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, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 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. |_|
(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 20, 2000 was $24,308,953 based on 2,627,995 such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $9.25 as reported by the Nasdaq National Market.
The number of shares of Common Stock of the registrant outstanding at
March 20, 2000 was 11,927,995.
DOCUMENTS INCORPORATED BY REFERENCE
Notice and Proxy Statement for the 2000 Annual Meeting of
Shareholders to be held May 16, 2000.
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..................................................14
Item 3. Legal Proceedings...........................................14
Item 4. Submission of Matters to a Vote of Security Holders.........15
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...23
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 52 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., J R Cigar (DC), Inc., J.R. Tobacco of Burlington,
Inc., Casa Blanca, Inc. and JR Cigar.Com, 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 26 years, the Company has maintained an
extensive proprietary mail order list of regular customers. The Company's
average order size is approximately $99.00 Management utilizes its mail order
catalogs as its primary advertising vehicle. Each glossy, color catalog is
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replete with humorous asides and anecdotes written by Lew Rothman, the Company's
President and Chief Executive Officer, who views the retail catalog as a means
of personally communicating with the Company's established customer base. The
Company catalog frequently highlights the Company's proprietary cigars and
changes its product offerings and featured specials with each issue. On average,
each catalog offers 20 different brands of cigars from six different countries;
however, by dialing 1-800-JR-CIGAR, a customer can order any cigar or tobacco
accessory currently carried by the Company. In the event that the Company does
not have a particular product in stock, a customer may place an order to ship on
arrival, or knowledgeable telemarketers may direct the customer to similar
products by utilizing the Company's sophisticated database. The Company has
increased the frequency and circulation of its mail order catalog and updated
its website as an additional means of advertising. Retail mail order sales
decreased 9.4% to $56.3 million in 1999, accounting for 17.8% of net sales,
compared to $62.1 million in 1998, representing 21.7% of net sales.
Cigar Stores. The Company currently maintains six specialty cigar stores. The
Company's strategy is to: (i) locate its stores in densely populated, highly
trafficked areas where demand for premium cigars is high; (ii) maintain
exceptional inventories of premium cigars; and (iii) maintain fully humidified
and climate-controlled stores to ensure freshness. In December 1999, the Company
relocated one of its New York stores to Fifth Avenue from 45th Street. Sales
generated by the Company's cigar stores increased 27.3% to $32.6 million in 1999
accounting for 10.3% of the Company's net sales, compared to $25.6 million in
1998, accounting for 9.0% 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 were $67.9 million in 1999, accounting
for 21.4% of net sales, which was consistent with 1998 sales of $68.0 million,
representing 23.7% of net sales.
Internet. In April 1999, the Company commenced internet sales. For 1999 the
Company's internet sales were $3.7 million or 1.2% of net sales.
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
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
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shopping;" and (iv) competitive prices. Sales generated by the Company's
wholesale division grew 19.7% to $156.5 million in 1999, accounting for
approximately 49.3% of net sales, compared to $130.8 million in 1998, accounting
for 45.6% 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 1.1% to $57.5 million in 1999, accounting for 18.1% of net sales,
compared to $56.9 million in 1998, accounting for 19.8% 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 34.0% to
$99.0 million in 1999, accounting for 31.2% of net sales, compared to $73.9
million in 1998, accounting for 25.8% of net sales.
Products
Cigars and Other Tobacco Products
Sales of premium and mass market cigars and other tobacco products decreased
2.1% to $149.9 million for the year ended December 31, 1999, accounting for
47.3% of net sales, compared to $153.1 million for the year ended December 31,
1998, representing 53.4% 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 75% off of manufacturers' suggested retail prices.
The Company believes that its proprietary product offerings are unmatched in the
marketplace for superior quality at affordable prices. The Company's premium
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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 $15.00 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 exclusively the El Rey del Mundo(R),
Belinda(R) and Bolivar(R) as well as Romeo Y Julieta brand names. 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, Santa Clara, Romeo Y Julieta and Cuba Aliados.
The following premium cigars are either trademarks or pending trademarks of the
Company or brands exclusively licensed to or distributed by the Company:
Honduras: Belinda, Chivis, Consuegra, Honduran Specials, J.R Alternatives, J.R
Ultimate, La Rosa Especiales, Lew's Smokers, Maria Mancini, Mocha, Mocha
Supreme, Rey del Mundo, Tena Y Vega, Vintage Hondurans, Plasencia, LaEscepcion,
Cuba Aliados.
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, Flamenco, Bock y Cia.
Nicaragua: Jose Marti, La Finca, Rosa Cuba, Villar y Villar, Remedios, Flor de
Farach, Mayorga.
Mexico: Mocambo, Santa Clara, Shane.
Jamaica: J.R Alternatives, Whitehall, Temple Hall, Alvarez Lopez, La Corona.
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
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,
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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 six new premium cigar brands during 2000: H.
Upmann, Connoisseur Cabinet, Montecristo Connoisseur Cabinet and Meadly Y
Garcia, which will be produced in the Dominican Republic, and Placencia and
LaEscepcion, 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. Overall cigarette
sales grew 26.3% to $137.1 million in 1999, accounting for 43.2% of net sales
compared to $108.6 million in 1998.
Fragrances and Other Merchandise.
The Company believes that diversification in its product mix encourages
increased retail sales. The Company purchases a wide variety of designer
fragrances and specialty goods from distributors for resale exclusively in its
discount outlet stores and, to a lesser extent, other Company retail stores.
