<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1997
REGISTRATION NO. 333-_________
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOLT'S CIGAR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5993 51-0350003
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
REGISTRATION)
</TABLE>
12270 TOWNSEND ROAD
PHILADELPHIA, PENNSYLVANIA 19154
(215) 676-8778
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT G. LEVIN, PRESIDENT
HOLT'S CIGAR HOLDINGS, INC.
12270 TOWNSEND ROAD
PHILADELPHIA, PA 19154
(215) 676-8778
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
MATTHEW H. LUBART, ESQ. NEIL GOLD, ESQ.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL, LLP FULBRIGHT & JAWORSKI L.L.P.
(FORMED IN THE COMMONWEALTH OF PENNSYLVANIA) 666 FIFTH AVENUE
997 LENOX DRIVE, BUILDING THREE NEW YORK, NEW YORK 10103
LAWRENCEVILLE, NEW JERSEY 08648
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. /x/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
| | PROPOSED MAXIMUM | PROPOSED MAXIMUM |
TITLE OF EACH CLASS OF | AMOUNT TO | OFFERING PRICE | AGGREGATE | AMOUNT OF
SECURITIES TO BE REGISTERED | BE REGISTERED | PER SHARE(1) | OFFERING PRICE(2)| REGISTRATION FEE
Common Stock, $.001 par value (2)................. | 2,012,500 shares | $14.00 | $28,175,000 | $8,537.88
</TABLE>
(1) Estimated solely for the purpose of determining the registration fee.
(2) Includes 262,500 shares of Common Stock subject to sale upon the exercise of
an over-allotment option granted to the Underwriters.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION -- DATED SEPTEMBER 24, 1997
PROSPECTUS
- --------------------------------------------------------------------------------
1,750,000 Shares
[LOGO HERE] HOLT'S CIGAR HOLDINGS, INC.
Common Stock
- --------------------------------------------------------------------------------
All of the 1,750,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby are being sold by Holt's Cigar Holdings, Inc.
(the "Company"). Prior to the Offering (the "Offering"), there has been no
public market for the Common Stock. It is currently anticipated that the initial
public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
<PAGE>
Application has been made to include the Common Stock in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "HOLT."
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
- -------------------------------------------------------------------------------
Per Share..... $ $ $
- -------------------------------------------------------------------------------
Total(3)...... $ $ $
===============================================================================
(1) The Company and a shareholder of the Company (the "Selling Shareholder")
have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Principal and Selling Shareholders" and "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $550,000.
(3) The Selling Shareholder has granted the several Underwriters a 30-day
over-allotment option to purchase up to 262,500 additional shares of Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and the
total Proceeds to Selling Shareholder will be $ . See "Principal and
Selling Shareholders" and "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about November , 1997.
PRUDENTIAL SECURITIES INCORPORATED JANNEY MONTGOMERY SCOTT INC.
November , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[PICTURES TO COME]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and information under "Risk Factors." All
information in this Prospectus gives effect to the reorganization of the Company
(the "Reorganization"), pursuant to which the Company merged newly formed
wholly-owned subsidiaries with Ashton Distributors, Inc. and Holt's Cigar
Company, Inc. in exchange for shares of the Common Stock. See "Reorganization of
the Company" and Combined Financial Statements and notes thereto. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and all references in
this Prospectus to the "Company" mean Holt's Cigar Holdings, Inc. and its
subsidiaries. All references to a "Fiscal" year refer to the fiscal year ended
March 31 of such year.
THE COMPANY
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the three months ended June 30, 1997, the Company had net sales of $17.3
million and $6.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 92.0%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The cigar market is divided into three principal categories: premium
cigars, mass market cigars and little cigars. The Company's primary product is
premium cigars, which are generally imported, hand-made or hand-rolled cigars
made with long filler, 100% natural tobacco leaf and which generally sell at
retail prices above $1.00 per cigar. According to the Cigar Association of
America, sales of all categories of cigars totalled 4.6 billion units, or $1.6
billion, in 1996, and grew from 1993 to 1996 at a compound annual growth rate
("CAGR") of 10.3% on a unit basis and 30.2% on a dollar basis. Unit sales of
premium cigars, which had remained essentially flat between 1981 and 1993,
increased at a CAGR of 36.9%, on a unit basis, from 1993 to 1996. The Cigar
Association of America reports that premium cigar imports for the six month
period ended June 30, 1997 have increased approximately 95.0% compared to cigar
imports for the same period in 1996. The Company believes that the increase in
demand for premium cigars is a result of several factors, including: (i)
increased visibility of cigar smoking; (ii) increased interest in luxury goods;
(iii) the expansion of the cigar smoking customer base; and (iv) an increase in
the number of venues that cater to cigar smoking customers. Due to the increased
demand for premium cigars, the industry continues to experience shortages in
supply and increasing prices.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar Ltd. ("Fuente Cigar"), a Dominican Republic
based manufacturer of premium cigars. Cigars made by Fuente Cigar enjoy a
worldwide reputation for the finest tobaccos, expert blends, consistency and
quality of construction. The Company believes that its relationship with Fuente
Cigar will enable the Company to continue to grow its Ashton brand as well as to
introduce new brands to be manufactured for the Company by Fuente Cigar. Two of
the executive officers of Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., are directors of the Company and a related Fuente family
partnership will own approximately 24.4% of the shares of Common Stock
outstanding upon completion of the Offering.
3
<PAGE>
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed by Fuente Cigar and the Company. In Fiscal 1996, Fiscal 1997 and the
three months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar.
The Company's principal objective is to enhance its position as a leading
distributor and retailer of premium cigars. The principal elements of the
Company's business strategy include: (i) strengthening the Ashton brand
primarily by increasing the volume of Ashton cigars supplied to the Company;
(ii) a continued focus on providing a broad range of premium cigar offerings
from a variety of leading manufacturers; (iii) building upon its relationship
with Fuente Cigar; (iv) using multiple distribution channels to reach a broader
customer base; and (v) a commitment to customer service and satisfaction.
The Company's growth strategy is designed to capitalize on its competitive
strengths and the significant growth trends in the premium cigar market by: (i)
introducing new premium cigar brands owned or exclusively distributed by the
Company; (ii) increasing the wholesale distribution of the Company's Ashton
brand premium cigars; (iii) expanding distribution of the Company's catalog and
the size of the Company's proprietary mailing list; and (iv) opening or
acquiring a limited number of retail stores in select markets.
The Company was incorporated on June 18, 1993 under the laws of the State
of Delaware. The Company's executive offices are located at 12270 Townsend Road,
Philadelphia, Pennsylvania 19154, and its telephone number is (215) 676-8778.
The Company's web site can be accessed at http://www.holts.com.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......................... 1,750,000 shares
Common Stock to be Outstanding after the Offering(1)(2)..... 5,770,000 shares
Use of Proceeds............................................. To (i) effect the distribution of
previously taxed but
undistributed earnings from
Ashton Distributors, Inc. to its
former shareholder; (ii)
establish new retail stores;
(iii) expand inventories of
premium cigars; (iv) repay
outstanding indebtedness; (v)
expand the Company's mail order
business; (vi) introduce new
premium cigar brands; (vii)
upgrade the Company's management
information and accounting
systems; and (viii) use for
general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol...................... HOLT
</TABLE>
- ------------------
(1) Excludes options to purchase an aggregate of 300,000 shares of Common Stock
authorized under the 1997 Employee Stock Option Plan (the "Employee Stock
Plan"), of which options to purchase 169,500 shares of Common Stock have
been granted at the initial public offering price per share, and an
aggregate of 180,000 shares of Common Stock authorized under the
Non-Management Directors Stock Option Plan (the "Director Stock Plan"), of
which options to purchase 60,000 shares of Common Stock have been granted at
the initial public offering price per share. See "Management -- Stock
Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Plans."
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk.
Investors should consider the material risk factors involved in connection with
an investment in the Common Stock.
------------------------
Ashton(Registered) is a registered trademark of the Company.
Holt's(Trademark), Cortesia(Trademark) and Castano(Trademark) are trademarks
with respect to which the Company has applications for registration pending.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ ------
STATEMENT OF OPERATIONS DATA:
Net sales............................... $3,042 $3,738 $5,662 $9,467 $17,278 $3,450 $6,361
Cost of goods sold...................... 2,039 2,412 3,041 5,159 9,566 1,978 3,612
------ ------ ------ ------ ------- ------ ------
Gross profit............................ 1,003 1,326 2,621 4,308 7,712 1,472 2,749
Operating expenses...................... 950 1,440 1,949 3,484 4,895 1,034 1,393
------ ------ ------ ------ ------- ------ ------
Income (loss) from operations........... 53 (114) 672 824 2,817 438 1,356
Other income............................ -- -- -- 22 32 4 14
------ ------ ------ ------ ------- ------ ------
Income (loss) before income tax
expense............................... 53 (114) 672 846 2,849 442 1,370
Income tax expense(1)................... 18 1 209 318 577 89 317
------ ------ ------ ------ ------- ------ ------
Net income (loss)....................... $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 353 $1,053
------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------- ------ ------
Pro forma net income(2)................. $ 1,702 $ 263 $ 820
Pro forma net income per share.......... $ .41 $ .06 $ .20
Pro forma weighted average shares
outstanding(3)........................ 4,164 4,164 4,164
Supplemental pro forma data:
Net income(4)......................... $ 1,746 $ 274 $ 825
Net income per share.................. $ .42 $ .07 $ .20
Weighted average shares
outstanding(5)...................... 4,198 4,202 4,197
SELECTED OPERATING DATA:
Percentage of net sales of premium
cigars(6)............................. 72.9% 79.0% 88.1% 84.5% 86.3% 89.4% 92.0%
Percentage of net sales of accessories
and other tobacco products............ 27.1% 21.0% 11.9% 15.5% 13.7% 10.6% 8.0%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------ ------ -------
BALANCE SHEET DATA:
Working capital........................................... $2,793 $ 93 $20,254
Total assets.............................................. 5,887 6,132 23,593
Total debt................................................ 447 447 --
Stockholders' equity...................................... 3,651 1,195 21,803
</TABLE>
- ------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization increased to
include the effects of the incremental shares required to fund distributions
in excess of earnings over the previous year to the shareholder of Ashton
Distributors, Inc.
(Footnotes continued on next page)
6
<PAGE>
(Footnotes continued from preceeding page)
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $11,000 and $4,400 for Fiscal 1997 and the three months ended
June 30, 1996 and 1997, respectively, which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
(6) Includes both wholesale and retail sales of premium cigars.
(7) Pro forma to give effect to an S Corporation distribution to the shareholder
of approximately $2.7 million and the related effects of the revised capital
structure and the application of purchase accounting to the acquisition of
minority interests represented by certain stock options.
(8) Pro forma as adjusted to reflect the sale by the Company of 1,750,000 shares
of Common Stock offered hereby at a price of $13.00 per share, the mid-point
of the filing range (after deducting underwriting discounts and estimated
offering expenses), and the application of the estimated net proceeds
therefrom. See "Reorganization of the Company" and "Use of Proceeds."
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding 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
Company's relationship with Fuente Cigar and other manufacturers; (iv) the use
of the net proceeds to the Company of the Offering; (v) trends in the premium
cigar industry; (vi) government regulations; (vii) the Company's financing
plans; and (viii) the declaration and payment of dividends. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, and under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND FOR PREMIUM CIGARS. The Company
has experienced, and expects to continue to experience, a shortage in the supply
of certain premium cigars, including its proprietary Ashton brand. Although many
premium cigar manufacturers (including Fuente Cigar from whom the Company
purchased approximately 47.0% of its premium cigars on a dollar basis in Fiscal
1997) have taken measures to increase production, there can be no assurance that
the Company will have access to sufficient supplies of premium cigars. With the
exception of a supply agreement between the Company and Fuente Cigar, the
Company is not a party to long-term supply contracts with any manufacturers. The
Company relies and intends in the future to rely upon the strength of its
relationships with leading manufacturers to meet its supply requirements. There
can be no assurance that the Company will be able to continue to maintain these
relationships or that such relationships will be sufficient to enable the
Company to meet future demand for its proprietary cigars and other premium
branded cigars which the Company sells. Any material inability of the Company to
expand its current supply of premium cigars in a timely manner would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Suppliers."
Cigar manufacturers have experienced, and continue to experience, shortages
of properly aged and blended tobacco ready for manufacturing, and shortages in
skilled employees for blending and rolling premium cigars. In general, the aging
process for tobacco requires that tobacco be purchased several years in advance
of actual use in the manufacturing process. Tobacco shortages may prevent the
Company from purchasing sufficient cigars to meet demand, maintaining its growth
expectations or even maintaining its current level of sales. These factors are
all outside the control of the Company, may significantly impact the ability of
the Company to secure an adequate supply of premium cigars in a timely fashion
and could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON FUENTE CIGAR LTD. In Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar. Purchases from Fuente Cigar include all of the Company's Ashton
brand cigars, a significant percentage of the Company's proprietary Holt's brand
cigars, as well as proprietary Fuente Cigar brands. The Company has entered into
a Private Label Manufacturing Agreement with Fuente Cigar (the "PLMA") pursuant
to which Fuente Cigar has agreed to sell to the Company at least 5.0 million
premium cigars per year (the "Minimum Amount") and to use its best reasonable
efforts to sell additional cigars ordered by the Company. However, there can be
no assurance that such minimum supply of cigars or any additional cigars will be
provided to the Company. The PLMA permits noncompliance with the Minimum Amount
for various reasons
8
<PAGE>
including, but not limited to, a shortage of labor or the inability to secure
materials or supplies at reasonable prices. Under the PLMA, Fuente Cigar selects
the brands and sizes of the various premium cigars that may be delivered to the
Company to satisfy the Minimum Amount, which brands may include Ashton, Holt's
or cigars sold under any Fuente Cigar owned brand names. There can be no
assurance that the various sizes and brands sold by Fuente Cigar to the Company
will coincide with the preferences of the Company's customers. The Company has
also entered into an exclusive distributorship agreement with Fuente Cigar
pursuant to which the Company will be the exclusive wholesale distributor of up
to three new premium cigar brands to be developed with and manufactured by
Fuente Cigar. These agreements specifically prohibit any actions for specific
performance and damages in the event of a breach of such agreements by Fuente
Cigar. It is unlikely that the Company could replace Fuente Cigar with a
substitute supplier in a timely fashion, and any failure of Fuente Cigar to
supply premium cigars to the Company in appropriate numbers and in a timely
manner or to develop new premium cigar brands to be distributed by the Company
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Suppliers."
DEPENDENCE ON ASHTON BRAND. In Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, wholesale sales of Ashton brand premium cigars and
accessories represented, on a dollar basis, approximately, 38.9%, 37.6% and
39.6%, respectively, of net sales. The Company estimates that an additional
3.5%, 7.3%, and 6.9% of net sales for Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, respectively, consisted of sales of Ashton brand
premium cigars and accessories through the Company's retail operations. The
success of the Company's business is therefore dependent, in significant part,
on the sale of Ashton brand premium cigars and accessories. A decline in the
demand for Ashton brand premium cigars and accessories for any reason would have
a material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL CONFLICTS OF INTEREST. Fuente Cigar is controlled by Carlos A.
