to maturity.
Concentrations of Credit Risk
Certain financial instruments potentially subject the Company to concentrations
of credit risk. These financial instruments consist primarily of cash and cash
equivalents, short-term investments, and trade accounts receivable. The Company
places its temporary cash investments and short-term investments in government
obligations and commercial paper of high credit quality corporations to limit
its credit exposure. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base, their dispersion across different geographic areas and
generally short payment terms.
Merchandise Inventory
Merchandise inventory is stated at the lower of cost (determined by the
first-in, first-out method) or market; market represents the lower of
replacement cost or estimated net realizable value. Merchandise inventory
consists of goods held for re-sale.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation and
amortization of assets, is computed using the straight-line and accelerated
methods over the lesser of the estimated useful lives of the related assets.
These lives range from 3 to 39 years.
Advertising
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotion costs amounted to $1,129, $1,605 and $2,114 for the
years ended December 31, 1996, 1997 and 1998, respectively.
F-12
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
2. Summary of Significant Accounting Policies (continued)
Income Taxes
Income taxes are accounted for by the liability method in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". Under this method, deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial carrying
amounts and the tax bases of existing assets and liabilities.
Revenue Recognition
Sales are recognized upon shipment of products or, in the case of sales by
Company owned stores, when payment is received.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ
from those estimates.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related Interpretations
in accounting for its employee stock option plans because, the alternative fair
value accounting provided for under SFAS No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise price of the Company's employee stock options equals the fair market
value of the underlying common stock on the date of the grant, no compensation
expense is recognized.
Earnings per Share
Earnings per share are calculated in accordance with SFAS Statement No. 128,
"Earnings per Share." Basic earnings per share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The calculation of dilutive earnings per share
includes the effect of dilutive securities. Pro forma earnings per share amounts
F-13
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
2. Summary of Significant Accounting Policies (continued)
have been presented and, where appropriate, restated to conform to the Statement
128 requirements.
Segments of an Enterprise and Related Information
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("Statement No. 131").
Statement 131 superseded SFAS No. 14, "Financial Reporting for Segments of a
Business Enterprise". Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The adoption of this Statement did not
affect results of operations or financial position of the Company.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivatives be recorded in the balance sheet as either an asset or liability
measured at its fair value and that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. This statement is effective for fiscal years beginning after June 15, 1999.
The provisions of this statement shall not be applied retroactively to financial
statements of prior periods. The Company is in the process of evaluating this
statement and has not yet determined the future impact on its consolidated
financial statements.
3. Acquisition
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.
F-14
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
4. Property, Equipment and Improvements
Property, equipment and improvements consist of the following:
December 31
1997 1998
-----------------------------------
Land $ 1,593 $ 2,548
Building and improvements 11,003 19,164
Machinery and equipment 2,979 4,005
Furniture and fixtures 1,754 2,534
Leasehold improvements 5,283 5,020
Automobiles 174 188
-----------------------------------
22,786 33,459
Less accumulated depreciation and amortization 4,268 5,845
===================================
$18,518 $27,614
===================================
5. Long-Term Debt and Line of Credit
Long-term debt is comprised as follows:
December 31
1997 1998
-----------------------------------
Distribution Notes payable to stockholders,
due in quarterly installments, with
interest at 7.0% through June 1, 2000 $19,833 $11,900
Additional Distribution Notes payable to
stockholders, due June 1, 2000, with
interest at 7.0% 1,000 1,000
-----------------------------------
20,833 12,900
Less current portion 7,933 7,933
===================================
Long-term debt $12,900 $ 4,967
===================================
During 1998, the Company entered into a $20,000 line of credit with a bank,
which expires on May 31, 1999. Borrowings under this facility are unsecured and
bear interest at the bank's prime rate less 0.5% or the London Inter-Bank
Offering Rate ("LIBOR") plus 1.5%. There were no borrowings outstanding under
this line of credit at December 31, 1998.
The fair value of the Company's long-term debt approximates its carrying value
as the interest rates are substantially the same as are currently available to
the Company for similar debt instruments.