Such specialty goods include, among other things, books, collectibles, gift
items, toys, household items, jewelry, jeans and other clothing items. The
Company offers all such products at significantly reduced prices, with
fragrances frequently sold at prices ranging from 20% to 75% off the suggested
retail price. The Company believes that diversification in its product mix
encourages customers to purchase more than one type of item and contributes to
increased sales. Although the majority of such products are sold from the
Company's three 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 21.0% to $30.0 million in 1999, accounting for 9.5% of net sales, compared
to $24.8 million in 1998, accounting for 8.7% of net sales.
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Sources of Supply
The Company believes that the quality and strength of its business relationships
with the world's leading manufacturers developed over a 26-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 enable 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
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of mouth to achieve steadily increasing sales during years of industry decline
as well as industry prosperity, and believes that 25% of the nation's premium
cigar smoking public represents its customer base. The Company's Chief Executive
Officer, Lew Rothman, is a well-known figure in the world of cigars and the
Company's products are widely reputed to be of high quality at affordable
prices. As such, the Company is frequently featured in articles printed by such
publications as Cigar Aficionado, Smoke and the Tobacconist and numerous
newspapers. Consequently, the Company has not been required to maintain a sales
force (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 1999, the Company issued eight catalogs and
plans to distribute six during 2000.
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 90% 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
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),
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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 Villar(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),
Jeroboam(R) and Habana 2000 and trademark applications are pending for the
RectangulareTM and 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, 1999, the Company had 1,059 employees, of whom 418 were
engaged in sales, 37 in finance and administration, 232 in operations and 372 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, 1999, various administrative and other services have been
performed for the Company by MC Management who had 121 employees, including 85
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
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
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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. On March 21, 2000 the U.S. Supreme Court ruled that the FDA
lacks the power to regulate tobacco products.
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.
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
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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. However in February 1999, a jury in California,
awarding the plaintiffs a total of $51,500,000 in compensatory and punitive
damages.
Current tobacco litigation generally falls within one of three categories: class
actions, individual actions (which have been filed mainly in the State of
Florida) or actions brought by individual states generally to recover Medicaid
costs allegedly attributable to tobacco-related illnesses. The pending actions
allege a broad range of injuries resulting from the use of tobacco products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases, punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.
<PAGE>
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.
The federal government has sued the tobacco industry seeking reimbursement for
billions of dollars spent by government held programs to treat smoking-related
illnesses. This 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.
Excise Taxes. Cigars long have been subject to federal, state and local excise
taxes, and such taxes frequently have been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 18.06% of the manufacturer's selling price, capped at $42.50
per thousand cigars.
Based on scheduled increases to the federal excise tax on cigarettes, which
result in proportionate tax increases to the federal excise tax on all other
tobacco products, the tax on large cigars is scheduled to be raised to 20.71%
and capped at $48.75 per thousand large cigars on January 1, 2002.
The Clinton administration recently proposed additional increases in the federal
excise tax on cigarettes which, if enacted as proposed, would proportionately
increase the tax on large cigars by approximately an additional 64.1% over the
already scheduled increases. In addition, the administration has proposed
accelerating the effective date of the scheduled January 1, 2002 increase to
become effective October 1, 2000. The Company believes that the enactment of
significantly increased excise taxes could have a material adverse effect on the
business of the Company. The Company is unable to predict the likelihood of the
passage or the enactment of future increases in tobacco excise taxes as they
relate to cigars.
<PAGE>
Tobacco products also are subject to certain state and local taxes. As evidenced
by the passage of the Proposition 10 referendum in California, an act used to
fund early childhood development programs, children's health and development
concerns at the state level exert pressure to increase tobacco taxes.
Proposition 10, which became effective on January 1, 1999, raised the tax on
cigars in California from 26.17% of the manufacturer's selling price to 61.53%.
The number of states that impose excise taxes on cigars is currently 44. Of the
states without tobacco taxes, a proposal to add such taxes is pending in West
Virginia. State cigar excise taxes are not subject to caps similar to the
federal excise tax. From time to time, the imposition of state and local taxes
has had some impact on sales regionally. The enactment of new state excise taxes
and the increase in existing state excise taxes are likely to have an adverse
effect on regional sales as cigar consumption generally declines.
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.
The Company owns a 70,000 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 144,000 square foot facility in Burlington, North Carolina
of which 42,000 square feet are used as a discount outlet store and 102,000
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
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
1050 Connecticut Avenue, Washington, DC 1,510 July 12, 2009
562 Fifth Avenue, New York, NY 5,076 March, 31, 2011
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 effect on the
Company.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders, through the solicitation of
proxies or otherwise.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Since June 26, 1997, the Company's Common Stock has been quoted on the Nasdaq
National Market under the symbol "JRJR." The following table sets forth the high
and low sales price of the Common Stock on the Nasdaq National Market for the
period commencing with the listing of the Common Stock on the Nasdaq National
Market through December 31, 1999.
1998 1999
Quarter High Low High Low
First $29.25 $19.25 $23.25 $7.25
Second $24.25 $17.75 $12.81 $7.44
Third $22.75 $10.25 $12.75 $9.25
Fourth $23.25 $9.44 $10.63 $7.56
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,
2000 was 1,665.