Fuente, Sr. and his son, Carlos P. Fuente, Jr., each of whom is a director of
the Company. The Fuente Investment Partnership, a partnership whose interests
are beneficially owned by Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. and
Cynthia Fuente Suarez, will own approximately 24.4% of the shares of Common
Stock outstanding after the Offering. These relationships may present potential
conflicts of interest to Messrs. Fuente in their capacity as members of the
Board of Directors. The Company has established a policy that it will not enter
into or amend any agreement between the Company and any entity which is related
to Fuente Cigar, Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. or Cynthia Fuente
Suarez on terms that are less favorable than those which could be otherwise
obtained from unaffiliated third parties. A majority of the disinterested
members of the Board of Directors will be required to approve any amended or new
agreements with Fuente Cigar and its related entities. Additionally, Fuente
Cigar and its affiliates are currently competitors of the Company and may
compete further with the Company in the future as Fuente Cigar: (i) makes
proprietary cigars for other distributors, including distributors in which
affiliates of Fuente Cigar own a controlling interest; and (ii) makes
proprietary cigars under its own name which compete directly with Ashton brand
premium cigars. See "Business -- Suppliers" and "Certain Transactions --
Relationship with Fuente Cigar and Related Parties."
LIMITED EXPERIENCE IN INTRODUCING NEW CIGAR BRANDS. One element of the
Company's growth strategy is to introduce and market new premium cigar brands.
To date, the Company has successfully introduced and marketed one proprietary
brand, the Ashton brand premium cigar, originally launched in 1986. The Company
expects to expand distribution in 1998 of the recently introduced Castano brand
and to exclusively distribute up to three new brands over the three year period
commencing in 1998. These brands are to be developed by Fuente Cigar and the
Company and to be manufactured by Fuente Cigar. Failure of the Company to
successfully introduce and market these new brands would have a material adverse
effect on the Company's business, results of operations and financial condition.
LIMITED EXPERIENCE IN OPENING SPECIALTY CIGAR STORES. The Company intends
to open or acquire additional retail cigar stores. To date, the Company has
opened and operated only one retail store. Although the Company's Philadelphia
store is profitable, no assurance can be given that such
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profitability can be sustained in the future or that any additional Company
stores will achieve sales and profitability comparable to the Company's
Philadelphia store. The profitable operation of new retail stores is dependent
on a number of factors, including identifying appropriate geographic markets,
evaluating the suitability of specific locations within such markets, hiring,
training and assimilating management and store level employees, negotiating
acceptable lease terms and constructing and opening new stores in a timely and
cost effective manner. There can be no assurance that the Company will be able
to successfully identify, open and operate additional retail stores.
DECLINING MARKET FOR CIGARS THROUGH 1993. According to industry sources,
the cigar industry experienced declining unit sales between 1964 and 1993. While
the cigar industry has experienced increasing annual unit sales since 1993,
there can be no assurance that recent positive trends will continue on a
long-term basis or that new customers will remain cigar smokers in the future.
See "Business -- Market Overview." In addition, the market for premium cigars,
and consequently the Company's net sales and results of operations, will be
subject to fluctuations based upon general economic conditions in the United
States. If there were to be a general economic downturn or recession in the
United States, the Company expects that the market for luxury related items such
as premium cigars would decrease. In the event of such an economic downturn or
recession, there can be no assurance that the Company's business, results of
operations and financial condition would not be materially adversely affected.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company has
experienced rapid growth over the last several years and its future operating
results will depend, in part, upon its ability to service a larger customer base
and to manage its overall expansion effectively. The Company's growth will
increase the responsibilities for both existing and new management personnel,
and will place significant demands on the Company's management, working capital
and systems. The Company will be required to expand and improve its operational
and financial systems and to expand the number of employees at all levels,
including senior management. There can be no assurance that the Company's
management information systems, accounting systems, purchasing systems,
inventory control systems, retail sales systems and internal controls will be
adequate or that the Company will be able to upgrade its systems and controls to
respond to such growth. The inability to successfully upgrade its controls and
systems could have a material adverse effect on the successful operation of the
Company's business, implementation of its growth strategy and future operating
results. If the Company is unable to manage this growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL
TRADE. The cigars sold by the Company are manufactured outside the United
States, principally in the Dominican Republic, Honduras, Nicaragua, Jamaica and
Mexico. As a result, the Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade including changes in the law and policies that govern
foreign investment and international trade in such countries, as well as, to a
lesser extent, changes in United States laws and regulations relating to foreign
investment and trade. Any such social, political or economic changes could pose,
among other things, the risk of supply interruption or significant increases in
the prices of tobacco products. Any such changes in social, political or
economic conditions may have a material adverse effect on the Company's
business, results of operations or financial conditions.
DEPENDENCE ON SHIPPERS. The Company primarily uses United Parcel Service
to ship its products. Although the recent strike by United Parcel Service
employees did not have a material adverse effect on the Company, there can be no
assurance that any future strike or work stoppage by United Parcel Service or
other major shipping carriers then being used by the Company will not have a
material adverse effect on the Company's business, results of operations and
financial condition or that alternate shipping carriers will be immediately
available and willing to deliver the Company's shipments in a timely fashion.
RELIANCE ON KEY PERSONNEL. The Company's operations will continue to
depend upon the efforts of senior personnel of the Company, including Robert G.
Levin, the Chairman of the Board,
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Chief Executive Officer and President of the Company and a well known figure in
the cigar industry. In significant part, the Company's relationships with its
manufacturers, suppliers and customers is based upon long-term personal
relationships with Mr. Levin. The loss of the services of Mr. Levin or other
senior personnel would have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company intends to
purchase and maintain key-man life insurance on Mr. Levin, the proceeds of such
insurance are not expected to be sufficient to compensate the Company for the
loss of his services. The Company's future performance will also depend to a
significant extent on its ability to identify, attract, train and retain highly
skilled sales, marketing and management personnel. There can be no assurance
that the Company will be successful in identifying, attracting or retaining such
personnel, and the failure to identify, attract and retain such personnel could
have a material adverse effect on the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly
operating results have fluctuated in the past and may fluctuate in the future as
a result of a variety of factors, including the timing of catalog mailings and
specialty direct mail pieces, the timing of the opening of new retail stores,
the timing of introduction of new brands and the price and availability of
premium cigars. Therefore, the results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent
quarter or any full year. Fluctuations caused by variations in quarterly
operating results may subsequently affect the market price of the Common Stock.
In addition, the Company expects its business to continue to exhibit some
seasonality, with increases in premium cigar and related accessory sales during
the holiday season, although the effect of this may be somewhat less evident due
to the growth in the Company's net sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS. The tobacco
industry is subject to regulation in the United States at the federal, state and
local levels, and the recent trend is toward increasing regulation. A variety of
bills relating to tobacco issues have been recently introduced in the United
States Congress, including bills that, if passed, would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the United States Federal Trade Commission (the "FTC") to the United States
Food and Drug Administration (the "FDA") and require the tobacco industry to
fund the FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the
access to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with tobacco
related diseases. Although hearings have been held on certain of these
proposals, to date none of such proposals have been passed by Congress. Future
enactment of such proposals or similar bills may have a material adverse effect
on the Company's business, results of operations and financial condition.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine.
Although certain legal challenges to the FDA's determination are pending, there
can be no assurance that such determination will not be upheld, nor that in the
future, the FDA will not prevail in an attempt to extend such jurisdiction to
cigars. In addition, a majority of states restrict or prohibit smoking in
certain public places and restrict sale of tobacco products (including cigars)
to minors. Local legislative and regulatory bodies have increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. Individual establishments such as bars and
restaurants have further prohibited pipe and cigar smoking even though other
tobacco products are permitted in such establishments. Further restrictions of a
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similar nature could have a material adverse effect on the business, results of
operations and financial condition of the Company. Numerous proposals have also
been considered at the state and local level restricting smoking in certain
public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, legislation recently introduced in
Massachusetts would, if enacted, require warning labels on cigar boxes and the
states of Minnesota and Texas have enacted legislation which would require cigar
manufacturers to provide information on the levels of certain substances in
their cigars to these states on an annual basis. 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 or more restrictive legislation.
Consideration at both the federal and state level also has been given to
consequences of 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
business, results of operations and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. The National Cancer
Institute has announced that it will issue a report in 1997 describing research
into cigars and health. There can be no assurance as to the ultimate content,
timing or effect of this report or any additional regulation of cigars 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, results of operations and financial condition.
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation. Private plaintiffs in such
litigation are seeking compensatory and, in some cases, punitive damages, for
various injuries claimed to result from the use of tobacco products or exposure
to tobacco smoke, and some of these actions have named cigarette distributors as
well as manufacturers as defendants. Over 40 states have filed lawsuits against
the major United States cigarette manufacturers to recover billions of dollars
in damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorneys General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things, the
tobacco companies would pay hundreds of billions of dollars to the various
states; the FDA could regulate nicotine as a "drug" and tobacco products as
"drug delivery devices;" all outdoor advertising, sports event advertising and
advertising on non-tobacco products would be banned and certain class action
lawsuits and punitive damage claims against tobacco companies would be
prohibited. President Clinton recently announced that he would not support the
Proposed Settlement unless significant changes were incorporated. Therefore, the
potential impact of the Proposed Settlement on the cigar industry in general and
the Company in particular is uncertain. There can be no assurance that similar
litigation will not be brought against cigar manufacturers and distributors. The
potential costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business, results of operations and
financial condition. The State of Florida has entered into a separate settlement
agreement with major United States cigarette manufacturers with respect to
tobacco products, including roll-your-own and little cigars. This settlement
agreement provides, in part, for a ban on billboard and transit advertising,
significant document disclosure by the settling cigarette companies, billions of
dollars in settlement payments and certain adjustments pending the resolution of
the Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed
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Settlement is approved the Proposed Settlement will supercede the Mississippi
settlement. The recent increase in the sales of cigars and the publicity of such
increases may increase the probability of legal claims. See "-- Extensive and
Increasing Regulation of Tobacco Products" and "Business -- The Tobacco Industry
- -- Litigation."
EFFECT OF INCREASES IN EXCISE TAXES. Cigars have long 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. In the past, there have been proposals by the
federal government to reform healthcare through a national program to be funded
principally through increases in federal excise taxes on tobacco products.
Enactment of new or significant increases in existing federal, state or local
excise taxes on cigars could result in decreased unit sales of premium cigars
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION. The markets for the Company's products are highly competitive
and subject to rapid consumer change and frequent new product introductions and
extensions. The Company's wholesale distribution business faces competition from
larger, well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new entrants to the marketplace. The Company's retail
operations compete with a large number of other mail order companies, some of
which are larger and better financed than the Company. The Company also faces
significant competition from a large number of existing, and an increasing
number of new, retail stores and smoking establishments selling the same branded
products as the Company. Existing or future competitors may develop or offer the
same or similar premium cigars which may result in decreases in the Company's
sales of premium cigars. Many of these competitors have longer operating
histories and significantly greater financial, managerial, creative, sales and
marketing and other resources than the Company. The Company's ability to retain
its existing customers and attract new customers depends on the quality of its
premium cigars, the availability of product, its reputation in the industry and
its ability to maintain customer satisfaction.
RISKS RELATING TO TRADEMARKS. The Company's success is dependent, in part,
on the brand name Ashton, and in the future, will be dependent on new brand name
trademarks to be developed by the Company (including the Castano brand name), or
which are used in connection with premium cigars which the Company expects to
exclusively distribute in the United States. The Company relies primarily on
trademarks to protect the Ashton, Holt's, Cortesia and Castano names. The
illegal use of the Company's trademarks, or trademarks associated with brands
the Company exclusively distributes, as well as the cost of prosecuting or
defending claims for infringement or invalidity, or claims for indemnification
resulting from infringement claims, with or without merit, could be
time-consuming, result in costly litigation and divert management's attention
and resources.
CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Offering, Robert
G. Levin will own approximately 45.3% of the outstanding shares of Common Stock
(40.7% if the Underwriters' over-allotment is exercised in full) and the Fuente
Investment Partnership will own approximately 24.4% of the outstanding shares of
the Common Stock. Mr. Levin and such partnership are parties to a shareholder
agreement pursuant to which they have agreed to vote for each other's respective
nominees to the Board of Directors. Accordingly, the parties to such shareholder
agreement will be able to control the Company, elect all the directors and
generally direct the affairs of the Company. In addition, each of the parties to
the shareholder agreement has a right of first refusal to purchase the others'
shares, and each of the parties to such shareholder agreement have granted the
other a right to participate on a proportionate basis in any sale of Common
Stock by either party. See "Management" and "Principal and Selling
Shareholders."
PROVISIONS WITH ANTI-TAKEOVER EFFECT. Certain provisions of the Company's
Certificate of Incorporation and By-Laws, as well as the Delaware General
Corporation Law could delay or frustrate the removal of incumbent directors and
could make difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be viewed as beneficial by the Company's
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<PAGE>
shareholders. The Board of Directors of the Company is empowered to issue
preferred stock in one or more series without shareholder action. Any issuance
of this "blank-check" preferred stock could materially limit the rights of
holders of the Common Stock and render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. In addition, the Certificate of Incorporation and By-Laws
contain a number of provisions which could impede a takeover or change in
control of the Company, including, among other things, staggered terms for
members of the Board, the requiring of two-thirds vote of shareholders to amend
certain provisions of the Certificate of Incorporation or to take any action by
written consent, and a fair price requirement. Certain provisions of the
Delaware General Corporation Law to which the Company will be subject may also
discourage takeover attempts that have not been approved by the Board. See
"Description of Capital Stock -- Potential Anti-Takeover Effect of Certain
Provisions of the Certificate of Incorporation and By-Laws."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 5,770,000 shares of Common Stock outstanding, 1,750,000
(2,012,500 if the Underwriters' over-allotment option is exercised in full) of
which will be freely tradeable without restriction or requirement of future
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 4,020,000 shares of Common Stock are "restricted
securities" as that term is defined by Rule 144 promulgated under the Securities
Act. Of such shares, no shares will be eligible for sale in the public market
immediately following commencement of the Offering and 4,020,000 shares will
become eligible for sale 90 days following commencement of the Offering. The
Company, its officers and directors and all shareholders and certain option
holders, including the Selling Shareholder, owning upon completion of the
Offering, in the aggregate, 4,020,000 shares of Common Stock and options to
purchase 542,400 shares of Common Stock and the Company have executed agreements
pursuant to which they have agreed that they will not, for a period of 180 days
from the date of this Prospectus, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any Common Stock, or other
capital stock of the Company without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except that such
agreement does not prevent the Company from granting additional options under
the Employee Stock Plan or the Director Stock Plan. Upon the expiration or
release from such lock-up agreements, 4,020,000 shares will be available for
immediate sale under Rule 144 and 542,400 additional shares subject to vested
stock options could also be sold, subject in some cases to certain volume
limitations. Prudential Securities Incorporated may, in its sole discretion, at
any time and without notice, release all or any portion of the securities
subject to such lock-up agreements. Sale of such shares in the future could
adversely affect the prevailing market price of the Common Stock. No prediction
can be made as to the effect, if any, that future sales of shares or the
availability of shares for sale will have on the market price for Common Stock
prevailing from time to time. Sale of substantial amounts of Common Stock in the
public market, or the perception of the availability of shares for sale, could
adversely affect the prevailing market price of the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. Beginning nine months after the Offering, the holders of options to
purchase an aggregate of 482,400 shares of Common Stock which are "restricted
securities" (the "Registerable Securities") will be entitled to certain rights
with respect to registration of such shares. If exercised, such registration
rights could result in the Registerable Securities being sold earlier than
otherwise allowable under Rule 144, and could adversely affect the prevailing
market price of the Common Stock. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to
utilize approximately $11.1 million, representing approximately 53.6% of the
estimated net proceeds of the Offering, for general corporate purposes,
including working capital. Accordingly, the Company will have broad discretion
as to the application of such proceeds. An investor will not have the
opportunity to evaluate
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<PAGE>
the economic, financial and other relevant information utilized by the Company
in determining the application of such proceeds. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in the Offering will experience an immediate and substantial dilution in the net
tangible book value of each share of Common Stock of $9.29 per share based upon
an initial public offering price of $13.00, the mid-point of the filing range.