F-15
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
5. Long-Term Debt and Line of Credit (continued)
The Distribution Notes and Additional Notes payable to stockholders as of
December 31, 1998 will mature as follows:
1999 $ 7,933
2000 4,967
===================
$12,900
===================
6. Income Taxes
The Predecessor Entities were corporations that elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and local
tax regulations. Therefore, for the years ended December 31, 1996 and for the
period January 1, 1997 to June 26, 1997 (the period prior to the Offering), no
provision has been made in the accompanying financial statements for federal and
certain state and local income taxes, since such taxes are the liability of the
principals. In connection with the Offering, the Company became subject to
federal and additional state income taxes.
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 provision for income taxes consists of the following:
Year ended December 31
1996 1997 1998
-----------------------------------------------------
Current income taxes:
Federal taxes $ - $ 4,186 $7,427
State and local taxes 149 1,668 1,852
Deferred income taxes (5) (1,073) (85)
-----------------------------------------------------
$144 $ 4,781 $9,194
=====================================================
F-16
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
6. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax asset as of December 31, 1997 and 1998 are as follows:
Year ended December 31
1997 1998
-----------------------------------
Deferred tax assets:
Book over tax depreciation $ 102 $ -
Allowance for doubtful accounts 32 59
Inventory capitalization and reserves 485 520
Amortization of signing bonuses - 389
Other book accruals 479 453
-----------------------------------
Total deferred tax assets 1,098 1,421
Deferred tax liability:
Tax over book depreciation - 238
-----------------------------------
===================================
Net deferred tax assets $1,098 $1,183
===================================
The pro forma provision for income taxes represents the income tax provisions
that would have been reported had the Company been subject to federal and
additional state income taxes during the years ended December 31, 1996 and 1997.
The pro forma income tax provision has been prepared according to SFAS No. 109.
The pro forma income tax provision consists of the following (in thousands):
Year ended December 31
1996 1997
---------------------------------
Current income taxes:
Federal taxes $4,234 $ 8,624
State and local taxes 1,356 2,658
---------------------------------
5,590 11,282
Deferred income tax benefit (328) (1,027)
---------------------------------
$5,262 $10,255
=================================
F17
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
6. Income Taxes (continued)
A reconciliation setting forth the differences between the actual effective tax
rate for the year ended December 31, 1998 and the pro forma effective tax rates
for the years ended December 31, 1996 and 1997 of the Company, and the U.S.
federal statutory tax rate for the years ended December 31, 1996, 1997 and 1998
is as follows:
1996 1997 1998
-----------------------------------
Federal statutory rate 34.3% 34.4% 35.0%
State and local taxes, net of federal tax
benefits 6.5 6.5 5.1
===================================
Effective tax rate 40.8% 40.9% 40.1%
===================================
7. Employee Benefit Plans and Stock Option Plans
401(k) Plan
During 1997, the Company adopted a defined contribution plan (401(k)) for all
eligible employees. The plan provides for discretionary contributions by the
Company based on the performance of the Company. Effective November 1998, the
Company contributes an amount equal to 100% of the first 5% of salaries that the
employees contribute. The Company made no contributions to the plan in 1997 and
made contributions of $196 to the plan in 1998.
1997 Employee Stock Purchase Plan
During 1997, the Company adopted, and the stockholders approved, the 1997
Employee Stock Purchase Plan, effective on July 1, 1997. This plan permits
eligible employees of the Company and its subsidiaries (generally all full-time
employees who have completed one year of service) to purchase shares of Common
Stock at a discount. Employees who elect to participate will have amounts
withheld through payroll deduction during six-month purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to purchase
stock at a price equal to 85% of the market price at the beginning of the period
or the end of the period, whichever is lower. Stock purchased under the plan
will be subject to a six-month holding period. The Company has reserved 300,000
shares of Common Stock for issuance under this plan. During 1998, 2,146 shares
were issued under the plan and remain outstanding at December 31, 1998.
F-18
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
7. Employee Benefit Plans and Stock Option Plans (continued)
1997 Long-Term Incentive Plan
Prior to the Offering, the Board of Directors ("Board") and the Company's
stockholders approved the Company's 1997 Long-Term Incentive Plan (the
"Incentive Plan"). The purpose of the Incentive Plan is to provide executive
officers, key employees, and others with additional incentives enabling such
persons to increase their ownership interests in the Company. The maximum number
of shares of Common Stock that may be subject to outstanding awards may not be
greater than 800,000 shares. Awards may be settled in cash, shares, other awards
or other property, as determined by the Committee.