<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,
1995 1996 1997 1998 1999
(dollars in thousands, except per share amounts)
Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 152,695 $ 191,982 $ 240,348 $ 286,512 $ 317,001
Cost of goods sold 130,645 158,007 190,886 233,717 261,706
Gross profit 22,050 33,975 49,462 52,795 55,295
Selling, general, and administrative
expenses 18,768 20,954 24,715 28,767 33,574
Income from operations 2,789 12,347 23,842 22,451 19,566
Interest (expense) income net (627) (582) 14 (239) 127
Other income (expenses) 150 560 260 716 169
Income before income taxes 2,312 12,325 24,116 22,928 19,862
Provision (benefit) for income taxes (74) 144 4,781 9,194 7,981
Net income $ 2,386 $ 12,181 $ 19,335 $ 13,734 $ 11,881
Earnings per share - basic - - - 1.08 0.96
Earnings per share - diluted - - - 1.08 0.96
Weighted average shares outstanding -
basic - - - 12,719 12,333
Weighted average shares outstanding -
diluted - - - 12,771 12,333
Pro forma earnings per share -
basic (1) - $ 0.73 $ 1.30 - -
Pro forma earnings per share -
diluted (1) - $ 0.73 $ 1.29 - -
Pro forma common shares
outstanding - basic (1) - 9,812 11,281 - -
Pro forma common shares
outstanding - diluted (1) - 9,812 11,374 - -
Balance Sheet Data:
Working capital $ 8,914 $ 18,522 $ 55,213 $ 50,647 $ 42,573
Total assets 32,670 42,682 91,262 104,672 101,501
Total long-term debt, including
current portion 7,129 8,279 20,833 12,900 4,967
Total Stockholders' equity 12,090 23,476 61,176 73,670 79,306
</TABLE>
(1) See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.
<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 29-year history in the cigar industry, the
Company has established itself as an important participant in the movement of
tobacco products from manufacturers to the customers. Manufacturers value the
Company's ability to perform distribution, credit, customer support and
marketing functions, which would otherwise be the responsibility of the
manufacturer. Customers value the Company's extensive variety of tobacco
products and rapid order fulfillment and benefit from advantageous pricing
derived through the Company's volume buying as a direct importer and
distributor. The Company's net sales have grown from $240.3 million in the year
ended December 31, 1997 to $286.5 million and $317.0 million, in the years ended
December 31, 1998 and December 31, 1999, 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, three large discount outlet stores and the internet, and
wholesale consisting of the wholesale cigar mail order business and wholesale
cash and carry cigarette stores 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,
1997 1998 1999
$ % $ % $ %
($ in millions)
Retail operations:
<S> <C> <C> <C> <C> <C> <C>
Direct mail cigars.........$52.9 22.0 % $62.1 21.7 % $56.3 17.8 %
Cigar stores............... 23.0 9.6 25.6 9.0 32.6 10.3
Discount outlet stores..... 63.6 26.5 68.0 23.7 67.9 21.4
Internet................... - - - - 3.7 1.2
Total retail sales....... 139.5 58.1 155.7 54.4 160.5 50.7
Wholesale operations:
Direct mail cigars......... 46.0 19.1 56.9 19.8 57.5 18.1
Cash-and-carry cigarettes*.. 54.8 22.8 73.9 25.8 99.0 31.2
Total wholesale sales.....100.8 41.9 130.8 45.6 156.5 49.3
Total net sales.................$240.3 100.0 % $286.5 100.0 % $317.0 100.0 %
- --------------------
*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,
1997 1998 1999
$ % $ % $ %
($ in millions)
<S> <C> <C> <C> <C> <C> <C>
Cigars/Tobacco*..........$135.2 56.3 % $153.1 53.4 % $149.9 47.3 %
Cigarettes............... 83.3 34.6 108.6 37.9 137.1 43.2
Fragrances............... 7.5 3.1 7.6 2.7 8.0 2.5
Other merchandise........ 14.3 6.0 17.2 6.0 22.0 7.0
Total net sales.....$240.3 100.0 % $286.5 100.0 % $317.0 100.0 %
- --------------------
* 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,
1997 1998 1999
Revenues:
<S> <C> <C> <C>
Retail sales...................... 58.1 % 54.4 % 50.7 %
Wholesale sales................... 41.9 45.6 49.3
Net Sales......................... 100.0 100.0 100.0
Cost of goods sold..................... 79.0 81.6 82.6
Gross profit........................... 20.6 18.4 17.4
Selling, general and
administrative expenses........... 10.3 10.0 10.6
Depreciation and amortization.......... 0.4 0.6 0.6
Income from operations................. 9.9 7.8 6.2
Other income (expense):
Interest (expense), net........... (0.5) 0.1 0.1
Other............................. 0.6 0.3 0.0
Income before income taxes............. 10.0 8.0 6.3
Provision for income taxes............. 2.0 3.2 2.5
Net income............................. 8.0 % 4.8 % 3.8 %
</TABLE>
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Net sales were $317.0 million and $286.5 million for 1999 and 1998,
respectively, an increase of $30.5 million or 10.6%. Retail sales increased 3.1%
to $160.5 million for 1999 from $155.7 for 1998. The increase in retail sales
was due primarily to a $7.0 million or 27.3% increase in retail cigar stores
sales from 1998 and $3.7 million of internet sales which did not exist in the
prior year. These increases were partially offset by a 9.4% decrease in mail
order sales. Wholesale sales increased 19.7% to $156.5 million for 1999 from
$130.8 million in 1998. The increase in wholesale sales was due primarily to a
$25.1 million, or 34.0% increase in cash-and-carry cigarette sales.