See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or
be sustained upon completion of the Offering. The initial public offering price
will be determined by negotiations between the Company and the representatives
of the Underwriters based upon a number of factors, including market valuations
of other companies engaged in activities similar to those of the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The initial public offering price may not be indicative
of the market price of the Common Stock following completion of the Offering.
The trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or the opening or acquisition of retail stores by
the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, changes in government
legislation or litigation affecting tobacco products, general trends in the
industry, overall market conditions or other factors. In addition, the stock
markets historically have experienced extreme price and volume fluctuations
which may affect the market price of the Common Stock in a manner unrelated or
disproportionate to the operating performance of the Company. These market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."
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REORGANIZATION OF THE COMPANY
THE REORGANIZATION
Prior to the Reorganization, the business of the Company was conducted
through separate, but related, companies: (i) Holt's Cigar Company, Inc., a
Pennsylvania corporation engaged in the operation of the mail order catalog
business and the Philadelphia retail store ("Holt's"); (ii) Ashton Distributors,
Inc., a Pennsylvania corporation engaged in the wholesale distribution of Ashton
premium cigars and Ashton cigar-related accessories ("Distributors"); and (iii)
the Company, Holt's Cigar Holdings, Inc. (formerly known as Ashton Holdings,
Inc.), a Delaware corporation which owned the Ashton trademarks and licensed
their use to Distributors. All of the issued and outstanding shares of the
common stock of Holt's and Distributors were owned by Robert G. Levin and the
issued and outstanding shares of the common stock of Holdings were owned 60.0%
by Mr. Levin and 40.0% by the Fuente Investment Partnership. In addition, there
were outstanding options (held by persons other than Mr. Levin) to purchase
shares of the Common Stock (the "Options").
The Company, Holt's and Distributors and their respective shareholders
agreed to a plan of reorganization (the "Reorganization"), whereby, in a series
of transactions prior to the closing of the Offering: (i) the Company will amend
its Certificate of Incorporation to change its authorized common stock from
15,000 shares of Class A common stock and 5,000 shares of Class B common stock
to 25,000,000 shares of Common Stock; (ii) the Company will effect a
307.74-for-one stock split; (iii) the Company will issue an aggregate of
3,517,197 shares of Common Stock in exchange for the shares of Class A and Class
B common stock then outstanding; (iv) Holt's and Distributors will become wholly
owned subsidiaries of the Company, and the Company will issue 502,803 shares of
Common Stock to Robert G. Levin in exchange for all the outstanding common stock
of Holt's and Distributors; and (v) holders of options to purchase an aggregate
of 12% of the Company will exchange such options for options to purchase 482,400
shares of Common Stock. Immediately following the Reorganization, it is the
Company's intention to form a new Delaware subsidiary and to assign and transfer
to it all of the Company's rights in and to the Ashton, Holt's, Cortesia and
Castano trademarks and other intellectual property rights currently owned by
Holt's.
As a result of the Reorganization: (i) the Company will have issued and
outstanding 4,020,000 shares of Common Stock, of which 2,613,015 shares will be
owned by Robert G. Levin and 1,406,985 shares will be owned by the Fuente
Investment Partnership; and (ii) the Company will have issued, options to
purchase an aggregate of 482,400 shares of Common Stock at a price of $.50 per
share. At the time these options were granted, Mr. Levin and the principals of
the Fuente Investment Partnership agreed that these options would not dilute the
ownership interest of the Fuente Investment Partnership. Accordingly, Mr. Levin
has agreed that upon exercise of any such options, he will contribute to the
capital of the Company one share of Common Stock for each share purchased
pursuant to these options.
TERMINATION OF S CORPORATION STATUS
Prior to the Reorganization, Distributors operated as an S Corporation for
federal income tax purposes under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and for state corporate income tax purposes under
comparable state laws. As a result of its status as an S Corporation, the
taxable income of Distributors has been taxed for federal and state income tax
purposes directly to Robert G. Levin, Distributors' sole shareholder, rather
than to Distributors. Following the Reorganization, Distributors will no longer
qualify as an S Corporation and it will be fully subject to federal and state
income taxes as a C Corporation under the Code.
Prior to the Offering, Distributors will declare a dividend to Robert G.
Levin in an amount equal to Distributors' accumulated undistributed taxable
income as of the Offering date (estimated to be $2.7 million), which amount will
be paid from the net proceeds of the Offering.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company hereby (after deducting underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $20.6 million, assuming an initial public offering price of $13.00
per share, the mid-point of the filing range.
The Company intends to use approximately: (i) $2.7 million to effect the
distribution of previously taxed but undistributed earnings from Ashton
Distributors, Inc. to its former shareholder (see "Reorganization -- Termination
of S Corporation Status"); (ii) $2.6 million to establish two new retail stores
in select urban centers; (iii) $2.0 million to increase inventories of premium
cigars; (iv) $650,000 to repay outstanding indebtedness of the Company; (v)
$600,000 to expand its mail order business; (vi) $500,000 for the introduction
of new premium cigar brands; and (vii) $500,000 to upgrade the Company's
management information and accounting systems. The outstanding indebtedness to
be repaid with the net proceeds of the Offering includes three different loans
with approximately $450,000, $146,000 and $54,000 outstanding, respectively,
bearing interest at 8.75%, 8.50% and 9.0%, respectively, and maturing at
December 2008, June 2020 and April 1998, respectively. The $450,000 loan,
described above, was incurred to finance the construction of tenant improvements
for the Company's new office, warehouse and distribution facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The remainder of the net proceeds of the Offering, approximately $11.1
million, will be used for general corporate purposes, including working capital
to support the growth of the Company business. In lieu of establishing new
retail stores, as described in (i) above, the Company may elect to acquire
existing retail locations and, to the extent such stores are acquired rather
than established, the Company anticipates that the cost to acquire a store will
be substantially greater than the $1.3 million allocated to establish a store.
In addition, a portion of the net proceeds may also be used for acquisition of
proprietary cigar brands and existing distributors of premium cigars. The
Company currently has no agreements with respect to the acquisition of any
retail store, cigar brand or distributor.
Pending application of the net proceeds of the Company from the Offering,
the Company intends to invest in interest-bearing bank accounts, short-term,
investment grade securities or guaranteed obligations of the United States
government.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends except for S
Corporation distributions from Ashton Distributors, Inc. to its shareholder. The
Company intends to retain future earnings for use in its business and does not
anticipate paying or declaring any dividends on shares of its Common Stock in
the foreseeable future. The Board of Directors of the Company intends to review
this policy from time to time, after taking into account various factors such as
the Company's financial condition, results of operations, current and
anticipated cash needs and plans for expansion.
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CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the capitalization of the Company at June 30, 1997 (i) on a combined basis, (ii)
on a pro forma combined basis assuming consummation of the Reorganization and
recording the anticipated S Corporation distribution of approximately $2.7
million with respect to undistributed earnings of Ashton Distributors, Inc., and
(iii) on a pro forma as adjusted basis to give effect to the sale of 1,750,000
shares of Common Stock offered hereby (at an assumed initial public offering
price of $13.00 per share, the mid-point of the filing range) and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........................ $ 122 $ 122 $ --
====== ====== =======
Stockholder distribution payable......................... -- 2,700 --
====== ====== =======
Long-term debt........................................... 325 325 --
------ ------ -------
Stockholders' equity:
Preferred stock (pro forma), no par value; 1,000,000
shares authorized; none issued...................... -- -- --
Common stock (pro forma), $.001 par value; 25,000,000
shares authorized; 4,020,000 shares issued and
outstanding and 5,770,000 shares issued and
outstanding pro forma as adjusted(1)(2)............. 91 4 6
Additional paid-in capital............................. 304 585 21,191
Retained earnings...................................... 3,306 606 606
Treasury stock......................................... (50) -- --
------ ------ -------
Total stockholders' equity.......................... 3,651 1,195 21,803
------ ------ -------
Total capitalization.......................... $3,976 $1,520 $21,803
====== ====== =======
</TABLE>
- ------------------
(1) Excludes: (i) 169,500 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Employee Stock Plan; and (ii) 60,000 shares
of Common Stock issuable upon the exercise of options granted under the
Director Stock Plan. See "Management -- Stock Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Options."
18
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma book value of the Common Stock from
the initial public offering price. At June 30, 1997, the pro forma net tangible
book value of the Company was $822,000, or $0.20 per share of outstanding Common
Stock after giving effect to the Reorganization, including S Corporation
distributions of approximately $2.7 million. After giving effect to the Offering
(at an assumed initial public offering price of $13.00 per share, the mid-point
of the filing range), the pro forma net tangible book value of the Common Stock
would be $21.4 million, or $3.71 per share. This represents an immediate
increase in pro forma net tangible book value of $3.51 per share of Common Stock
to existing shareholders and an immediate and substantial dilution of $9.29 per
share of Common Stock to new investors purchasing shares of Common Stock in the
Offering. The following table illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $13.00
Pro forma net tangible book value before the Offering.... $0.20
Increase attributable to new investors................... 3.51
-----
Pro forma net tangible book value after the Offering....... 3.71
------
Dilution to new investors.................................. $ 9.29
======
</TABLE>
The following table summarizes the number of shares of Common Stock sold by
the Company, the total consideration paid to the Company and the average price
per share paid by the existing shareholders and by the new investors purchasing
shares of Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 4,020,000 69.7% $ 589,061 2.5% $ 0.15
New investors............. 1,750,000 30.3 22,750,000 97.5 13.00
--------- ------ ----------- ------
Total................... 5,770,000 100.0% $23,339,061 100.0%
========= ====== =========== ======
</TABLE>
The computations in the table set forth above exclude shares issuable
pursuant to the outstanding options granted January 1, 1996, the shares issuable
pursuant to the Employee Stock Plan and the Director Stock Plan.
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods and at the dates indicated,
summary combined financial data for the Company. The information presented below
under the captions "Statement of Operations Data" for Fiscal 1995, 1996 and 1997
and "Balance Sheet Data" as of March 31, 1996 and 1997 is derived from the
Company's audited financial statements. The Company's audited financial
statements as of March 31, 1996 and 1997 and for the three years ended March 31,
1997 are included elsewhere in this Prospectus. The selected financial data for
the Company presented below under the captions "Statement of Operations Data"
for Fiscal 1993 and 1994 and for the three months ended June 30, 1996 and 1997
and the "Balance Sheet Data" as of March 31, 1993, 1994 and 1995 and June 30,
1997 are derived from the Company's unaudited financial statements. In the
opinion of management, such unaudited financial information contains all
adjustments (which consist only of normal recurring adjustments) necessary to
present fairly the financial position and results of operations of the Company
as of such dates and for such periods. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $3,042 $3,738 $5,662 $9,467 $17,278 $3,450 $6,361
Cost of goods sold....................... 2,039 2,412 3,041 5,159 9,566 1,978 3,612
------ ------ ------ ------ ------- ------ ------
Gross profit............................. 1,003 1,326 2,621 4,308 7,712 1,472 2,749
Operating expenses....................... 950 1,440 1,949 3,484 4,895 1,034 1,393
------ ------ ------ ------ ------- ------ ------
Income (loss) from operations............ 53 (114) 672 824 2,817 438 1,356
Other income............................. -- -- -- 22 32 4 14
------ ------ ------ ------ ------- ------ ------
Income (loss) before income tax
expense................................ 53 (114) 672 846 2,849 442 1,370
Income tax expense(1).................... 18 1 209 318 577 89 317
------ ------ ------ ------ ------- ------ ------
Net income (loss)........................ $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 353 $1,053
====== ====== ====== ====== ======= ====== ======
PRO FORMA AND SUPPLEMENTAL PRO FORMA INCOME DATA:
Income before income tax expense......... $ 2,849 $ 442 $1,370
Pro forma income tax provision(2)...... 1,135 176 547
Pro forma amortization of
goodwill(2).......................... 12 3 3
------- ------ ------
Pro forma net income(2).................. $ 1,702 $ 263 $ 820
======= ====== ======
Pro forma net income per share........... $ .41 $ .06 $ .20
======= ====== ======
Pro forma weighted average shares
outstanding(3)......................... 4,164 4,164 4,164
Supplemental pro forma net income(4)..... $ 1,746 $ 274 $ 825
======= ====== ======
Supplemental pro forma net income per
share.................................. $ .42 $ .07 $ .20
======= ====== ======
Supplemental pro forma weighted
average shares outstanding(5).......... 4,198 4,202 4,197
<CAPTION>
MARCH 31,
------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 431 $ 346 $ 721 $1,035 $ 2,211 $2,793
Total assets............................. 938 1,425 2,260 3,686 5,406 5,887
Total debt............................... 31 88 72 497 312 447
Stockholders' equity..................... 453 643 1,162 1,653 3,025 3,651
</TABLE>
(footnotes on following page)
20
<PAGE>
- ------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception, and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization increased to
include the effects of the incremental shares required to fund distributions
in excess of earnings over the previous year to the shareholder of Ashton
Distributors, Inc.
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $11,000 and $4,400 for Fiscal 1997 and the three months ended
June 30, 1996 and 1997, respectively, which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to a "Fiscal" year refer to the fiscal year ended March 31 of
such year.
OVERVIEW
The Company is a leading distributor and retailer of brand name premium
cigars, cigar-related accessories and other tobacco products. The Company's
primary focus is the premium cigar market. The following table sets forth the
net sales of the Company's products, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Premium Cigars.............. $4,988 88.1% $7,996 84.5% $14,915 86.3%
Accessories and Other....... 674 11.9 1,471 15.5 2,363 13.7
------ ----- ------ ----- ------- -----
Total....................... $5,662 100.0% $9,467 100.0% $17,278 100.0%
====== ===== ====== ===== ======= =====
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C> <C> <C>
Premium Cigars.............. $3,084 89.4% $5,850 92.0%
Accessories and Other....... 366 10.6 511 8.0
------ ----- ------ -----
Total....................... $3,450 100.0% $6,361 100.0%
====== ===== ====== =====
</TABLE>
The Company's results of operations have been significantly affected by
current industry trends in the premium cigar market. Since 1993, the cigar
industry has experienced increasing consumption and retail sales across all
major categories, especially in the premium cigar segment. On a unit basis,
premium cigar sales grew at a CAGR of approximately 36.9% from 1993 to 1996,
while retail dollar sales have increased more rapidly due to price increases.
From Fiscal 1994 to Fiscal 1997, the Company's net sales increased at a CAGR of
66.6% and its sales of premium cigars increased at a CAGR of 71.6% over the same
period.
The Company's products are marketed on a wholesale basis to premium cigar
retailers nationwide, and on a retail basis through the Company's mail order
catalog and Philadelphia retail store. The following table sets forth the
Company's wholesale and retail sales, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------- -----------------------------------------
1995 1996 1997 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale............ $2,296 40.6% $3,687 38.9% $ 6,502 37.6% $1,174 34.0% $2,521 39.6%
Retail-Mail Order.... 1,674 29.5 3,178 33.6 6,633 38.4 1,301 37.7 2,510 39.5
Retail-Store......... 1,692 29.9 2,602 27.5 4,143 24.0 975 28.3 1,330 20.9
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Total................ $5,662 100.0% $9,467 100.0% $17,278 100.0% $3,450 100.0% $6,361 100.0%
====== ===== ====== ===== ======= ===== ====== ===== ====== =====
</TABLE>
The Company was incorporated in 1983, and its predecessors have been in
continuous operation since 1898. Immediately prior to the Offering, the Company
will undergo a Reorganization whereby, among other things, the Company will
acquire all of the issued and outstanding stock of Ashton Distributors, Inc. and
Holt's Cigar Company, Inc. from their sole shareholder, Robert G. Levin, in
exchange for shares of Common Stock and Ashton Distributors, Inc. will thereupon
be subject to taxation as a C Corporation. The Reorganization is intended to
qualify as a tax-free exchange under the Code. See "Reorganization of the
Company."