In connection with the Offering, Non-Qualified Stock Options to purchase a total
of 450,000 shares of Common Stock of the Company were granted to executives,
employees of MC Management, other employees and consultants of the Company. Each
of these options have an exercise price per share equal to the initial public
offering price. These options vest generally in three equal installments on each
of the first three anniversaries of the Offering, and generally will expire on
the earlier of 10 years after the date of grant or thirty days after termination
of employment. If termination is for cause, all options will terminate
immediately.
1997 Non-Employee Directors' Stock Plan
Prior to the Offering, the Company adopted and the stockholders approved the
1997 Non-Employee Directors' Stock Plan (the "Directors' Plan"), which provides
for (i) the automatic grant to each non-employee director serving at the
commencement of the Offering of an option to purchase 10,000 shares, and (ii)
thereafter, the automatic grant to each newly elected non-employee director of
an option to purchase 10,000 shares upon such person's initial election as a
director; provided, however, that the number of options which may be granted to
newly elected non-employee directors upon such person's initial election after
the commencement of the Offering may be altered by the Board. A total of 100,000
shares are reserved for issuance under the Directors' Plan.
Options granted under the Directors' Plan will have an exercise price per share
equal to the fair market value of a share at the date of grant. Options will
expire 10 years from the date of grant. Options will vest and become exercisable
ratably, 20% per year, following the date of grant of the options, subject to
acceleration by the Board. The Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees, nonforfeitable shares or
nonforfeitable credits representing "deferred shares" settleable at future
dates, as elected by the director.
F-19
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
7. Employee Benefit Plans and Stock Option Plans (continued)
A summary of stock option activity relating to the Company's stock options are
as follows:
Long-Term Non-Employee
Incentive Plan Directors Plan
----------------------------------------------
Weighted- Weighted-
Average Number Average Number
Exercise of Exercise of
Price Shares Shares
----------------------------------------------
Outstanding at January 1, 1997 $ - - $ - -
Granted 17.00 450,000 17.00 20,000
- - 25.38 10,000
Exercised - - - -
Canceled 17.00 (35,000) - -
----------------------------------------------
Outstanding at January 1, 1998 17.00 415,000 19.79 30,000
Granted - - - -
Exercised - - - -
Canceled 17.00 (14,000) - -
----------------------------------------------
Outstanding at December 31, 1998 17.00 401,000 $19.79 30,000
==============================================
Options exercisable at
December 31, 1998 $17.00 134,000 $19.79 6,000
==============================================
There were no options exercisable at December 31, 1997.
Stock options outstanding at December 31, 1998 are summarized as follows:
Weighted-Average
Outstanding Remaining
Options at Contractual Life
December
Range of Exercise Price 31, 1998
- - ----------------------------------------------------------------------------
$17.00 per share 421,000 9 years
$25.38 per share 10,000 9 years
==================
$17.00 to $25.38 per share 431,000
==================
F-20
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
7. Employee Benefit Plans and Stock Option Plans (continued)
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".
SFAS 123 requires pro forma information regarding net income and earnings per
share as if the Company has accounted for its employee stock options granted
under the fair value method of SFAS 123. The fair value of these equity awards
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions used for grants in 1997:
risk-free interest rates of 5.73%; expected volatility of 73%; expected option
life of 7 years; and an expected dividend yield of 0%.
The weighted-average grant fair value of options granted during 1997 was $12.30
per share. The total compensation related to stock-based compensation awards,
net of related income tax benefits, under SFAS 123 for 1997 and 1998 would have
been approximately $532 and $1,037, respectively.
For purposes of pro forma disclosures, the estimated fair value of the equity
awards is amortized to expense over the options' vesting period. The Company's
pro forma information, for the year ended December 31, 1997 and 1998, is as
follows:
1997 1998
------------------------
Pro forma net income $14,306 $12,697
Pro form net income per share of common stock - basic $1.27 $1.00
Pro forma net income per share of common stock - diluted $1.26 $.99
8. Related Party Transactions
From time to time, prior to the Offering, the Company made or received cash
advances from the stockholders. Such advances bore interest at 9% and had no
established due dates. Net interest income amounted to $78, $169 and $-0- in
1996, 1997 and 1998, respectively.
During 1997 and 1998, the Company purchased cigars from affiliated companies
aggregating approximately $7.6 million and $8.2 million, respectively. The
affiliated entities are partially owned by an officer/director and by another
director of the Company.