Gross profit was $55.3 million and $52.8 million for 1999 and 1998,
respectively, an increase of $2.5 million or 4.7%. The increase in gross profit
was due to the increase in sales volume. As a percentage of net sales, gross
profit decreased to 17.4% for 1999 from 18.4% for 1998, primarily due to greater
sales of lower margin cigarettes and an unanticipated slackening in the demand
for premium cigars.
Selling, general and administrative ("SG&A") expenses were $33.6 million and
$28.8 million for 1999 and 1998, respectively, an increase of $4.8 million or
16.7%. The increase in SG&A expense was related to increased staffing and other
costs associated with the new discount outlet store and warehouse in Burlington,
North Carolina, which commenced operations in the fourth quarter of 1998 and the
expansion of two discount outlet stores in North Carolina. As a percentage of
net sales, SG&A expenses increased to 10.6% for 1999 from 10.0% for 1998.
<PAGE>
Depreciation expense was $2.2 million and $1.6 million for 1999 and 1998,
respectively, an increase of $0.6 million primarily due to the opening of three
new stores, Wall Street, New York in May 1998, Burlington, North Carolina in
October 1998 and the opening of our new Fifth Avenue store in New York in
December 1999, plus the remodeling of our Statesville and Selma locations in
1999
Income from operations was $19.6 million and $22.5 million for 1999 and 1998,
respectively, a decrease of $2.9 million or 12.9%. As a percentage of net sales,
income from operations decreased to 6.2% for 1999 from 7.8% for 1998, primarily
due to a reduction in gross margins and higher S,G&A costs.
Interest expense was $0.8 million and $1.3 million for 1999 and 1998,
respectively. The decrease in interest expense was due to a reduction in the
distribution note payable to stockholders. Other income, primarily interest, was
$1.1 million and $1.8 million for 1999 and 1998, respectively. The decrease in
other income was primarily due to a reduction in gains from sales of marketable
securities.
Income before income taxes was $19.9 million and $22.9 million for 1999 and
1998, respectively, a decrease of $3.0 million or 13.3%. The provision for
income taxes in 1999 was $8.0 million, as compared to $9.2 million in 1998.
As a result of the foregoing, the Company had net income of $11.9 million in
1999, compared to $13.7 million in 1998, a decrease of 13.1% or $1.8 million.
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.
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 $22.4 million
<PAGE>
for 1999 principally representing net income for the year ended December 31,
1999 and a decrease in inventory of $9.0 million offset by an increase of
accounts payable and accrued expenses of $0.9 million. Net cash used in
investing activities during such period was $11.9 million primarily representing
an increase of property and equipment of $18.8 million. Net cash used in
financing activities was $14.2 million for 1999, representing a reduction in the
distribution notes outstanding by $7.9 million and the purchase of treasury
stock in the amount of $6.3 million.
Net proceeds of approximately $53.3 million from the Company's initial public
offering were used for the following purposes through December 31, 1999: (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, (viii) $14.9 million for working capital and
general corporate purposes and (ix) $0.8 million to expand retail selling space
at existing discount outlet stores.
As of December 31, 1999, the Company had working capital of $42.6 million
compared to $50.6 million at December 31, 1998. Working capital as of December
31, 1999 is comprised primarily of cash and cash equivalents of $9.1 million,
short-term marketable securities of $6.6 million, accounts receivable of $4.4
million, $40.0 million of inventory and $4.6 million of prepaid and other
current assets offset by $17.2 million of accounts payable and accrued expenses
and $5.0 million of the current portion of the distribution notes.
The Company has available a short term, unsecured line of credit in the amount
of $20.0 million through May 31, 2000 with interest at either the bank's base
rate minus 50 basis points or an increment over LIBOR, at the Company's option.
There were no amounts outstanding under the Company's line of credit as of
December 31, 1999. The Company anticipates renewing this line of credit
agreement in May 2000.
At December 31, 1999 the Company had outstanding Distribution Notes in the
amount of $4.0 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.
The repurchase of up to $10.0 million of the Company's common stock was approved
by the Board of Directors subject to market conditions. For the year ended
<PAGE>
December 31, 1999, the Company repurchased 668,500 shares of its outstanding
common shares at an average price of $9.41 raising the total shares repurchased
to 783,000 at an average cost of $9.66 as of December 31, 1999.
Capital expenditures, primarily for computers, discount outlet store, office
furniture, and leasehold improvements were $8.8 million and $10.7 million in
1999 and 1998, respectively. Included in capital expenditures were the purchase,
improvement and furnishing of the Burlington, North Carolina facility in 1998
and the improvements and furnishings at our Selma and Statesville, North
Carolina locations plus the opening of our new Fifth Avenue, New York store in
New York City in 1999.
The Company anticipates that it will be able to satisfy its ongoing cash
requirements for the foreseeable future, primarily with cash flows from
operations, and cash and short-term marketable securities, supplemented as
necessary by borrowings under its existing line of credit.
Year 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. During 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues, either with its
products, its internal systems, or the products and services of third parties.
The Company will continue to monitor its mission critical computer applications
and those of its suppliers and vendors throughout the Year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 ("Statement 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. The Company will be required to adopt Statement 133, as amended by
Statement No. 137, which defers the effective date, as of January 1, 2001. 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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company invests its available cash in U.S. Treasury Obligations, Corporate
<PAGE>
Bonds and commercial paper. Although the rate of interest paid on U.S. Treasury
Obligations, Corporate Bonds 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 marketable securities is
not material.