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain items
in the Company's statement of operations for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- ----------------------
1995 1996 1997 1996 1997
----- ----- ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold....................... 53.7 54.5 55.4 57.3 56.8
----- ----- ------ ----- -----
Gross profit.............................. 46.3 45.5 44.6 42.7 43.2
Operating expenses........................ 34.4 36.8 28.3 30.0 21.9
----- ----- ------ ----- -----
Income from operations.................... 11.9 8.7 16.3 12.7 21.3
Other income.............................. 0.0 0.2 0.2 0.1 0.2
----- ----- ------ ----- -----
Income before income tax
expense................................. 11.9% 8.9% 16.5% 12.8% 21.5%
===== ===== ====== ===== =====
</TABLE>
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales increased approximately $2.9 million, or 84.4%, from
$3.5 million in the three months ended June 30, 1996 to $6.4 million in the
three months ended June 30, 1997. Net sales increased primarily as a result of
the increase in net sales of premium cigars from $3.1 million for the three
months ended June 30, 1996 to $5.9 million for the comparable period in 1997. Of
such increase, $1.5 million was attributable to increased retail sales of
premium cigars and $1.3 million was attributable to increased wholesale sales of
premium cigars. These increases were the result of (i) increased availability of
premium cigars from the Company's suppliers, (ii) strong demand for premium
cigars, and (iii) increases in the average selling price per cigar of premium
cigars.
Gross Profit. Gross profit increased approximately $1.2 million, or 86.8%,
from $1.5 million in the three months ended June 30, 1996 to $2.7 million in the
three months ended June 30, 1997. Gross profit as a percent of net sales
increased from 42.7% in the three months ended June 30, 1996 to 43.2% in the
three months ended June 30, 1997. The increase in gross profit as a percent of
net sales was primarily due to the increase in the proportion of net sales
represented by premium cigars which generally carry a higher gross margin.
Operating Expenses. Operating expenses increased approximately $359,000,
or 34.7%, from $1.0 million in the three months ended June 30, 1996 to $1.4
million in the three months ended June 30, 1997. As a percentage of net sales,
operating expenses decreased from 30.0% in the three months ended June 30, 1996
to 21.9% in the three months ended June 30, 1997. This decrease was primarily
due to net sales increasing at a higher rate than the increase in operating
expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased approximately $7.8 million, or 82.5%, from
$9.5 million in Fiscal 1996 to $17.3 million in Fiscal 1997. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $8.0
million in Fiscal 1996 to $14.9 million in Fiscal 1997. Of such increase, $4.6
million was attributable to increased retail sales of premium cigars and $2.3
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of (i) increased availability of premium cigars from
the Company's suppliers, (ii) strong demand for premium cigars, and (iii)
increases in the average selling price per cigar of premium cigars. The
remaining increase in net sales of approximately $900,000 was attributable to
increased sales of accessories and other products.
Gross Profit. Gross profit increased approximately $3.4 million, or 79.0%,
from $4.3 million in Fiscal 1996 to $7.7 million in Fiscal 1997. Gross profit as
a percent of net sales decreased from 45.5% in Fiscal 1996 to 44.6% in Fiscal
1997. The decrease in gross profit as a percent of net sales was
23
<PAGE>
primarily due to cigars on a retail basis being sold at a lower margin as a
result of costs from manufacturers increasing faster than market retail prices.
Operating Expenses. Operating expenses increased approximately $1.4
million, or 40.5%, from $3.5 million in Fiscal 1996 to $4.9 million in Fiscal
1997. This increase was primarily due to an increased number of employees which
increased payroll and related employee expenses, and an increase in professional
fees and sales commissions. As a percentage of net sales, operating expenses
decreased from 36.8% in Fiscal 1996 to 28.3% in Fiscal 1997. This decrease was
primarily due to net sales increasing at a higher rate than the increase in
expenses.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased approximately $3.8 million, or 67.2%, from
$5.7 million in Fiscal 1995 to $9.5 million in Fiscal 1996. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $5.0
million in Fiscal 1995 to $8.0 million in Fiscal 1996. Of such increase, $1.6
million was attributable to increased retail sales of premium cigars and $1.4
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of increased supply of premium cigars from the
Company's suppliers and strong demand for premium cigars. The remaining increase
in net sales of approximately $800,000 was attributable to increased sales of
accessories and other products.
Gross Profit. Gross profit increased approximately $1.7 million, or 64.4%,
from $2.6 million in Fiscal 1995 to $4.3 million in Fiscal 1996. Gross profit as
a percent of net sales decreased from 46.3% in Fiscal 1995 to 45.5% in Fiscal
1996. The decrease in gross profit as a percent of net sales was primarily due
to cigars on a retail basis being sold at a lower margin as a result of
increased costs from the manufacturers, partially offset by an increase in the
Company's wholesale prices.
Operating Expenses. Operating expenses increased approximately $1.6
million, or 78.8%, from $1.9 million in Fiscal 1995 to $3.5 million in Fiscal
1996. This increase was due to an increased number of employees which increased
payroll and related employee expenses, increased advertising expenditures and
other increased costs incurred as a result of the Company's growth. As a
percentage of net sales, operating expenses increased from 34.4% in Fiscal 1995
to 36.8% in Fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited operations data for each of
the Company's preceding nine quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $1,809 $2,450 $2,518 $2,689 $3,450 $4,160 $4,957 $4,710 $6,361
Gross profit............. 826 1,086 1,157 1,239 1,472 1,993 2,227 2,020 2,749
Income from operations... 79 297 275 174 438 786 1,043 551 1,356
</TABLE>
The following table sets forth certain unaudited operations data as a
percentage of net sales for each of the Company's preceding nine quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............. 45.7 44.3 46.0 46.1 42.7 47.9 44.9 42.9 43.2
Income from operations... 4.4 12.1 10.9 6.5 12.7 18.9 21.0 11.7 21.3
</TABLE>
24
<PAGE>
The Company's quarterly operating results have fluctuated due to several
factors, including the timing of catalog mailings and specialty direct mail
pieces, the opening of the Company's retail store and the price and availability
of premium cigars. In addition, the Company expects its business to continue to
exhibit some seasonality, with increases in premium cigar and cigar-related
accessory sales during the holiday season, although the effect of this may be
somewhat less evident due to the growth in the Company's net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash generated from operations and bank debt. Net cash provided by operations
for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three months ended June 30,
1997 of $539,000, $669,000, $1,130,000 and $835,000, respectively, consisted
primarily of net income and depreciation and amortization offset by increases in
accounts receivable and inventory.
On January 29, 1997, the Company entered into a $400,000 line of credit
with Jefferson Bank with borrowings thereunder accruing interest at the bank's
prime rate. At June 30, 1997, the Company had no borrowings under the line of
credit. On May 5, 1995, the Company entered into a long-term note payable with
Jefferson Bank due in monthly payments including interest at 9.0%. At June 30,
1997, the outstanding balance on this note was $90,268. The note matures in
April 1998. On October 14, 1994, the Company entered into a long-term note
payable to Jefferson Bank due in monthly payments including interest at 8.5%. At
June 30, 1997, the outstanding balance on this note was $146,613. This note
matures in June 2020. On June 17, 1997, the Company entered into a construction
loan agreement with Jefferson Bank to construct tenant improvements for the
Company's new office, warehouse and distribution facility. The maximum available
under this agreement is $450,000. Interest on the loan is charged at 8.75% and
matures December 2008. At June 30, 1997, the outstanding balance on this note
was $170,000. The credit line and the notes payable are secured by accounts
receivable, inventory, a second mortgage on the retail store realty owned by a
shareholder and the personal guaranty of a shareholder. The long-term notes
payable and the construction loan will be repaid with the net proceeds of the
Offering.
The Company believes that the net proceeds of the Offering, together with
cash generated from its operating activities and available bank borrowings, will
be sufficient to fund its operations and expansion programs at least through the
end of Fiscal 1999.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
net sales or results of operations.
25
<PAGE>
BUSINESS
GENERAL
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the three months ended June 30, 1997, the Company had net sales of $17.3
million and $6.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 92.0%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar, a Dominican Republic based manufacturer of
premium cigars. Cigars made by Fuente Cigar enjoy a worldwide reputation for the
finest tobaccos, expert blends, consistency and quality of construction. The
Company believes that its relationship with Fuente Cigar will enable the Company
to continue to grow its Ashton brand as well as to introduce new brands to be
manufactured for the Company by Fuente Cigar. Two of the executive officers of
Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr., are directors of
the Company and a related Fuente family partnership will own approximately 24.4%
of the shares of Common Stock outstanding upon completion of the Offering.
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed with and manufactured by Fuente Cigar. In Fiscal 1996, Fiscal 1997 and
the three months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar.
MARKET OVERVIEW
The cigar market is divided into three principal categories: premium
cigars, mass market cigars (large and small) and little cigars. Premium cigars
are generally imported, hand-made or hand-rolled cigars made with long filler,
100% natural tobacco leaf and which generally sell at retail prices above $1.00
per cigar. In order to make hand-made cigars, tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch" which is placed in a
mold. Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a
premium cigar.
After declining for almost thirty years from a peak in 1964, the cigar
market entered a significant growth period in 1993. According to the Cigar
Association of America, sales of all categories of cigars totaled 4.6 billion
units, or $1.6 billion, in 1996, and grew from 1993 to 1996 at a CAGR of 10.3%
on a unit basis and 30.2% on a dollar basis. Unit sales of premium cigars, which
had remained essentially flat between 1981 and 1993, increased at a CAGR of
36.9%, on a unit basis, from 1993 to 1996. The Cigar Association of America
reports that premium cigar imports for the six month period ended June 30, 1997
have increased approximately 95.0% compared to cigar imports for the same period
in 1996.
The Company believes that the increase in demand for premium cigars is the
result of several factors, including: (i) the improved image of cigar smoking
resulting from increased publicity, including the success of Cigar Aficionado
magazine and the increased visibility of cigar smoking by celebrities; (ii) the
emergence of an expanded base of younger, highly educated, affluent adults aged
25 to 35 and the growing interest of this group in luxury goods, including
premium cigars; (iii) the
26
<PAGE>
increase in the number of adults over age 40 (a demographic group believed to
smoke more cigars than any other demographic group); and (iv) the proliferation
of establishments where cigar smoking is encouraged, as well as "cigar smoker"
dinners and other special events for cigar smokers.
Cigar manufacturers have experienced a shortage of raw materials
(principally properly aged tobacco) due to increased demand for premium cigars
and the length of time necessary to cultivate, grow, harvest, age and process
the tobacco used in the manufacture of premium cigars. In addition,
manufacturers of premium cigars have reported shortages of skilled labor
necessary for processing, blending and manufacturing premium cigars, although
these manufacturers currently report that labor shortages have been easing. As a
result, wholesalers and retailers of premium cigars have experienced and
continue to experience shortages in supply and increasing prices with respect to
premium cigars.
BUSINESS STRATEGY
The Company's principal business objective is to enhance its position as a
leading distributor and retailer of a broad range of premium cigars and
cigar-related accessories. The principal elements of this business strategy
include:
Strengthening the Ashton Brand. The Company believes its proprietary
Ashton brand premium cigars are nationally recognized among the top brands due
to their flavor, consistency and quality of construction. Cigar Aficionado
magazine has consistently rated Ashton cigars as "very good to excellent" in
each category evaluated by the publication. To continue to build the Ashton
brand, the Company plans to: (i) secure an increasing volume of Ashton cigars
supplied by Fuente Cigar; (ii) expand the Ashton product line to include
additional sizes and shapes; (iii) broaden awareness of the Ashton brand name
through targeted advertising in select national and regional publications; and
(iv) increase the sales of cigar-related accessories featuring the Ashton brand
name.
Concentration on Premium Cigars. The Company is focused on the premium,
hand-made cigar market. Within this segment, the Company offers a diverse range
of sizes, shapes, tastes, blends and prices designed to appeal to the
preferences of premium cigar consumers. Products sold by the Company include
over 170 brands manufactured by companies such as Fuente Cigar, General Cigar
Company, Consolidated Cigar Holdings Corporation, Lane Limited and Villazon &
Co., Inc. (acquired by General Cigar Company in January 1997). The Company
believes that its broad offering of premium cigars is essential to maintain the
appeal of its catalog and retail store as single sources for a broad range of
premium cigar products. This concentration on premium cigars has positioned the
Company to benefit from the highest growth segment of the cigar industry.
Building on Relationship with Fuente Cigar. To secure a source of
high-quality premium cigars at a time when demand exceeds supply, the Company
entered into an amended agreement with Fuente Cigar pursuant to which Fuente
Cigar agreed to sell at least 5.0 million premium cigars per year to the Company
and to use its best reasonable efforts to sell to the Company premium cigars in
excess of the 5.0 million annual minimum. Fuente Cigar is a leading manufacturer
of premium cigars made in the Dominican Republic, and cigars made by Fuente
Cigar enjoy a worldwide reputation for use of the finest tobaccos, expert
blends, consistency and quality of construction. Fuente Cigar has manufactured
the Company's Ashton brand since 1988 and has agreed that the Company will be
the exclusive distributor of up to three new brands to be introduced over the
three year period commencing in 1998, which brands will be developed with and
manufactured exclusively by Fuente Cigar. Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., two of the principal executive officers of Fuente Cigar, serve on
the Company's Board of Directors and their affiliated family partnership will
own approximately 24.4% of the shares of Common Stock outstanding after the
Offering. The Company believes that its relationship with Fuente Cigar is an
important element of its overall strategy of increasing sales of branded premium
cigars.
Use of Multiple Distribution Channels. The Company believes that
distribution of its products through its wholesale, catalog and retail store
channels enables it to: (i) reach a geographically broad group of customers;
(ii) maintain a strong retail presence enabling it to react quickly to changes
in customer preferences; and (iii) benefit from significant growth opportunities
available through national distribution of its branded products.
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Commitment to Customer Service. The Company believes its emphasis on
customer service and satisfaction is an integral part of its success. Catalog
and store sales personnel are trained to educate customers on the relative
merits of premium cigar products and to assist customers in making informed
purchasing decisions. In addition, the Company offers a 100% Guarantee of
Satisfaction to its customers which provides for a refund, credit or replacement
for any full or partially smoked box of cigars. The Company received the Best of
Philly award from Philadelphia magazine in 1997 as the best retail cigar store
in the Philadelphia area.
GROWTH STRATEGY
The principal elements of the Company's growth strategy are:
Introduction of New Proprietary Brands. The Company believes that the
increased popularity of premium cigars has resulted in cigar smokers who are
more informed, selective and brand conscious. At the same time, several new
brands of premium cigars have been introduced by manufacturers and distributors
seeking to capitalize on the increasing popularity of cigars. The Company
believes that many of these brands have not utilized the tobacco grades and
production methods normally associated with quality premium cigars. As a result,
the Company believes that premium cigar smokers prefer cigars with a highly
regarded brand name that are produced by respected cigar manufacturers. Under a
distributorship agreement with Fuente Cigar, the Company will be the exclusive,
worldwide distributor for up to three new premium brands to be developed by
Fuente Cigar and the Company. The Company and Fuente Cigar anticipate that these
brands will be introduced over a three year period beginning in 1998. The
Company intends to support these new brands through advertising in trade and
consumer publications and at cigar-related events. Based on its success with the
Ashton brand and its wholesale customer base of over 1,000 specialty
tobacconists, the Company believes that it is well positioned to support the
introduction of new brands.