F-21
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
8. Related Party Transactions (continued)
The Company has a management agreement with a management company which provides
certain administrative services to the Company. The management company is owned
by a director of the Company. Management fee expense in 1996, 1997 and 1998
amounted to $3,071, $4,132 and $4,525, respectively. In addition, the management
company paid rent to the Company in the amount of $146 in 1996, 1997 and 1998.
In consideration for entering into a long-term agreement with the management
company, the Company paid a signing bonus of $1 million to the management
company subsequent to the Offering.
9. Commitments and Contingencies
Employment Agreements
Effective upon consummation of the Offering, the Company entered into three year
employment agreements with three executives of the Company. The agreements
provide for aggregate annual base salaries of $505, plus employment benefits and
bonuses, which shall be determined at the discretion of the Board of Directors.
In connection with entering into an employment agreement, one of the executives
received a signing bonus of $500.
Leases
The Company is obligated under various noncancelable lease agreements for the
rental of premises classified as operating leases. Several of the leases contain
escalation clauses which provide for scheduled increases.
Future minimum lease payments for operating leases as of December 31, 1998 are
as follows:
Operating
Leases
-------------------
1999 $ 801
2000 599
2001 620
2002 620
2003 635
Thereafter 1,027
-------------------
Total minimum lease payments $4,302
===================
F-22
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
9. Commitments and Contingencies (continued)
Rental expense under operating leases amounted to $817, $922 and $1,024 in 1996,
1997 and 1998, respectively.
Litigation
The Company, from time to time, may be a defendant in actions arising in the
ordinary course of business. In the opinion of management, such litigation will
not have a material effect on the Company's combined financial condition or
results of operations.
Self-Insurance
Effective April 25, 1994, the Company established the Pyramid Insurance Trust
Fund (the "Trust") to provide health and welfare benefits to eligible employees.
Contributions to the Trust by the Company shall be in amounts sufficient to pay
all costs and expenses of the Trust, including, but not limited to, the cost of
self-insured benefit claim payments, a reserve for self-insured benefit claims
and premiums for any fully insured benefit coverage. Contributions to the Trust,
all of which were charged to operations, amounted to $619, $642 and $1,078 in
1996, 1997 and 1998, respectively.
10. Computation of Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for 1998:
Numerator:
Net income $13,734
==================
Denominator:
Denominator for basic earnings per share - weighted-
average shares 12,719
Effect of dilutive securities - stock options 52
------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversion 12,771
==================
Basic earnings per share $ 1.08
==================
Diluted earnings per share $ 1.08
==================
F-23
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
11. Segment Reporting
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" in 1998, which changes the way the Company reports
information about its operating segments.
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 segements 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 from operations before
income taxes. 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.
F-24
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
11. Segment Reporting (continued)
Year ended December 31
1996 1997 1998
--------------------------------------------
Net sales
Retail $111,400 $139,500 $155,639
Wholesale 80,582 100,848 130,873
============================================
Total consolidated net sales $191,982 $240,348 $286,512
============================================
Depreciation and amortization expense
Retail $ 329 $ 445 $ 1,062
Wholesale 345 410 351
--------------------------------------------
Total segment depreciation and
amortization expense 674 855 1,413
--------------------------------------------
Reconciling item
Corporate depreciation expense - 50 164
--------------------------------------------
Total consolidated depreciation and
amortization expense $ 674 $ 905 $ 1,577
============================================
Interest income
Retail $ 53 $ 29 $ -
Wholesale 154 143 -
--------------------------------------------
Total segment interest revenue 207 172 -
--------------------------------------------
Reconciling item
Corporate income - 1,111 1,056
--------------------------------------------
Total consolidated interest income $ 207 $ 1,283 $ 1,056
============================================
Interest expense
Retail $ 24 $ 579 $ 651
Wholesale 765 690 644
--------------------------------------------
Total consolidated interest expense $ 789 $ 1,269 $ 1,295