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-25 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 1999 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A (the "Company's 1999 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 1999 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information called for by this Item 12 is incorporated by reference to the
information set forth under the headings "Security Ownership of Certain
Beneficial Owners" and "Security Ownership of Management" in the Company's 1999
Proxy Statement.
<PAGE>
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 1999 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>
F-1
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, 1998 and 1999.................F-3
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999..........................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998 and 1999..........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999..........................................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.
<PAGE>
F-2
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, 1998 and 1999 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, 1997. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999, 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,
1997 in conformity with accounting principles generally accepted in the United
States. 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 2, 2000
<PAGE>
F-3
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share and per share amounts)
December 31
1998 1999
------------------------------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 12,759 $ 9,107
Marketable securities - current 5,719 6,568
Accounts receivable, net of allowance for doubtful accounts of $145 and $87
at December 31, 1998 and 1999, respectively 2,568 4,436
Merchandise inventory 49,056 40,043
Prepaid expenses and other current assets 4,712 3,757
Loans receivable - affiliates and other associated entities 685 806
Deferred tax assets 1,183 51
------------------------------------
Total current assets 76,682 64,768
Property, equipment and improvements, at cost, net of
accumulated depreciation and amortization 27,614 34,241
Other assets 376 379
Marketable securities - non-current - 2,113
------------------------------------
Total assets $104,672 $101,501
====================================
Liabilities and stockholders' equity Current liabilities:
Current portion of distribution notes payable to stockholders $ 7,933 $ 4,967
Accounts payable 16,238 13,919
Accrued expenses 1,864 3,309
------------------------------------
Total current liabilities 26,035 22,195
Distribution notes payable to stockholders, less current portion 4,967 -
------------------------------------
Total liabilities 31,002 22,195
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, 12,752,000 and
12,756,000 issued at December 31, 1998 and 1999, respectively, 12,637,500
and 11,973,000 outstanding at December 31, 1998 and 1999, respectively 128 128
Additional paid-in capital 52,751 52,795
Retained earnings 22,066 33,947
------------------------------------
74,945 86,870
Less 114,500 and 783,000 shares of treasury stock, at cost, at December 31, (1,275) (7,564)
1998 and 1999, respectively
------------------------------------
Total stockholders' equity 73,670 79,306
------------------------------------
Total liabilities and stockholders' equity $104,672 $101,501
====================================
See accompanying notes.
</TABLE>
<PAGE>
F-4
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
Year ended December 31
1997 1998 1999
------------------------------------------------------
<S> <C> <C> <C>
Net sales $240,348 $286,512 $317,001
Cost of goods sold 190,886 233,717 261,706
------------------------------------------------------
Gross profit 49,462 52,795 55,295
Operating expenses:
Selling 5,192 6,271 7,187
General and administrative 19,523 22,496 26,387
Depreciation and amortization 905 1,577 2,155
------------------------------------------------------
Income from operations 23,842 22,451 19,566
Other income (expense):
Interest expense (1,269) (1,295) (771)
Interest income 1,283 1,056 898
Rental income 202 166 161
Other, net 58 550 8
------------------------------------------------------
Income before income taxes 24,116 22,928 19,862
Provision for income taxes 4,781 9,194 7,981
------------------------------------------------------
Net income $ 19,335 $ 13,734 $ 11,881
======================================================
Per share data:
Earnings per share - basic $ 1.08 $ 0.96
===================
===================
Earnings per share - diluted $ 1.08 $ 0.96
===================
===================
Weighted-average shares outstanding - basic 12,719 12,333
===================
===================
Weighted-average shares outstanding - diluted 12,771 12,333
===================
Pro forma - unaudited
Historical income before provision for income taxes $ 24,116
Pro forma adjustments other than income taxes 977
-------------------
Pro forma income before income taxes 25,093
Pro forma provision for income taxes 10,255
-------------------
-------------------
Pro forma net income $ 14,838
===================
Pro forma earnings per share - basic $ 1.30
===================
===================
Pro forma earnings per share - diluted $ 1.29
===================
Pro forma common shares outstanding - basic 11,281
===================
===================
Pro forma common shares outstanding - diluted 11,374
===================
See accompanying notes.
</TABLE>
<PAGE>
F-5
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
Common
Stock of Additional
Predecessor Common Stock Paid-in Retained Treasury
----------------------
Entities Shares Amount Capital Earnings Stock Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 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
Net income 11,881 11,881
Issuance of common stock 4,000 44 44
Purchase of treasury stock (6,289) (6,289)
------------------------------------------------------------------------------------
Balance at December 31, 1999 $ - 12,756,000 $128 $52,795 $ 33,947 $(7,564) $ 79,306
====================================================================================
See accompanying notes.