Increase Wholesale Distribution of Proprietary Premium Cigars. The Company
expects to be able to distribute an increased number of premium cigars under the
Ashton brand, other proprietary brands and brands for which it will act as the
exclusive distributor. In anticipation of an increased supply of premium cigars,
the Company intends to expand its wholesale operations by: (i) increasing the
number of its direct sales force personnel covering wholesale acccounts; (ii)
penetrating existing accounts with a greater amount and variety of premium
cigars; and (iii) adding new accounts domestically and internationally.
Expand Catalog Distribution and Sales. The Company believes that its
catalog operations enable it to market and sell premium cigars to a large and
diverse group of customers. During Fiscal 1998, the Company distributed its
Spring/Summer catalog to a proprietary list of over 80,000 cigar smokers, cigar
purchasers and others evidencing interest in premium cigar products, compared to
35,000 and 45,000 in Fiscal 1995 and Fiscal 1996, respectively. The Company
anticipates that it will distribute its Fall/Winter catalog to over 100,000
individuals by the end of Fiscal 1998. The Company plans to increase its catalog
revenues by: (i) increasing the size of the Company's proprietary mailing list;
(ii) increasing the frequency of catalog mailings; and (iii) increasing the size
and capability of the Company's mail order operations. The Company completed a
move to a larger distribution facility in September 1997, and believes that the
larger facility will enable it to process a greater number of incoming telephone
orders and a greater volume of deliveries to its catalog customers.
Open or Acquire Selected Retail Locations. The Company intends to open or
acquire cigar stores in selected, densely populated and highly trafficked areas
where demand for premium cigars is high. New store openings or acquired stores
will enable the Company to increase its total market presence and develop a
broader base of customers for its catalog division. The Company is also
considering opening retail locations in special venues such as sports arenas and
casino/hotels.
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PRODUCTS
The Company markets a broad selection of premium cigars and related
accessories. A small percentage of the Company's sales are derived from the sale
of mass market cigars. Premium cigars accounted for approximately 88.1%, 84.5%,
86.3% and 92.0% of the Company's net sales in Fiscal 1995, Fiscal 1996, Fiscal
1997 and the three months ended June 30, 1997, respectively.
Premium Cigars. Premium cigars are generally imported, hand-made or
hand-rolled cigars made with long filler, 100% natural tobacco leaf which sell
at retail prices above $1.00 per cigar. The Company uses tobaccos of the finest
grades for its Ashton brand cigars. Such tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch," which is placed in a
mold. Then, specially selected "wrapper" tobacco is hand-wrapped around the
bunch. After the manufacturing process is complete, an Ashton cigar will
normally be aged from three months to one year in specially constructed and
climate controlled aging rooms. The premium cigars manufactured by Fuente Cigar
for the Company undergo numerous quality control procedures at each stage of the
manufacturing, aging and packaging process.
The Company markets over 170 brands of premium cigars, ranging in price
from $1.00 to $28.00 per cigar. Of these brands, Ashton, Holt's, Cortesia and
Castano are proprietary brands owned by the Company. Net sales of the Company's
proprietary cigars represented approximately 44.1%, 41.6% and 39.6% of the
Company's net sales for Fiscal 1996, Fiscal 1997 and the three months ended June
30, 1997, respectively.
The significant growth in the Company's proprietary cigar sales has been
primarily due to an increase in the popularity of the Ashton brand. The Ashton
brand, which was introduced in 1986, is comprised of 22 different sizes and
shapes with retail prices generally between $4.50 and $17.00 per cigar. The
Company believes that the proprietary Ashton brand premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Ashton brand cigars are targeted at the upper end of the
premium cigar market. Holt's and Cortesia brand premium cigars are sold by the
Company exclusively through its catalog and Philadelphia retail store. The
Holt's brand is comprised of 18 different sizes and shapes with retail prices
generally between $2.30 and $4.80 per cigar. The Holt's brand premium cigars are
targeted at the middle of the premium cigar market. The Cortesia brand is
comprised of six different sizes and shapes with retail prices generally between
$1.30 and $3.10 per cigar. The Company also distributes cigars under its
proprietary Castano brand name. The Castano brand of premium cigars was
introduced in July 1997 and has been in limited production since that time. The
Company intends to increase distribution of this brand in 1998. The Castano
brand currently has five different sizes and shapes with retail prices generally
between $4.50 and $6.75 per cigar.
The Company intends to introduce up to three more brands to be developed
with and manufactured by Fuente Cigar over the next three years under an
exclusive distributorship agreement. Management will work closely with Fuente
Cigar to develop the specific blends, wrapper and sizes for these new brands, to
be sold under trademarks owned by Fuente Cigar. See "-- Suppliers."
Accessories. The increased demand for premium cigars has led to an
increase in the market for cigar accessories such as humidors, cigar cutters,
cigar cases, lighters and ashtrays. The Company offers accessories by brand name
manufacturers, as well as accessories incorporating the Ashton trademark. Net
sales of accessories represented approximately 7.1%, 10.8%, 12.4% and 7.3% of
the Company's net sales for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, respectively.
Other Tobacco Products. The Company offers a limited selection of other
tobacco products, including mass market cigars, smokeless tobacco and pipe
tobacco for sale through its mail order catalog and retail store, as well as a
limited number of imported cigarettes which are sold only through the Company's
retail store. Net sales of other tobacco products represented approximately
4.8%, 4.7%, 1.3%, 0.7% of the Company's net sales for Fiscal 1995, Fiscal 1996,
Fiscal 1997 and the three months ended June 30, 1997, respectively.
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MARKETING AND DISTRIBUTION
The Company distributes its Ashton brand premium cigars and cigar-related
accessories on a wholesale basis to specialty tobacconists nationwide, and also
sells premium cigars on a retail basis through its mail order catalog and its
retail store.
Wholesale Operations. The Company distributes premium cigars, cigar cases,
travel humidors and ashtrays which are marketed under the Ashton brand name and
feature the Ashton logo. Net sales from wholesale operations were $2.3 million,
$3.7 million, $6.5 million and $2.5 million for Fiscal 1995, Fiscal 1996, Fiscal
1997 and the three month period ended June 30, 1997, respectively.
The Company believes that its ability to secure an increasing supply of
premium cigars under the PLMA with Fuente Cigar will allow it to better satisfy
the current demand for Ashton cigars and to increase the number of its wholesale
customers. See "-- Suppliers." At present, the Company has limited the
acceptance of new wholesale accounts in order to attempt to satisfy the demand
of its existing account base. As of June 30, 1997, the Company's wholesale
account base totaled approximately 1,000 customers.
The Company's wholesale activities are serviced by a direct sales force of
five employees who represent only the Company's brands and four independent
sales representatives who represent Company brands as well as competing brands.
The Company intends to increase the size of its direct sales force in order to:
(i) better penetrate its existing wholesale accounts; (ii) increase its
wholesale account base through the opening of new accounts; and (iii) manage the
distribution of its products to protect the overall integrity and image of the
Company's brands. Additionally, the Company has agreed to serve as the exclusive
distributor for up to three new Fuente Cigar manufactured brands to be
introduced over a three year period beginning in 1998. To support the Company's
proprietary brands and brands which the Company will distribute exclusively, the
Company intends to invest in further brand and product promotion in national
publications, trade magazines and other publications. The Company utilizes two
distributors for the distribution of its Ashton brand cigars on a limited basis
in Europe.
Retail Operations. The Company sells a broad selection of premium cigar
and related accessories through its mail order operation and its Philadelphia
retail store. The Company is committed to providing high quality customer
service and provides a 100% Guarantee of Satisfaction for every product sold.
For premium cigar purchases, the Company's 100% Guarantee of Satisfaction
provides a refund, credit or replacement for any full box of cigars provided
that less than four cigars have been smoked, and a proportionate credit if four
or more have been smoked. Any other merchandise may be returned by the customer
for a full refund, credit or replacement within ten days of receipt of the
merchandise.
Mail Order Catalog
The Company's mail order catalog markets a large selection of premium
cigars and accessories. In the current fiscal year, the Company distributed
approximately 80,000 copies of its Spring/Summer catalog and anticipates
distributing over 100,000 copies of its Fall/Winter catalog. Each of the
Company's four-color glossy catalogs contains photographs of the Company's
products and features premium cigars and other special offerings. The Company
mails its catalogs to its proprietary list of cigar smokers, cigar purchasers
and others evidencing interest in cigar products, and the Company deletes a name
from its proprietary list if there has been no sales activity for two years. In
addition, the Company produces four to eight page mailings that it distributes
four times per year. Sales associates are able to provide information on
products offered in the Company's catalogs and other mailings. The Company's
call center operates from 8:00 a.m. to 6:00 p.m. Monday to Friday, Eastern Time,
and from 9:00 a.m. to 3:00 p.m., Eastern Time, on Saturdays. Net sales from the
Company's mail order catalog were $1.7 million, $3.2 million, $6.6 million and
$2.5 million in Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three months ended
June 30, 1997, respectively.
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Retail Store
The Company currently operates a 3,000 square foot retail store located in
Philadelphia, Pennsylvania. The Company's retail store contains a large,
walk-in, open-display humidor, smoking lounge, cigar lockers and accessory
retail space. The Company intends to incorporate many of these features in new
retail locations in order to establish them as "destination" stores which draw
customers from a large geographic area. The Company's store received the Best of
Philly award from Philadelphia magazine as the best retail cigar store in the
Philadelphia area in 1997. The Company intends to acquire or develop two
additional cigar stores in selected, densely populated, highly trafficked areas
where demand for premium cigars is high. The cost to develop a new retail
location is estimated to be approximately $600,000 for fit-out, furnishings and
equipment, and approximately $700,000 for the cost of inventory and initial
operating capital. With respect to any retail store acquisitions, the costs will
be dependent upon the location, size and operating performance of the store. The
Company is also considering opening retail facilities in special venues such as
sports arenas and casino/hotels. Net sales from the Company's retail store were
$1.7 million, $2.6 million, $4.1 million and $1.3 million in Fiscal 1995, Fiscal
1996, Fiscal 1997 and the three months ended June 30, 1997, respectively.
Distribution. In September 1997, the Company relocated its distribution
center to a 21,360 square foot facility located in Philadelphia, Pennsylvania.
The facility also houses the Company's corporate offices, wholesale and mail
order operations. The humidified and climate controlled cigar storage warehouse
located within this facility is approximately 5,000 square feet, a substantial
increase over the 2,200 square feet of humidified storage space at the Company's
prior facility. The specific products in stock vary from time to time depending
upon the ability of the Company to secure supplies of premium cigars, and if in
stock, such products are available for shipment to wholesale and retail
customers within one day of receipt of an order.
SUPPLIERS
The Company has long-term relationships with over 50 suppliers including
major manufacturers such as Fuente Cigar, General Cigar Company, Consolidated
Cigar Holdings Corporation, Lane Limited and Villazon & Co., Inc. Fuente Cigar
supplied approximately 39.2%, 47.0% and 45.4% of all premium cigars purchased,
on a dollar basis, by the Company during Fiscal 1996, Fiscal 1997 and the three
month period ended June 30, 1997, respectively. General Cigar Company acquired
Villazon & Co., Inc. in January 1997, and, on a combined basis, they supplied
approximately 13.4%, 18.4% and 11.6% of all premium cigars purchased, on a
dollar basis, by the Company in Fiscal 1996, Fiscal 1997 and the three months
ended June 30, 1997, respectively. No other supplier accounted for more than 10%
of the Company's premium cigar purchases during these periods. The Company
believes that maintaining and strengthening its long-term relationships with its
suppliers is essential to securing an allocation of the limited worldwide
premium cigar supply. Other than its agreements with Fuente Cigar, the Company
has no agreements relating to the supply of premium cigars.
Private Label Manufacturing Agreement with Fuente Cigar ("PLMA"). The
Company entered into the PLMA with Fuente Cigar in April 1997 whereby Fuente
Cigar agreed to sell the Company a minimum of 5.0 million premium cigars per
year for an initial term of ten years and the Company has agreed to use its best
reasonable efforts to purchase at least 5.0 million cigars during each year of
the term of the PLMA. In addition, Fuente Cigar agreed to use its best
reasonable efforts to sell to the Company premium cigars in excess of the 5.0
million per year. The premium cigars supplied by Fuente Cigar pursuant to the
PLMA include the Company's proprietary Ashton and Holt's brand premium cigars,
as well as any other premium cigars manufactured by Fuente Cigar under its
trademarks, and will be comprised of those brands in such amounts, sizes and
shapes as determined by Fuente Cigar. The PLMA represents a commitment by Fuente
Cigar to increase its supply of premium cigars to the Company. Fuente Cigar
supplied the Company with 2.1 million premium cigars in Fiscal 1996 and 3.3
million premium cigars in Fiscal 1997. The purchase price for premium cigars
delivered under the PLMA is set by Fuente Cigar at the market price in effect
from time to time. The PLMA specifies that while the Company owns the trademark
to the name Ashton, Fuente Cigar owns the formula used to blend the tobacco used
in the production of Ashton cigars. The PLMA permits noncompliance with the
obligations of Fuente Cigar to sell 5.0 million premium cigars per year for
various reasons, including
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but not limited to, a shortage of labor or the inability to secure materials and
supplies at reasonable prices. The PLMA provides that it is to be interpreted
and enforced under Florida law. However, the agreement specifically prohibits
any actions for specific performance and damages in the event of a breach of the
PLMA by Fuente Cigar. In the event that a competitor of Fuente Cigar were to
acquire control of the Company, Fuente Cigar may, after the expiration of an
eight month period commencing on the date of such change in control, give notice
of the termination of the PLMA effective one year from the date of such notice.
If Fuente Cigar does not give such notice, the PLMA will be automatically
renewed for successive one year terms if neither party gives notice of
termination.
Exclusive Distributorship Agreement. In September 1997, the Company and
Fuente Cigar entered into an exclusive distributorship agreement whereby Fuente
Cigar agreed to develop with the Company up to three new premium cigar brands to
be manufactured by Fuente Cigar, and to be exclusively distributed by the
Company on a worldwide basis. Cigars manufactured for the Company under this
agreement will be applied to the annual minimum requirement under the PLMA. The
initial term of this agreement expires on April 30, 2007. The Company is
obligated to use its best reasonable efforts to promote these new brands.
SALES AND ADVERTISING
At June 30, 1997, the Company employed five direct sales personnel in
connection with its wholesale operations, 10 telephone sales associates in the
Company's mail order catalog call center and 12 sales people in the Company's
Philadelphia retail store. In addition, the Company utilized four independent
sales agents in connection with its wholesale operations.
The Company's catalogs are its primary means of marketing to retail
customers. The Company targets its potential customers by originating its own
mailing list and keeping the mailing list exclusive to interested customers by
removing names from the mailing list if there has not been a purchase made
within two years. To support its retail sales, the Company utilizes local print
advertising, radio advertising during local sporting events and attends or
sponsors numerous cigar related events. The Company advertises through full page
advertisements in each issue of Cigar Aficionado magazine and through its
presence at or sponsorship of cigar related marketing events such as the "Big
Smokes" sponsored by Cigar Aficionado. Additionally, the Company relies to a
certain extent upon the reputation of the Ashton brand, Robert G. Levin, the
Company's Chairman of the Board, Chief Executive Officer and President, and
Fuente Cigar.