============================================
Income tax expense
Retail $ 209 $ 2,002 $ 4,226
Wholesale (65) 4,339 5,188
--------------------------------------------
Total segment income tax expense 144 6,341 9,414
--------------------------------------------
Reconciling item
Corporate income tax (benefit) - (1,560) (220)
--------------------------------------------
Total income tax expense $ 144 $ 4,781 $ 9,194
============================================
F-25
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
11. Segment Reporting (continued)
Year ended December 31
1996 1997 1998
--------------------------------------------
Segment net income
Retail $ 4,421 $ 7,329 $ 5,709
Wholesale 7,760 11,663 7,354
--------------------------------------------
Total segment net income 12,181 18,992 13,063
--------------------------------------------
Reconciling item
Corporate net income - 343 671
--------------------------------------------
Total consolidated net income $ 12,181 $ 19,335 $ 13,734
============================================
Total assets
Retail $ 17,734 $ 22,805 $ 44,324
Wholesale 24,948 29,584 43,779
--------------------------------------------
42,682 52,389 88,103
--------------------------------------------
Reconciling item
Corporate assets - 38,873 16,569
--------------------------------------------
Total consolidated assets $ 42,682 $ 91,262 $104,672
============================================
Capital expenditures
Retail $ 2,454 $ 8,351 $ 9,962
Wholesale 475 196 711
--------------------------------------------
Total capital expenditures $ 2,929 $ 8,547 $ 10,673
============================================
F-26
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
12. Quarterly Results of Operations (Unaudited)
The following is a summary of the unaudited quarterly results of operations for
1998 and 1997:
Quarter Ended
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
1998
Net sales $62,196 $70,042 $73,177 $81,097
Gross profit 12,564 13,682 14,903 11,646
Net income 3,532 3,940 4,335 1,927
Per share data:
Earnings per share - basic .28 .31 .34 .15
Earnings per share - diluted .27 .31 .34 .15
Weighted-average number of
common shares outstanding - basic 12,750 12,750 12,733 12,640
Weighted-average number of common
shares outstanding - diluted 12,873 12,833 12,733 12,640
1997
Net sales $49,683 $60,435 $62,002 $68,228
Gross profit 9,052 12,378 12,871 15,161
Net income 3,884 6,614(1) 4,084(1) 4,753(1)
Pro forma or net income per share data:
Earnings per share - basic .40 .67 .32 .37
Earnings per share - diluted .40 .67 .32 .37
Weighted-average number of
common shares outstanding - basic 12,750 12,750 12,750 12,750
Weighted-average or pro forma
weighted-average number of common
shares outstanding - diluted 9,812 9,812 12,942 12,934
(1) Net income reflects an income tax provision for federal and additional
state income taxes subsequent to the Offering, and the recording of an
additional deferred tax benefit at the time of the Offering. Prior to the
Offering, the entities in the combined group elected to be taxed as S
Corporations pursuant to the Internal Revenue Code and certain state and
local tax regulations.
F-27
<PAGE>
800-JR CIGAR, Inc. and Subsidiaries
Schedule II--Valuation and Qualifying Accounts
(In thousands)
Additions
--------------------------------
Charged Charged
Beginning to Cost and to Other Deductions Ending
Description Balance Expense Accounts (A) Balance
- - --------------------------------------------------------------------------------
Year ended December 31, 1998
Allowance for doubtful accounts $ 78 $209 $ - $142 $145
================================================
Year ended December 31, 1997
Allowance for doubtful accounts $ 118 $ 55 $ - $ 95 $ 78
================================================
Year ended December 31, 1996
Allowance for doubtful accounts $ 83 $ 191 $ - $156 $118
================================================
(A) Represented write-offs of accounts, net of recoveries.
S-1
<PAGE>
EXHIBIT LIST
Exhibit No. Description of Document
3.1 Certificate of Incorporation of the Company. Filed as Exhibit 3.1
to the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
3.2 By-Laws of the Company. Filed as Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Registration No. 333-23401)
and hereby incorporated by reference.
4.1 Form of Certificate for Common Stock of the Company. Filed as
Exhibit 4.1 to the Company's Registration Statement on Form S-1
(Registration No. 333-23401) and hereby incorporated by reference.
10.1 The Company's 1997 Long-Term Incentive Plan. Filed as Exhibit 10.1
to the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
10.2 The Company's 1997 Non-Employee Directors' Stock Plan. Filed as
Exhibit 10.2 to the Company's Registration Statement on Form S-1
(Registration No. 333-23401) and hereby incorporated by reference.
10.3 The Company's Employee Stock Purchase Plan. Filed as Exhibit 10.3
to the Company's Registration Statement on Form S-1 (Registration
No. 333-23401) and hereby incorporated by reference.