</TABLE>
<PAGE>
F-6
<TABLE>
<CAPTION>
800-JR CIGAR, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended December 31
1997 1998 1999
----------------------------------
Cash flows from operating activities
<S> <C> <C> <C>
Net income $19,335 $ 13,734 $ 11,881
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 905 1,577 2,155
Provision for uncollectible accounts 55 209 70
Deferred income taxes (1,073) (85) 1,132
Gain on sale of marketable securities - (399) -
Loss on sale of fixed assets - - 49
Changes in operating assets and liabilities:
Accounts receivable (665) (464) (1,938)
Merchandise inventory (15,163) (14,277) 9,013
Prepaid expenses and other current assets (1,455) (2,557) 955
Other assets (78) (133) (3)
Accounts payable and accrued expenses (1,585) 8,849 (874)
----------------------------------
Net cash provided by operating activities 276 6,454 22,440
Cash flows from investing activities
Purchase of marketable securities (14,981) (25,158) (10,417)
Proceeds from maturity and sale of marketable securities - 34,819 7,455
Purchase of property and equipment (8,547) (10,673) (8,831)
Loans (extended to) repaid by affiliates and other associated entities 467 (82) (121)
Loans extended to stockholders (445) - -
----------------------------------
Net cash used in investing activities (23,506) (1,094) (11,914)
Cash flows from financing activities
Proceeds from issuance of Common Stock 54,545 35 44
Expenses paid in connection with Common Stock offering (1,275) - -
Payments of distribution notes (3,967) (7,933) (7,933)
Payments of long-term debt (8,279) - -
Payments of capital lease obligations (89) - -
Purchase of treasury stock - (1,275) (6,289)
Distribution to stockholders (7,189) - -
----------------------------------
Net cash provided by (used in) financing activities 33,746 (9,173) (14,178)
----------------------------------
Net increase (decrease) in cash and cash equivalents 10,516 (3,813) (3,652)
Cash and cash equivalents, beginning of year 6,056 16,572 12,759
------------
-----------------------
Cash and cash equivalents, end of year $ 16,572 $ 12,759 $ 9,107
==================================
Supplemental disclosure of cash flow data
Income taxes paid $ 6,053 $ 11,021 $ 4,919
=======================
==================================
Interest paid $ 1,177 $ 1,180 $ 730
==================================
Supplemental disclosure of noncash investing and financing activities
Non-cash distribution to stockholders 2,916 - -
Distribution notes issued to stockholders 24,800 - -
See accompanying notes.
</TABLE>
<PAGE>
F-7
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
December 31, 1999
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. The 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, 1999, (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),
(viii) $14,900 for working capital and general corporate purposes, and (ix) $770
for the expansion of existing outlet stores.
Basis of Presentation
800-JR CIGAR was incorporated in Delaware in March 1997. Concurrent with the
completion of 800-JR CIGAR's Offering, the former principals of the predecessor
group of companies contributed to 800-JR CIGAR all of the outstanding stock in
the entities listed below that comprise the predecessor group of companies, in
exchange for 9,300,000 shares of common stock of 800-JR CIGAR (the
"Reorganization").
<PAGE>
F-8
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 combined results of operations
for the period from January 1, 1997 to June 26, 1997 of J.R. Tobacco of America,
Inc., J.N.R. Grocery Corp., J&R Tobacco (New Jersey) Corp., J.R. Tobacco Company
of Michigan, Inc., cigars by Santa Clara, N.A., Inc., J.R. Tobacco Outlet, Inc.,
J.R.-46th Street, Inc., J.R. Tobacco NC, Inc., 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.
<PAGE>
F-9
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.
Selected statement of income data for the year ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
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 period ended December 31, 1997
reflects the Reorganization, the Offering and the following adjustments as if
they had occurred on January 1: a) a decrease in aggregate compensation 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 $798 for 1997
assuming the issuance of the Distribution Notes; c) a reduction in interest
expense of $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 $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 $5,474 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.
<PAGE>
F-10
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)
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.
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).
<PAGE>
F-11
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
1. Basis of Presentation (continued)
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.
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.
Marketable Securities
Marketable securities consist of U.S. Treasury obligations, corporate bonds and
commercial paper which have various maturity dates. All marketable securities
have been designated by the Company as held-to-maturity. Accordingly, such
securities are carried at amortized cost. At December 31, 1999, the carrying
value of such held-to-maturity marketable securities approximated their fair
value. The contractual maturities of marketable securities, regardless of their
balance sheet classification, follows:
Cost
------------------
Due within one year $6,568
Due after one year through five years 675
Due after five years through 10 years 120
Due after 10 years 1,318
------------------
$8,681
==================
<PAGE>
F-12
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)
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, marketable securities, and trade accounts receivable. The Company
places its temporary cash investments and marketable securities in government
obligations, corporate bonds 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 $1,605, $2,114 and $2,902 for the
years ended December 31, 1997, 1998 and 1999, respectively.
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.
<PAGE>
F-13
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)
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
have been presented and, where appropriate, restated to conform to the Statement
128 requirements.
Recently Issued Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133 ("Statement 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. The Company will be required to adopt Statement 133, as amended by
Statement No. 137, which defers the effective date, as of January 1, 2001. 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>
F-14
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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.
4. Property, Equipment and Improvements
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Land $ 2,548 $ 2,453
Building and improvements 19,164 23,746
Machinery and equipment 4,005 5,105
Furniture and fixtures 2,534 2,897
Leasehold improvements 5,020 7,721
Automobiles 188 303
--------------------------------
33,459 42,225
Less accumulated depreciation and amortization 5,845 7,984
--------------------------------
$27,614 $34,241
================================
</TABLE>
5. Long-Term Debt and Line of Credit
Long-term debt is comprised as follows:
<TABLE>
<CAPTION>
December 31
1998 1999
--------------------------------
<S> <C> <C>
Distribution Notes payable to stockholders,
due in quarterly installments, with
interest at 7.0% through June 1, 2000 $11,900 $3,967
Additional Distribution Notes payable to
stockholders, due June 1, 2000, with
interest at 7.0% 1,000 1,000
-------------------------------
12,900 4,967
Less current portion 7,933 4,967
-------------------------------
Long-term debt $ 4,967 $ -
===============================
</TABLE>
<PAGE>
F-15
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)
During 1999, the Company entered into a $20,000 line of credit with a bank,
which expires on May 31, 2000. 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 or 1999.