INFORMATION SYSTEMS
The Company has upgraded its information systems over the past year and
intends to make additional capital expenditures of approximately $500,000 from
the net proceeds of the Offering to further upgrade the capabilities of its
systems in support of anticipated growth. The Company has engaged an outside
consultant to further enhance the productivity and regularly review the
suitability of its management information systems. Additional investments are
also anticipated to enhance the Company's web site.
INTELLECTUAL PROPERTY
Ashton is a registered trademark of the Company. Holt's, Cortesia and
Castano are trademarks with respect to which the Company has applications for
registration pending. As the Company believes that its existing trademarks,
particularly the Ashton trademark, are critical to the Company's continued
success, the Company intends to vigorously defend its trademarks against any
potential infringement.
COMPETITION
The markets for the Company's products are highly competitive and subject
to rapid consumer change and frequent new product introductions and extensions.
The Company's wholesale distribution business faces competition from larger,
well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new entrants to the marketplace. The Company's retail sales
compete with a large number of other mail
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order companies, some of which are larger and better financed than the Company.
The Company also faces significant competition from a large number of existing,
and an increasing number of new, retail stores and smoking establishments
selling the same branded products as the Company. Existing or future competitors
may develop or offer the same or similar premium cigars which may result in
decreases in the Company's sales of premium cigars. Many of these competitors
have longer operating histories and significantly greater financial, managerial,
creative, sales and marketing and other resources than the Company. The
Company's ability to retain its existing customers and attract new customers
depends on the quality of its premium cigars, the availability of product, its
reputation in the industry, and its ability to maintain customer satisfaction.
The Company's Ashton brand competes on the basis of quality and consistency of
its premium cigars and service to its wholesale customers. The Company's retail
operations compete on the basis of breadth of product, customer service and
price.
THE TOBACCO INDUSTRY
Regulation. Cigar manufacturers, like other producers of tobacco products,
are subject to regulation at the 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
purchase of tobacco products, together with an appropriate enforcement program.
The recent trend is toward increasing regulation of the tobacco industry, and
the recent increase in popularity of cigars could lead to an increase in
regulation of cigars. A variety of bills relating to tobacco issues have been
introduced in the U.S. Congress, including bills that would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the FTC to the FDA and require the tobacco industry to fund the FDA's
oversight; (v) increase tobacco excise taxes; (vi) restrict the access to
tobacco products by, among other things, banning the distribution of tobacco
products through the mail, except for sales subject to proof of age; (vii)
require licensing of retail tobacco product sellers; (viii) regulate tobacco
product development; and (ix) require tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Although hearings have been held on certain of these proposals, to
date none of such proposals have been passed by Congress.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine. In
addition, a majority of states restrict or prohibit smoking in certain public
places and restrict sale of tobacco products (including cigars) to minors. Local
legislative and regulatory bodies have increasingly moved to curtail smoking by
prohibiting smoking in certain buildings or areas or by requiring designated
"smoking" areas. Individual establishments, such as bars and restaurants, have
further prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Numerous proposals also have been considered
at the state and local level restricting smoking in certain public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, legislation recently introduced in
Massachusetts would, if enacted, require warning labels on cigar boxes, and the
states of Minnesota and Texas have recently enacted legislation which would
require cigar manufacturers to report the levels of various substances in their
cigars on an annual basis. Consideration at both the federal and state level
also has been given to consequences of second-hand smoke.
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
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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 National Cancer Institute also has announced that it will issue a
report in 1997 describing research into cigars and health. The study and these
reports could affect pending and future tobacco regulation and litigation.
Litigation
Litigation against the cigarette industry historically has been brought by
individual cigarette smokers. In 1992, the United States Supreme Court
in Cipollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts state law 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 generally have been unsuccessful. A jury in Florida, however, recently
determined that a cigarette manufacturer was negligent in the production and
sale of its cigarettes and sold a product that was unreasonably dangerous and
defective, awarding the plaintiffs a total of $750,000 in damages.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions 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.
Over 40 states have filed lawsuits against the major United States
cigarette manufacturers to recover billions of dollars in damages, primarily
costs of medical treatment of smokers. On June 20, 1997, the Attorneys General
of 40 states and several major cigarette manufacturers announced a proposed
settlement of the lawsuits filed by these states (the "Proposed Settlement").
The Proposed Settlement, which will require Federal legislation to implement, is
complex and may change significantly or be rejected. The Proposed Settlement
would significantly change the way in which cigarette companies and tobacco
companies do business. Among other things, the tobacco companies would pay
hundreds of billions of dollars to the various states; the FDA could regulate
nicotine as a "drug" and tobacco products as "drug delivery devices;" all
outdoor advertising, sports event advertising and advertising on non-tobacco
products would be banned and certain class action lawsuits and punitive damage
claims against tobacco companies would be prohibited. President Clinton recently
announced that he would not support the Proposed Settlement unless significant
changes were incorporated. Therefore, the potential impact of the Proposed
Settlement on the cigar industry in general and the Company in particular is
uncertain. The State of Florida has entered into a separate settlement agreement
with major United States cigarette manufacturers with respect to tobacco
products including roll-your-own and little cigars. The settlement agreement
provides, in part, for a ban on billboard and transit advertising, significant
document disclosure by the settling cigarette companies, billions of dollars in
settlement payments, and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved it will
supercede the Mississippi settlement. The recent increase in the sales of cigars
and the publicity such increases have received may have the effect of increasing
the probability of legal claims.
In May 1996, the Fifth Circuit Court of Appeals 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 this action recently have been
filed in certain states. To date, two pending class actions against major
cigarette manufacturers have been
34
<PAGE>
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.
Excise Taxes. Cigars have long 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 12.75% of the manufacturer's selling price, net of the
federal excise tax and certain other exclusions, capped at $30.00 per thousand
cigars.
In the past, there have been various proposals by the federal government to
fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund the Clinton Administration's health care reform program. The
Company believes that the volume of cigars sold would have been dramatically
reduced if excise taxes were enacted as originally proposed as part of the
Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company.
Tobacco products also are subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. Forty-two states impose excise taxes on cigars. State cigar excise taxes
are not subject to caps similar to the federal cigar 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 sales of cigars.
EMPLOYEES
As of June 30, 1997, the Company had a total of 37 full time and four part
time employees, all of whom are based in the United States. Of this total, 23
full time and four part time employees were engaged in sales and marketing,
seven full time employees were employed in administration and finance, and seven
full time employees were employed in shipping and receiving. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with employees to be
good.
FACILITIES
The Company's principal executive and administrative offices, as well as
its warehouse, shipping, call center and customer service facilities, are
located at its leased headquarters facility in Philadelphia, Pennsylvania. The
Company currently occupies 21,360 square feet of space in the Philadelphia
facility. This facility, which was opened in September 1997, is leased for a
term of five years (with options to extend) at an aggregate annual rental of
$74,760 plus certain common area expenses, which rental will increase in
proportion to increases in the consumer price index. The Company anticipates
that this new facility will be sufficient to meet the Company's needs for the
foreseeable future. The Company leases its 3,000 square foot Philadelphia retail
store from the Company's Chairman of the Board, Chief Executive Officer and
President, Robert G. Levin, for an initial term through October 31, 2004. The
Company has the right to renew this lease for an additional five year period.
The rent paid by the Company is $75,000 per year, which rent is fixed through
the end of the renewal term. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings which are
expected, individually or in the aggregate, to have a material adverse effect on
the Company's business, operating results or financial condition.
35
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert G. Levin...................... 51 Chairman of the Board, Chief Executive Officer and
President
Michael Pitkow....................... 48 Chief Operating Officer, Executive Vice President
and Director
Robert H. Levitt..................... 40 Chief Financial Officer
Carlos A. Fuente, Sr................. 62 Director
Carlos P. Fuente, Jr................. 43 Director
Harvey W. Grossman(1)(2)............. 59 Director
Marvin B. Sharfstein(1)(2)........... 53 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Robert G. Levin is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Levin has been engaged in the business of the
Company since 1972, and has been Chairman of the Board, Chief Executive Officer
and President since 1980.
Michael Pitkow joined the Company in October 1995 as Chief Operating
Officer and Executive Vice President and has been a Director of the Company
since September 1997. From 1985 through October 1995, Mr. Pitkow was the owner
of Pitkow Associates, a media service and marketing communications company. From
1983 to 1985, Mr. Pitkow was general manager of Cable AdNet, then Philadelphia's
largest cable advertising interconnect company.
Robert H. Levitt joined the Company as Chief Financial Officer in November
1996. From 1991 until November 1996, Mr. Levitt was a senior manager at
Schmeltzer o Master Group, P.C., the Company's independent accountants until May
1997. From 1989 through 1991, Mr. Levitt served as a controller for several
privately held companies. From 1981 through 1989, Mr. Levitt was a manager in
the emerging business group of Deloitte & Touche, L.L.P.
Carlos A. Fuente, Sr. became a Director in September 1997. Mr. Fuente, Sr.
has worked in the cigar industry his entire life, first working for his father,
Arturo Fuente, Sr., and then as President and Chairman of the Board of the
family manufacturing business which he acquired from his father in the early
1960's. The cigar manufacturing business is currently operated through Fuente
Cigar, a privately-held company owned by Fuente family interests. Mr. Fuente,
Sr. is the third of four generations of Fuente family members to own and operate
a cigar manufacturing business.
Carlos P. Fuente, Jr. became a Director in September 1993. Mr. Fuente, Jr.
is the son of Carlos A. Fuente, Sr. and has been employed by the Fuente family's
cigar manufacturing business since 1970. Mr. Fuente, Jr. has been the President
of Fuente Cigar since 1990.
Harvey W. Grossman became a Director in September 1997 and serves on the
Audit and Compensation Committees. Mr. Grossman is a certified public accountant
and a partner in Cogen Sklar LLP, a certified public accounting firm in Bala
Cynwyd, Pennsylvania. Mr. Grossman is a member of both the American and
Pennsylvania Institutes of Certified Public Accountants and was a member of the
Pennsylvania Institute of Certified Public Accountants' Forensic and Litigation
Services Committee from 1995 to 1996.
Marvin B. Sharfstein became a Director in September 1997, and serves on the
Company's Audit and Compensation Committees. Mr. Sharfstein has been a Director
of Holt's Cigar Company, Inc., and
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<PAGE>
Ashton Distributors, Inc. the Company's wholly owned subsidiaries, since January
1996. From 1983 through February 1996, Mr. Sharfstein served as the Vice
President of Corporate Finance and a Director of Cabot Medical Corp., a publicly
traded medical device manufacturer which he founded. Since February 1996, Mr.
Sharfstein has been a financial consultant to a variety of businesses through
MBS Capital Corp. a merchant banking firm.
TERMS OF OFFICE AND BOARD COMMITTEES
Prior to the consummation of the Offering, the Company's Certificate of
Incorporation will be amended to provide that directors of the Company shall be
divided into three classes, as nearly equal in number as possible. The initial
term of office of the Class I Directors shall expire on the day of the first
annual meeting of stockholders following the end of Fiscal 1998 (the "1998
Annual Meeting"); the initial term of office of the Class II Directors shall
expire on the day of the annual meeting of stockholders next succeeding the 1998
Annual Meeting; and the initial term of office of the Class III Directors shall
expire on the day of the second annual meeting of stockholders succeeding the
1998 Annual Meeting. At each annual meeting of stockholders, directors elected
to succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. Thus, after consummation of the Offering and effective upon the
amendment of the Certificate of Incorporation, directors will stand for election
only once in three years. Effective upon the amendment of the Certificate of
Incorporation, Messrs. Pitkow and Grossman are expected to serve as Class I
directors, Messrs. Fuente, Jr. and Sharfstein are expected to serve as Class II
directors, and Messrs. Fuente, Sr. and Levin are expected to serve as Class III
directors.
In accordance with the amendment, the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to alter, change, amend, repeal, or adopt any provision
inconsistent with, the provisions of the Certificate of Incorporation providing
for the classified Board of Directors.
The Audit and Compensation Committees consist of Messrs. Sharfstein and
Grossman. The Audit Committee reviews the adequacy of the Company's internal
control systems and financial reporting procedures, reviews the general scope of
the annual audit, reviews and monitors the performance of non-audit services by
the Company's independent public accountants and reviews interested transactions
between the Company and any of its affiliates. The Compensation Committee
administers the Company's Employee Stock Plan and makes recommendations to the
Board of Directors concerning salaries and non-stock compensation for the
Company's officers and employees.
SHAREHOLDERS AGREEMENT
Pursuant to the shareholders agreement between the Fuente Investment
Partnership and Robert G. Levin, Mr. Levin is required to vote for two directors
nominated by the Fuente Investment Partnership and the Fuente Investment
Partnership is required to vote for the balance of the Board of Directors
nominees nominated by Mr. Levin. Currently, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr. are the directors nominated by Fuente Investment Partnership. All
other directors are the nominees of Mr. Levin. In addition, each of the Fuente
Investment Partnership and Mr. Levin (i) has a right of first refusal to
purchase the others shares and (ii) the right to participate on a proportionate
basis in any sale of the other party's Common Stock.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company receives $1,000 for
each meeting of the Board attended and for each committee meeting attended.
Messrs. Carlos A. Fuente, Sr., Carlos P. Fuente, Jr., Sharfstein and Grossman
have been granted options to purchase 15,000 shares of the Common Stock, each,
pursuant to the Director Stock Plan, which options are all fully vested and
exercisable at a price equal to the initial public offering price per share. The
Director Stock Plan
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<PAGE>
provides that options will be granted to non-employee directors of the Company
pursuant to an automatic, non-discretionary grant mechanism. Following the
Offering, each new non-employee director will automatically be granted an option
to purchase 15,000 shares of the Common Stock. Each non-employee director will
subsequently be granted an option to purchase 15,000 at each annual meeting of
stockholders beginning with the 1998 Annual Meeting of Stockholders. Each such
option will be granted at the fair market value of the Common Stock on the date
of the grant. Options granted to non-employee directors under the Director Stock
Plan vest in full upon the grant, and may be exercised immediately. See "--
Stock Options -- The Non-Management Directors Stock Option Plan."
EXECUTIVE COMPENSATION
The following table and accompanying footnotes provide certain information
concerning the compensation earned by the Company's Chief Executive Officer and
the other executive officer of the Company whose salary and bonus was in excess
of $100,000 (the "Named Officers") for Fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
-------------------------------------- COMPENSATION
NAME AND POSITION SALARY($) BONUS($) OTHER($)(1) ($)(2)
- ----------------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Robert G. Levin............................ 335,973 -- -- 4,750
Chairman of the Board, Chief Executive
Officer and President
Michael Pitkow............................. 111,039 5,000 -- --
Chief Operating Officer and Executive
Vice President
</TABLE>
- ------------------
(1) Pursuant to the Securities and Exchange Commission rules on executive
compensation disclosure, "All Other Compensation" does not include
perquisites because the aggregate amount of such compensation for each of
the persons listed did not exceed the lesser of (i) $50,000 or (ii) ten
percent of the combined salary and bonus for such person in Fiscal 1997.
(2) Represents the Company's matching contribution pursuant to its 401(k)
defined contribution plan.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Levin and Pitkow. Mr.
Levin's employment agreement, effective as of October 1, 1997, provides for a
minimum base salary of $400,000, to be reviewed at least annually and to be
adjusted based upon his performance, and has a term of five years which will be
automatically renewed for sucessive periods of one year if neither party gives
the required notice of termination. Mr. Pitkow's employment agreement, effective
as of October 1, 1997, provides for a minimum base salary of $150,000 per year,
to be reviewed at least annually, and expires on December 31, 1999.