10.4 1997 Employee Bonus Pool Plan. Filed as Exhibit 10.4 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.5 Employment Agreement, dated March 13, 1997 between the Company and
Lewis I. Rothman. Filed as Exhibit 10.5 to the Company's
Registration Statement on Form S-1 (Registration No. 333-23401)
and hereby incorporated by reference.
10.6 Employment Agreement, dated March 13, 1997 between the Company and
LaVonda M. Rothman. Filed as Exhibit 10.6 to the Company's
Registration Statement on Form S-1 (Registration No. 333-23401)
and hereby incorporated by reference.
10.7 Employment Agreement, dated March 13, 1997 between the Company
and Jane Vargas. Filed as Exhibit 10.7 to the Company's
Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.8 Management Agreement, dated March 13, 1997 by and between MC
Management and the Company. Filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Registration No. 333-23401)
and hereby incorporated by reference.
10.9 Form of Indemnification Agreement. Filed as Exhibit 10.9 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.10 Agreement dated March 13, 1997 by and between Cigars by Santa
Clara, N.A., Nicaraguan American Tobacco Company, ("Natco"). Filed
as Exhibit 10.12 to the Company's Registration Statement on Form
S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
10.11 Agreement dated March 13, 1997 by and between Natco and Nicaraguan
-American Tobacco Sociedad Anomima, S.A. Filed as Exhibit 10.13 to
the Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
10.12 Lease Agreement dated July 19, 1993 by and between J.R. Tobacco of
America, Inc., and Interstate Development Co., Inc. as amended by
First Amendment to Lease, dated November 2, 1993, by and between
J.R. Tobacco of America, Inc. and Interstate Development Company.
Filed as Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (Registration No. 333-23401) and hereby incorporated by
reference.
10.13 Lease Agreement, dated March 1, 1996 by and between J.R. Outlet,
Inc. and Casa Blanca, Inc. Filed as Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (Registration No. 333-23401)
and hereby incorporated by reference.
21.1 List of Subsidiaries of the Company. Filed as Exhibit 21.1 to the
Company's Registration Statement on Form S-1 (Registration No.
333-23401) and hereby incorporated by reference.
23.1 Consent of Ernst & Young LLP.
27.0 Financial Data Schedule.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
800-JR Cigar, Inc.
March 29, 1999 By:__/s/ Lew Rothman___________________________
Lew Rothman, Chairman of the Board, President,
Chief Executive Officer
March 29, 1999 By:__/s/ Michael E. Colleton____________________
Michael E. Colleton, Chief Financial Officer
March 29, 1999 By:__/s/ LaVonda Rothman________________________
LaVonda Rothman, Secretary and Director
March 29, 1999 By:__/s/ Jane Vargas____________________________
Jane Vargas, Vice President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 29, 1999 By:__/s/ Maureen Colleton_______________________
Maureen Colleton, Director
March 29, 1999 By:__/s/ Stephen Bloom__________________________
Stephen Bloom, Director
March 29, 1999 By:__/s/ John Oliva_____________________________
John Oliva, Director
March 29, 1999 By:__/s/ John F. Barry Jr.______________________
John F. Barry Jr., Director
<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-58397) pertaining to the 1997 Long-Term Incentive Plan, the 1997
Non-Employee Directors' Stock Plan and the 1997 Employee Stock Purchase Plan of
800-JR CIGAR, Inc. of our report dated March 10, 1999, with respect to the
consolidated financial statements and schedule of 800-JR CIGAR, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.
ERNST & YOUNG LLP
MetroPark, New Jersey
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
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<NAME> 800-JR CIGAR, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,759
<SECURITIES> 5,719
<RECEIVABLES> 2,568
<ALLOWANCES> 145
<INVENTORY> 49,056
<CURRENT-ASSETS> 76,682
<PP&E> 27,614
<DEPRECIATION> 5,845
<TOTAL-ASSETS> 104,672
<CURRENT-LIABILITIES> 26,035
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 73,542
<TOTAL-LIABILITY-AND-EQUITY> 104,672
<SALES> 286,512
<TOTAL-REVENUES> 286,512
<CGS> 233,717
<TOTAL-COSTS> 233,717
<OTHER-EXPENSES> 30,344
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,295
<INCOME-PRETAX> 22,928
<INCOME-TAX> 9,194
<INCOME-CONTINUING> 13,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 13,734
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