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.
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 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:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
------------------------------------------------------
Current income taxes:
<S> <C> <C> <C>
Federal taxes $ 4,186 $7,427 $5,342
State and local taxes 1,668 1,852 1,507
Deferred income taxes (1,073) (85) 1,132
------------------------------------------------------
$ 4,781 $9,194 $7,981
======================================================
</TABLE>
<PAGE>
F-16
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, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Year ended December 31
1998 1999
-----------------------------------
Deferred tax assets:
<S> <C> <C>
Allowance for doubtful accounts $ 59 $ 34
Inventory capitalization and reserves 520 466
Amortization of signing bonuses 389 230
Other book accruals 453 206
-----------------------------------
Total deferred tax assets 1,421 936
Deferred tax liability:
Tax over book depreciation 238 885
-----------------------------------
Net deferred tax assets $1,183 $ 51
====================================
</TABLE>
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 year ended December 31, 1997. The pro
forma income tax provision has been prepared according to SFAS No. 109.
The pro forma income tax provision for the year ended December 31, 1997 consists
of the following (in thousands):
Current income taxes:
Federal taxes $ 8,624
State and local taxes 2,658
------------------
11,282
Deferred income tax benefit (1,027)
------------------
$10,255
==================
A reconciliation setting forth the differences between the actual effective tax
rate for the years ended December 31, 1998 and 1999 and the pro forma effective
tax rates for the
<PAGE>
F-17
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
6. Income Taxes (continued)
years ended December 31, 1997 of the Company, and the U.S. federal statutory tax
rate for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------------------------
<S> <C> <C> <C>
Federal statutory rate 34.4% 35.0% 35.0%
State and local taxes, net of federal
tax benefits 6.5 5.1 5.2
----------------------------------
Effective tax rate 40.9% 40.1% 40.2%
==================================
</TABLE>
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 and $360 to the plan in 1998 and 1999, respectively.
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 and 1999, 2,146
and 3,166 shares, respectively, were issued under the plan and remain
outstanding at December 31, 1999.
<PAGE>
F-18
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,
<PAGE>
F-19
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)
nonforfeitable shares or nonforfeitable credits representing "deferred shares"
settleable at future dates, as elected by the director.
A summary of stock option activity relating to the Company's stock options are
as follows:
<TABLE>
<CAPTION>
Long-Term Non-Employee
Incentive Plan Directors Plan
------------------------------------------------
Weighted- Weighted-
Average Number Average Number
Exercise Price of Exercise Price of
Shares Shares
------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 $ - - $ - -
Granted 17.00 450,000 17.00 20,000
Exercised - - 25.38 10,000
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 January 1, 1999 17.00 401,000 19.79 30,000
Granted - - - -
Exercised - - - -
Canceled 17.00 (12,500) 17.00 (10,000)
------------------------------------------------
Outstanding at December 31, 1999 $17.00 388,500 $21.19 20,000
================================================
Options exercisable at
December 31, 1999 $17.00 259,000 $21.19 8,000
================================================
</TABLE>
There were no options exercisable at December 31, 1997.
On January 4, 2000, the Board approved a change in the exercise price from the
original price to the quoted market price at the close of business on January 4,
2000 ($8.75 per share) for options outstanding at that date under the Incentive
Plan and the Directors' Plan.
<PAGE>
F-20
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)
Stock options outstanding at December 31, 1999 are summarized as follows:
Weighted-Average
Outstanding Remaining
Options at Contractual Life
December
Range of Exercise Price 31, 1999
- ----------------------------------------------------------------------------
$17.00 per share 398,500 8 years
$25.38 per share 10,000 8 years
------------------
$17.00 to $25.38 per share 408,500
==================
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 1998 and 1999 would have
been approximately $1,037 and $929, 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, 1998 and 1999, is as
follows:
<TABLE>
<CAPTION>
1998 1999
-----------------------
<S> <C> <C>
Pro forma net income $12,697 $10,952
Pro form net income per share of common stock - basic $1.00 .89
Pro forma net income per share of common stock - diluted $.99 .89
</TABLE>
<PAGE>
F-21
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
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 $169 in 1997.
During 1998 and 1999, the Company purchased cigars from affiliated companies
aggregating approximately $8.2 million and $4.5 million, respectively. The
affiliated entities are partially owned by an officer/director and by another
director of the Company.
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 1997, 1998 and 1999
amounted to $4,132, $4,525 and $5,001, respectively. In addition, the management
company paid rent to the Company in the amount of $146 in 1997, 1998 and 1999.
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.
<PAGE>
F-22
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
9. Commitments and Contingencies (continued)
Future minimum lease payments for operating leases as of December 31, 1999 are
as follows:
Operating
Leases
-------------------
2000 $1,302
2001 1,323
2002 1,323
2003 1,339
2004 1,278
Thereafter 4,667
-------------------
Total minimum lease payments $11,232
===================
Rental expense under operating leases amounted to $922, $1,024 and $1,134 in
1997, 1998 and 1999, 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 $642, $1,078 and $1,255 in
1997, 1998 and 1999, respectively.