STOCK OPTIONS
The 1997 Employee Stock Option Plan. The Employee Stock Plan, approved by
the Board of Directors and shareholders of the Company in September 1997, is
intended to provide incentives to the officers and other employees of the
Company by providing them with opportunities to purchase shares of Common Stock
pursuant to options granted which qualify as "incentive stock options" ("ISO's")
under Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code") or which do not qualify as ISO's ("Non-Qualified Options") (ISO and
Non-Qualified Options being referred to collectively as "Options"). Options for
up to a maximum of 300,000 shares of Common Stock can be issued under the
Employee Stock Plan.
38
<PAGE>
The Employee Stock Plan is currently administered by the Board of
Directors, although it is the intent of the Board of Directors to transfer this
responsibility to the Compensation Committee following the Offering. The
Compensation Committee will have the authority to determine those employees of
the Company to whom Options will be granted. If any Option granted under the
Employee Stock Plan expires or terminates for any reason without having been
exercised in full or ceases for any reason to be exercisable in whole or in
part, the unpurchased shares subject to such Options are again available for
grants under the Employee Stock Plan.
Grants of Options under the Employee Stock Plan can be made at any time on
or after October 1, 1997 and prior to September 30, 2006. The exercise price of
all options to be granted under the Employee Stock Plan will be the fair market
value of the Common Stock on the date of grant defined in the Employee Stock
Plan. If an optionee ceases to be employed by the Company or certain affiliated
or successor entities other than by reason of death or disability, no further
installments of the Options shall generally become exercisable, and such
optionee's Options shall terminate after the passage of ninety days from the
date of termination or such optionee's employment. Upon the occurrence of
certain events such as stock dividends and stock splits, consolidations or
mergers, an optionee's rights with respect to Options granted are to be adjusted
as provided in the Employee Stock Plan. Pursuant to the Employee Stock Plan, the
Company has granted options to purchase an aggregate of 169,500 shares of Common
Stock at an exercise price equal to the initial public offering price per share.
These options vest as to one-third of the shares on each of the anniversary
dates of the date the Company granted such options, so long as the option holder
remains in the continuous employ of the Company during such period.
The Non-Management Directors Stock Option Plan. The Director Stock Plan,
approved by the Board of Directors and shareholders of the Company in September
1997, and is intended to provide incentives to the directors of the Company who
are not employees of the Company by providing them with options to purchase
shares of Common Stock. Options for up to a maximum of 180,000 shares of Common
Stock may be issued under the Director Stock Plan.
The Director Stock Plan is currently administered by the Board of
Directors. Each outside director of the Company is automatically granted options
to purchase 15,000 shares of the Common Stock at the fair market value thereof
as defined in the Director Stock Plan on the date of each grant of Options, and
each outside director is granted Options to purchase 15,000 shares of the Common
Stock at each annual meeting of the stockholders of the Company. All of these
Options vest immediately upon grant. Upon the occurrence of certain events such
as stock dividends and stock splits, consolidations or mergers, an optionee's
rights with respect to Options granted are to be adjusted as provided in the
Director Stock Plan.
Pursuant to the Director Stock Plan, the Company granted options to each of
Messrs. Fuente, Sr., Fuente, Jr., Sharfstein and Grossman to purchase 15,000
shares of Common Stock at the initial public offering price per share.
Other Options. In January 1996, options to purchase 201,000, 201,000 and
80,400 shares of the Common Stock were granted to Michael Pitkow, Chief
Operating Officer, Executive Vice President and a director of the Company,
Marvin Sharfstein, a director the Company and Carole Cohn, Mr. Levin's sister,
respectively. These options were granted at an exercise price of $.50 per share,
the estimated fair market value at the date of grant. At the time these options
were granted, Robert G. Levin and the Fuente Investment Partnership agreed that
these options granted by the Company would not dilute the ownership interest of
the Fuente Investment Partnership. Accordingly, Mr. Levin has agreed that upon
exercise of any such options he will contribute to the capital of the Company
one share of Common Stock for each share purchased pursuant to these options.
39
<PAGE>
CERTAIN TRANSACTIONS
Relationships with Fuente Cigar and Related Parties. In Fiscal 1996,
Fiscal 1997 and for the three months ended June 30, 1997, the Company purchased
approximately $1.9 million, $3.6 million and $1.5 million, respectively, of
premium cigars from Fuente Cigar, representing approximately 39.2%, 47.0% and
45.4%, respectively, of premium cigar purchases for such periods. At June 30,
1997, approximately $491,000 was due to Fuente Cigar for premium cigars sold to
the Company. Two of the principal executive officers of Fuente Cigar, Carlos A.
Fuente, Sr. and Carlos P. Fuente, Jr., are directors of the Company and a
related family partnership will own approximately 24.4% of the shares of Common
Stock outstanding upon completion of the Offering. The Company has entered into
two agreements with Fuente Cigar. See "Risk Factors -- Dependence on Fuente
Cigar Ltd." and " -- Potential Conflicts of Interest" and "Business --
Suppliers." Mr. Levin and an affiliate of Fuente Cigar have also entered into a
consulting agreement whereby such affiliate paid Mr. Levin the sum of $50,000
per year for consulting services. This agreement will be terminated upon
completion of the Offering.
Shareholders Agreement. The Fuente Investment Partnership and Robert G.
Levin have entered into an agreement which provides that Mr. Levin will vote all
of his shares of Common Stock for the election of two directors nominated by the
Fuente Investment Partnership (currently Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr.) and the Fuente Investment Partnership will vote all of its shares
of Common Stock for the remainder of the directors to be nominated by Mr. Levin.
In addition, the agreement grants each party a right of first refusal on sales
of Common Stock by the other party and provides for each party to participate on
a percentage basis in any transaction involving the sale of Common Stock.
Philadelphia Retail Store Lease. The Company currently leases from Robert
G. Levin, the Chairman of the Board, Chief Executive Officer and President of
the Company, the entire two-story building comprising approximately 4,700 square
feet in which the Company's retail store is located. The Company's retail store
occupies 3,000 square feet on the street level, and the Company sublets
approximately 1,700 square feet on the second floor to an unrelated third party.
The Company paid approximately $48,000 and $54,000 to Mr. Levin under this lease
in Fiscal 1996 and Fiscal 1997, respectively. The term of this lease extends
through October 31, 2004 and the Company has the right to renew this lease for
an additional five year term. The current rent paid to Mr. Levin is $6,250 per
month, or $75,000 per year, which rent is fixed through the end of the renewal
term.
Guaranty of Loan. The Company guaranteed certain debt of Mr. Levin
relating to the acquisition of the building in which the Company's Philadelphia
retail store is located. The balance on that loan was $435,567 at June 30, 1997.
Mr. Levin currently guarantees certain indebtedness of the Company. The total of
this indebtedness was $425,607 at June 30, 1997.
All of the foregoing transactions between the Company and the foregoing
persons and entities were on substantially the same terms and conditions as if
such transactions would have been entered into with unrelated third parties. The
Company has a policy to the effect that any future transactions between it and
any of its officers, directors, principal stockholders or the affiliates of the
foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent third
parties, and that any such transactions also be approved by a majority of the
Company's directors who are disinterested in the transaction.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization and as adjusted to reflect the sale of the shares of Common Stock
offered hereby, by (i) each director of the Company, (ii) each person who is
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (iii) the Named Officers, (iv) the Selling Shareholder, and (v)
all of the Company's executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-------------------
SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
- --------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Robert G. Levin(2).................................... 2,613,015 65.0% 45.3%
Fuente Investment Partnership(3)...................... 1,406,985 35.0 24.4
Carlos A. Fuente, Sr.(4).............................. 1,421,985 35.2 24.6
Carlos P. Fuente, Jr.(4).............................. 1,421,985 35.2 24.6
Marvin B. Sharfstein(5)............................... 216,000 5.4 3.7
Michael Pitkow(5)..................................... 201,000 5.0 3.5
Harvey W. Grossman(5)................................. 15,000 * *
All directors and executive officers as a group
(7 persons)......................................... 4,080,000 100.0% 70.0%
</TABLE>
- ------------------
*Less than 1% of outstanding shares of Common Stock.
(1) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to the shares
beneficially owned by them. The address for Messrs. Levin, Pitkow and
Sharfstein is 12270 Townsend Road, Philadelphia, Pennsylvania 19154, the
address for the Fuente Investment Partnership and Messrs. Fuente is c/o
Fuente Cigar Ltd., Zona Franca, Santiago, Dominican Republic.
(2) If the Underwriters' over-allotment option is exercised in full, Mr. Levin
will sell 262,500 shares of Common Stock, reducing his beneficial ownership
to 2,350,515 shares of Common Stock or 40.7% of the outstanding shares.
Further, in the event options to purchase up to 482,400 shares of Common
Stock are exercised by certain option holders including options to purchase
201,000 shares of Common Stock held by each of Messrs. Sharfstein and
Pitkow, Mr. Levin has agreed to contribute an equal number of shares owned
by him to the Company. See "Management -- Stock Options."
(3) The Fuente Investment Partnership is a Florida general partnership, the
partnership interests are beneficially owned by Carlos A. Fuente, Sr.,
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez, principals in Fuente Cigar.
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez are the children of Carlos
A. Fuente, Sr.
(4) Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr. are deemed the beneficial
owners of the shares of Common Stock owned by such partnership. Also
includes options to purchase 15,000 shares of Common Stock each granted
pursuant to the Director Stock Plan.
(5) Represents shares of Common Stock which may be acquired upon the exercise of
options granted by the Company.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will be authorized to issue
25,000,000 shares of Common Stock and 1,000,000 shares of preferred stock
immediately after the completion of the Offering, there will be 5,770,000 shares
of Common Stock outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of the Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors of
the Company. In such event, the holders of the remaining shares of Common Stock
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing of future agreements
between the Company and its debtholders. In the event of the liquidation,
dissolution or winding up of the Company, the holders of the Common Stock are
entitled to share ratably in all assets legally available for distribution after
payment of all debts and other liabilities.
PREFERRED STOCK
The Board of Directors, by unanimous consent, are authorized, subject to
certain limitations prescribed by law, without further stockholder approval, to
issue from time to time up to an aggregate of 1,000,000 shares of preferred
stock in one or more series and to fix the relative rights, preferences and
limitations of the shares within each series, including the dividend rights,
voting rights, redemption and sinking fund provisions, liquidation preferences,
conversion rights and preemptive rights and the number of shares constituting
any series. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting and other rights of holders of
Common Stock and, under certain circumstances, make it more difficult or costly
for a third party to acquire, or discourage a third party from attempting to
acquire, control of the Company. The Company has no present plans to issue any
shares of preferred stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by person who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the
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<PAGE>
three year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
amendment to the Certificate of Incorporation shall not become effective until
12 months after the date that it is adopted. The Company has not adopted such an
amendment to the Certificate of Incorporation or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation and under Delaware
laws, directors of the Company are not liable to the Company or its stockholders
for monetary damages, for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
The Company's Certificate of Incorporation provides for mandatory
indemnification of directors and officers of the Company against any expense,
liability and loss to which they become subject, or which they may incur as a
result of having been a director or officer of the Company. In addition, the
Company must advance or reimburse directors and officers for expenses incurred
by them in connection with certain claims.
In addition to the indemnification provision in the Certificate of
Incorporation, the Company will enter into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individuals
may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will
continue to be, provided to them.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-laws of the Company contain
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited proposal
from a third party which has acquired a block of stock of the Company, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders.
The Certificate of Incorporation provides that the Board be divided into
three classes of directors serving staggered three year terms. The
classification of the Board has the effect of making it more difficult for
stockholders to change the composition of the Board in a relatively short period
of time. At least two annual meetings of stockholders, instead of one, generally
will be required to effect a change in a majority of the Board. Such a delay may
help ensure that the Board and the stockholders, if confronted with an
unsolicited proposal by a stockholder attempting to force a stock repurchase at
a premium above market, a proxy contest or an extraordinary corporate
transaction, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interest of the stockholders. Directors, if any, elected by holders of preferred
stock voting as a class, will not be classified as aforesaid. In addition, under
Delaware law, in the case of a corporation having a classified board,
stockholders may remove a director only for cause. This provision will preclude
a stockholder from removing incumbent directors without cause.
43
<PAGE>
In addition, the Certificate of Incorporation restricts the ability of the
stockholders to take any action by written consent by requiring the approval of
two-thirds, instead of a majority, of the outstanding capital stock, and
contains a fair price requirement, pursuant to which certain merger, combination
or sale transaction proposals shall require the approval of two-thirds, instead
of a majority, of the outstanding capital stock, unless the proposal is approved
by two-thirds of the full Board of Directors or all holders of the then
outstanding capital stock (other than the stockholder making the bid) receive
cash in an amount at least equal to the highest price paid by the bidding
stockholder for shares of the capital stock of the Company during the three year
period preceding the date of such stockholder's offer or proposal. Such a
provision may have the effect of deterring takeover offers. The Certificate of
Incorporation also provides that the stockholders may not amend any of the
foregoing provisions without the approval of two-thirds of the outstanding
capital stock.
REGISTRATION RIGHTS
Pursuant to the options (the "Options") to purchase an aggregate of 482,400
shares of Common Stock which were granted to Michael Pitkow, Marvin B.
Sharfstein and Carol Cohn (the "Optionholders"), the Optionholders were granted
the right to demand that the Company register the shares of Common Stock
issuable upon the exercise of the Options at any time commencing nine months
after the effective date of this Prospectus. In addition, the Optionholders have
certain "piggy-back" registration rights. These registration rights expire on
December 31, 2005, at the expiration of the Options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,770,000 shares of
Common Stock outstanding, 1,750,000 (2,012,500 if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or requirement of further registration under the Securities Act. All
of the remaining 4,020,000 shares of Common Stock are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act.
Upon completion of the Offering, no shares will be eligible for sale in the
public market immediately following commencement of the offering, and, beginning
90 days after commencement of the Offering, 4,020,000 shares will become
eligible for sale pursuant to Rule 144. Upon expiration of the lock-up
agreements, no shares will become immediately eligible for sale without
restriction pursuant to Rule 144(k) (described below), and approximately
4,020,000 shares will be eligible for sale subject to the timing, volume, and
manner of sale restrictions of Rule 144. In addition, 542,400 additional shares
of Common Stock subject to outstanding vested stock options could also be sold,
subject in some cases to compliance with certain volume limitations as described
below.
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year (including
the holding period of any prior owner except an affiliate from whom such shares
were purchased) is entitled to sell in "brokers transactions" or to market
makers, within any three month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding (approximately
57,700 shares immediately after the completion of the Offering) or (ii)
generally, the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner other
than an affiliate from whom such shares were purchased), is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Pursuant to lock-up agreements, all of the Company's officers and
directors, and all shareholders and certain option holders, including the
Selling Shareholder, owning upon completion of the Offering, in the aggregate,
4,020,000 shares of Common Stock and options to purchase 582,400 shares of
Common Stock, and the Company have executed agreements pursuant to which they
have agreed that they will not, for a period of 180 days from the date of this
Prospectus, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock, or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except that such agreement does not
prevent the Company from granting additional options under the Employee Stock
Plan or the Director Stock Plan. Prudential Securities Incorporated may in its
sole discretion, at any time and without notice, release all or any portion of
the securities subject to such lock-up agreements.
Approximately 180 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering an aggregate of
approximately shares of Common Stock (including the
shares subject to outstanding options) that have been reserved for issuance
under its stock option and stock purchase plans, thus permitting the resale of
such shares in the public market without restriction under the Securities Act.