<PAGE>
F-23
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
10. Computation of Basic and Diluted Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share for 1999:
<TABLE>
<CAPTION>
1998 1999
---------------------------------
Numerator:
<S> <C> <C>
Net income $13,734 $11,881
================================
Denominator:
Denominator for basic earnings per share -
weighted-average shares 12,719 12,333
Effect of dilutive securities - stock options 52 -
-------------------------------
Denominator for diluted earnings per share - adjusted
weighted-average shares and assumed conversion
12,771 12,333
===============================
Basic earnings per share $1.08 $0.96
===============================
Diluted earnings per share $1.08 $0.96
===============================
</TABLE>
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.
<PAGE>
F-24
800-JR CIGAR, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Dollars in thousands, except per share amounts)
11. Segment Reporting (continued)
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.
<TABLE>
<CAPTION>
Year ended December 31
--------------------------------------------------------------------------
1997 1998 1999
--------------------------------------------------------------------------
Retail Wholesale Retail Wholesale Retail Wholesale
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $139,500 $100,848 $155,639 $130,873 $160,456 $156,545
Segment profit 9,331 16,002 10,539 12,938 5,258 16,264
Depreciation and amortization 445 410 1,062 351 1,560 422
Interest expense 579 690 651 644 353 375
Total assets 22,805 29,584 44,324 43,779 43,933 38,713
Capital expenditures 8,351 196 9,962 711 5,933 2,801
</TABLE>
The segment reporting detailed above reconciles to consolidated totals as
follows:
<TABLE>
<CAPTION>
Year ended December 31
1997 1998 1999
------------------------------------------------------
Profit and loss
<S> <C> <C> <C>
Total profit for reportable segments $25,333 $ 23,477 $ 21,522
Corporate segment (loss) (1,217) (549) (1,658)
------------------------------------------------------
Consolidated income before income taxes $24,116 $ 22,928 $ 19,864
======================================================
Assets
Total assets for reportable segments $52,389 $ 88,103 $ 82,646
Corporate segment assets 38,873 16,569 18,855
------------------------------------------------------
Consolidated assets $91,262 $104,672 $101,501
======================================================
Other significant items
Depreciation and amortization $ 855 $ 1,413 $ 1,982
Corporate segment depreciation and amortization 50 164 173
------------------------------------------------------
Consolidated depreciation and amortization $ 905 $ 1,577 $ 2,155
======================================================
Interest expense $ 1,269 $ 1,295 $ 728
Corporate interest expense - - 43
------------------------------------------------------
Consolidated interest expense $ 1,269 $ 1,295 $ 771
======================================================
Capital expenditures $ 8,547 $ 10,673 $ 8,734
Corporate capital expenditures - - 97
------------------------------------------------------
Consolidated capital expenditures $ 8,547 $ 10,673 $ 8,831
======================================================
</TABLE>
<PAGE>
F-25
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
1999 and 1998:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------------------
March 31 June 30 September 30 December 31
---------------------------------------------------------------
1999
<S> <C> <C> <C> <C>
Net sales $72,821 $78,798 $79,871 $85,511
Gross profit 12,827 13,279 13,893 15,296
Net income 2,446 2,609 3,069 3,757
Per share data:
Earnings per share - basic .19 .21 .25 .31
Earnings per share - diluted .19 .21 .25 .31
Weighted-average number of
common shares outstanding - basic 12,600 12,402 12,291 12,043
Weighted-average number of common shares
outstanding - diluted 12,600 12,402 12,291 12,043
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
</TABLE>
<PAGE>
S-1
<TABLE>
<CAPTION>
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 Balance
Description Balance Expense Accounts (A)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Allowance for doubtful accounts $145 $ 70 $ - $128 $ 87
================================================================================
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
================================================================================
</TABLE>
(A) Represented write-offs of accounts, net of recoveries.
<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, 2000 By:__/s/ Lew Rothman___________________________
Lew Rothman, Chairman of the Board, President,
Chief Executive Officer
March 29, 2000 By:__/s/ Michael E. Colleton_______________________
Michael E. Colleton, Chief Financial Officer
March 29, 2000 By:__/s/ LaVonda Rothman________________________
LaVonda Rothman, Secretary and Director
March 29, 2000 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, 2000 By:__/s/ Maureen Colleton_________________________
Maureen Colleton, Director
March 29, 2000 By:__/s/ Bernie_Rosenblum_______________________
Bernie Rosenblum, Director
March 29, 2000 By:__/s/ John Oliva______________________________
John Oliva, Director
March 29, 2000 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 2, 2000, 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, 1999.
/S/ERNST & YOUNG LLP
MetroPark, New Jersey
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001035507
<NAME> 800-JR CIGAR, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 9,107
<SECURITIES> 6,568
<RECEIVABLES> 4,436
<ALLOWANCES> 87
<INVENTORY> 40,043
<CURRENT-ASSETS> 64,768
<PP&E> 42,225
<DEPRECIATION> 7,984
<TOTAL-ASSETS> 101,501
<CURRENT-LIABILITIES> 22,195
<BONDS> 0
0
0
<COMMON> 128
<OTHER-SE> 79,178
<TOTAL-LIABILITY-AND-EQUITY> 101,501
<SALES> 317,001
<TOTAL-REVENUES> 317,001
<CGS> 261,706
<TOTAL-COSTS> 35,729
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (771)
<INCOME-PRETAX> 19,862
<INCOME-TAX> 7,981
<INCOME-CONTINUING> 11,881
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,881
<EPS-BASIC> .96
<EPS-DILUTED> .96
</TABLE>