45
<PAGE>
The holders of an aggregate of 482,400 shares of Common Stock (including
shares issuable upon exercise of vested options) or their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. See "Description of Capital Stock -- Registration Rights."
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
46
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Janney Montgomery Scott Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement, (the "Underwriting
Agreement") to purchase from the Company the number of shares of Common Stock
set forth opposite their respective names:
NUMBER
OF SHARES
UNDERWRITER ---------
Prudential Securities Incorporated..........................
Janney Montgomery Scott Inc.................................
---------
Total.................................................. 1,750,000
=========
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Stock initially at the initial public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may reallow a concession of $ per share
to certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representatives.
The Selling Shareholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 262,500
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriters' name in the preceding table bears to 1,750,000.
The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company, its officers and directors, the Selling Shareholder, all other
beneficial owners of the Common Stock and holders of options to purchase Common
Stock have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise
47
<PAGE>
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock or any securities convertible into
or exercisable or exchangeable for any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this Prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. Prudential Securities Incorporated may in its sole
discretion, at any time and without notice, release all or any portion of the
securities subject to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices of securities for companies in
businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Shareholder, and
in such case may purchase Common Stock in the open market following the closing
of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
262,500 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Fox, Rothschild, O'Brien &
Frankel, LLP. Certain legal matters related to the Offering will be passed upon
for the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The financial statements as of March 31, 1997 and for the year ended March
31, 1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements as of March 31, 1996 and for each of the two years
in the period ended March 31, 1996 included in this Prospectus have been so
included in reliance on the report of SchmeltzeroMaster Group, P.C., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
48
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective as of May 30, 1997, the Company's Board dismissed
SchmeltzeroMaster Group, P.C. and appointed Price Waterhouse LLP as the
Company's independent accountants. The report of SchmeltzeroMaster Group, P.C.
on the Company's combined financial statements as of March 31, 1996 and for each
of the two years in the period then ended did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. In connection with the audits for the years
ended March 31, 1995 and 1996 and through May 30, 1997, there were no
disagreements with SchmeltzeroMaster Group, P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
SchmeltzeroMaster Group, P.C. would have caused them to make reference thereto
in their report on the financial statements for such years. Prior to retaining
Price Waterhouse LLP, the Company had not consulted with Price Waterhouse LLP
regarding the application of accounting principles or the type of audit opinion
that might be rendered on the Company's financial statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement of Form
S-1 under the Securities Act with respect to the Company's Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in the Prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the Registration Statement and the exhibits and schedules thereto. The
information so omitted, including exhibits and schedules, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004.
Such materials also may be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants.
49
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
----------
<S> <C>
Reports of Independent Accountants.......................... F-2, F-3
FINANCIAL STATEMENTS
Combined Balance Sheets................................... F-4
Combined Statements of Operations......................... F-5
Combined Statements of Stockholders' Equity............... F-6
Combined Statements of Cash Flows......................... F-7
Notes to Combined Financial Statements.................... F-8 - F-18
</TABLE>
<PAGE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of Holt's Cigar Holdings, Inc. and Affiliates
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates at March 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
July 2, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Holt's Cigar Holdings, Inc. and Affiliates
We have audited the accompanying combined balance sheet of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
Schmeltzer o Master Group, P.C.
Certified Public Accountants
Wyncote, Pennsylvania
August 13, 1996
F-3
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
----------------------- JUNE 30, JUNE 30,
1996 1997 1997 1997
---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash................................. $ 639,450 $ 515,520 $ 841,218 $ 841,218
Accounts receivable (net of allowance
for doubtful accounts of $19,500,
$34,500 and $40,000 (unaudited) at
March 31, 1996, 1997, and June 30,
1997.............................. 464,740 1,235,669 1,186,607 1,186,607
Inventory............................ 1,557,207 2,583,877 2,623,277 2,623,277
Loan receivable -- officer........... 18,830 23,396 23,396 23,396
Prepaid expenses and other current
assets............................ 41,724 51,408 29,569 29,569
---------- ---------- ---------- ----------
Total current assets.............. 2,721,951 4,409,870 4,704,067 4,704,067
Property and equipment, net............ 817,938 848,226 1,038,966 1,038,966
Deposits............................... 8,302 15,495 15,495 15,495
Goodwill............................... -- -- -- 244,340
Other assets (net of accumulated
amortization of $120,770, $104,036
and $111,314 (unaudited) at March 31,
1996, 1997 and June 30, 1997......... 138,291 131,919 128,937 128,937
---------- ---------- ---------- ----------
Total assets........................... $3,686,482 $5,405,510 $5,887,465 $6,131,805
========== ========== ========== ==========
Current liabilities:
Lines of credit...................... $ 5,000 $ -- $ -- $ --
Current portion of long-term debt.... 148,666 129,441 122,470 122,470
Accounts payable..................... 383,671 892,999 852,101 852,101
Due to related party................. 504,000 713,800 491,000 491,000
Accrued expenses and other current
liabilities....................... 183,564 165,870 46,630 46,630
Income taxes payable................. 462,300 296,351 399,309 399,309
Stockholder distributions payable.... -- -- -- 2,700,000
---------- ---------- ---------- ----------
Total current liabilities......... 1,687,201 2,198,461 1,911,510 4,611,510
Long-term debt -- less current
portion.............................. 342,995 182,440 324,940 324,940
Deferred income taxes.................. 3,400 -- -- --
Commitments
Stockholders' equity:
Preferred stock (pro forma) no par
value, 1,000,000 shares
authorized, none
issued............................ -- -- -- --
Common stock (proforma) $.001 par
value, 25,000,000 shares
authorized, 4,020,000 issued and
outstanding....................... 91,114 91,114 91,114 4,020
Additional paid-in capital........... 303,607 303,607 303,607 585,041
Retained earnings.................... 1,308,165 2,679,888 3,306,294 606,294
---------- ---------- ---------- ----------
1,702,886 3,074,609 3,701,015 1,195,355
Treasury stock, 18,000 shares at
cost.............................. (50,000) (50,000) (50,000) --
---------- ---------- ---------- ----------
Total stockholders' equity........... 1,652,886 3,024,609 3,651,015 1,195,355
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity............................... $3,686,482 $5,405,510 $5,887,465 $6,131,805
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------- -----------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................. $5,662,215 $9,466,848 $17,277,940 $3,450,249 $6,361,422
Cost of goods sold........ 3,041,490 5,158,563 9,565,964 1,978,310 3,612,127
---------- ---------- ----------- ---------- ----------
Gross profit.............. 2,620,725 4,308,285 7,711,976 1,471,939 2,749,295
Operating expenses........ 1,948,670 3,483,645 4,894,829 1,033,976 1,392,816
---------- ---------- ----------- ---------- ----------
Income from operations.... 672,055 824,640 2,817,147 437,963 1,356,479
Other income.............. -- 21,610 31,976 3,951 13,933
---------- ---------- ----------- ---------- ----------
Income before income tax
expense................. 672,055 846,250 2,849,123 441,914 1,370,412
Income tax expense........ 209,400 318,200 576,600 89,000 317,000
---------- ---------- ----------- ---------- ----------
Net income................ $ 462,655 $ 528,050 $ 2,272,523 $ 352,914 $1,053,412
========== ========== =========== ========== ==========
Pro forma and supplemental
pro forma income data
(unaudited) (Note 15):
Income before income tax
expense, as
reported............. $ 2,849,123 $ 441,914 $1,370,412
Pro forma amortization
of goodwill.......... 12,217 3,054 3,054
----------- ---------- ----------
Pro forma income before
income tax expense... 2,836,906 438,860 1,367,358
Pro forma income
taxes................ 1,135,000 176,000 547,000
----------- ---------- ----------
Pro forma net income.... $ 1,701,906 $ 262,860 $ 820,358
=========== ========== ==========
Pro forma net income per
share................ $ .41 $ .06 $ .20
=========== ========== ==========
Pro forma weighted
average number of
shares............... 4,164,356 4,164,356 4,164,356
Supplemental pro forma
net income........... $ 1,745,906 $ 273,860 $ 824,758
=========== ========== ==========
Supplemental pro forma
net income per
share................ $ .42 $ .07 $ .20
=========== ========== ==========
Supplemental pro forma
weighted average
number of shares..... 4,198,475 4,202,189 4,196,596
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994........ $91,100 $204,621 $ 396,960 $(50,000) $ 642,681
Net income..................... -- -- 462,655 -- 462,655
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1995........ 91,107 254,114 859,615 (50,000) 1,154,836
Net income..................... -- -- 528,050 -- 528,050
Stockholders' distributions.... -- -- (79,500) -- (79,500)
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1996........ 91,114 303,607 1,308,165 (50,000) 1,652,886
Net income..................... -- -- 2,272,523 -- 2,272,523
Stockholders' distributions.... -- -- (900,800) -- (900,800)
------- -------- ---------- -------- ----------
Balance at March 31, 1997........ 91,114 303,607 2,679,888 (50,000) 3,024,609
Net income (unaudited)......... -- -- 1,053,412 -- 1,053,412
Stockholders' distributions
(unaudited)................. -- -- (427,006) -- (427,006)
------- -------- ---------- -------- ----------
Balance at June 30, 1997
(unaudited).................... $91,114 $303,607 $3,306,294 $(50,000) $3,651,015
======= ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------------- -------------------------
1995 1996 1997 1996 1997
-------- -------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $462,655 $528,050 $2,272,523 $352,914 $1,053,412
Adjustments to reconcile net income to net cash
provided by operations:
Allowance for doubtful accounts.............. 3,215 11,785 15,000 -- 5,500
Depreciation and amortization................ 54,102 114,758 140,852 30,256 28,797
Deferred income taxes........................ -- 3,400 (3,400) -- --
(Increase) decrease in:
Accounts receivable........................ (261,663) (147,803) (785,929) (244,688) 43,562
Inventory.................................. (191,982) (462,918) (1,026,670) 6,785 (39,400)
Prepaid expenses and other current
assets.................................. (34,543) 22,115 (9,684) (14,217) 21,839
Deposits................................... (1,560) 1,721 (7,193) (5,607) --
Increase (decrease) in:
Accounts payable and due to related
party................................... 236,937 209,241 719,122 92,534 (262,363)
Accrued expenses and other current
liabilities............................. 62,458 134,423 (17,694) 32,328 (119,240)
Income taxes payable....................... 209,400 254,200 (165,949) (161,177) 102,958
-------- -------- ---------- -------- ----------
Net cash provided by operating
activities............................ 539,019 668,972 1,130,978 89,128 835,065
-------- -------- ---------- -------- ----------
Cash flows from investing activities:
Purchase of property, equipment and other
assets....................................... (256,061) (61,948) (142,762) (21,194) (217,896)
Proceeds from (advances on) loan receivable --
officer...................................... 12,120 (18,830) (4,566) (4,566) --
-------- -------- ---------- -------- ----------
Net cash used in investing activities... (243,941) (80,778) (147,328) (25,760) (217,896)
-------- -------- ---------- -------- ----------
Cash flows from financing activities:
Net (payments) proceeds from lines of credit... (194,198) 5,000 (5,000) -- --
Payments on long-term debt..................... (20,755) (41,442) (201,780) (77,299) (34,465)
Payments on loan payable -- officer............ 48,218 (48,218) -- -- --
Proceeds from issuance of common stock......... 49,500 -- -- -- --
Stockholder distributions...................... -- (79,500) (900,800) (135,000) (427,006)
Proceeds from long-term debt................... -- -- -- -- 170,000
-------- -------- ---------- -------- ----------
Net cash used in financing activities... (117,235) (164,160) (1,107,580) (212,299) (291,471)
-------- -------- ---------- -------- ----------
Net (decrease) increase in cash.................. 177,843 424,034 (123,930) (148,931) 325,698
Cash -- beginning of the year.................... 37,573 215,416 639,450 639,450 515,520
-------- -------- ---------- -------- ----------
Cash -- end of the year.......................... $215,416 $639,450 $ 515,520 $490,519 $ 841,218
-------- -------- ---------- -------- ----------
Supplemental disclosures:
Interest paid.................................. $ 18,486 $ 50,048 $ 73,184 $ 15,569 $ 7,467
======== ======== ========== ======== ==========
Income taxes paid (refunded)................... $(14,749) $ 60,594 $ 487,739 $145,000 $ 325,150
======== ======== ========== ======== ==========
Supplementary information regarding
non-cash investing and financing
activities:
Non-cash acquisition of property............... $ 4,709 $574,634 $ 22,000 $ 20,000 $ --
======== ======== ========== ======== ==========
Non-cash disposition of property............... $ -- $(50,829) $ -- $ -- $ --
======== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the historical
accounts of Holt's Cigar Company, Inc., Ashton Distributors, Inc. and Ashton
Holdings, Inc. all of which are controlled by a single stockholder (together the
"Company") and reflect their combined financial position, results of operations
and cash flows after elimination of intercompany accounts and transactions. The
Company is engaged in the wholesale and retail sale of premium cigars and
cigar-related accessories.
The combined financial statements have been presented as if the Company had
operated as a single combined entity for all periods presented. Such financial
statements may not necessarily present the financial position, results of
operations and cash flows the Company would have reported as a single entity
because in part, Ashton Distributors, Inc. is a Subchapter S Corporation and the
Subchapter S election will terminate upon consummation of the Company's
reorganization. (See Note 15 for unaudited combined pro forma financial
information.)
Corporate Reorganization (unaudited)
In conjunction with the Company's initial public offering, the companies
will be reorganized in a transaction among entities under common control. Prior
to the reorganization, the controlling stockholder owned 100% of the outstanding
common stock of both Holt's Cigar Company, Inc. and Ashton Distributors, Inc.
and 60% of the outstanding common stock of Ashton Holdings, Inc. Ashton
Holdings, Inc. which changed its name to Holt's Cigar Holdings, Inc., will
acquire all the outstanding common stock of Holt's Cigar Company, Inc. and
Ashton Distributors, Inc. The assets acquired and liabilities assumed of Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. are reflected in the unaudited
proforma combined balance sheet at historical costs except for the ownership
interests (represented by options) held by individuals other than the
controlling stockholder or his immediate family which have been recorded as the
acquisition of minority interests at estimated fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying disclosures at the date of the financial statements.
Differences from those estimates, if any, are recorded in the period they become
known.
Inventory
Inventory is stated at the lower of average cost or market. Cost is
determined by the first-in first-out method. Inventory is composed of finished
goods held for re-sale.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
cash and trade accounts receivable. The Company places its temporary cash
investments with high credit quality financial institutions 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.
F-8
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable, accrued expenses and other liabilities approximate fair value
because of the short maturity of those instruments.
The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the Company
for debt with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations. Renewals and betterments that materially
extend the life of the asset are capitalized. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets. Useful lives range from five to thirty-nine years.
Long-lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1997, the
Company adopted this statement and determined that no impairment loss need be
recognized for applicable assets of continuing operations.
Revenue Recognition
Sales are recognized upon shipment of products.
Cost of Goods Sold
Cost of goods sold comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
------------------------------------ THREE MONTHS ENDED
1995 1996 1997 JUNE 30, 1997
---------- ---------- ---------- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Beginning inventory............... $ 902,307 $1,094,289 $1,557,207 $ 2,583,877
Purchases from:
Related party supplier
(Notes 11 and 12)............ 1,020,929 1,853,269 3,631,481 1,479,478
Other suppliers................. 2,212,543 3,768,212 6,961,153 2,172,049
Less: ending inventory............ (1,094,289) (1,557,207) (2,583,877) (2,623,277)
---------- ---------- ---------- -----------
Cost of goods sold................ $3,041,490 $5,158,563 $9,565,964 $ 3,612,127
========== ========== ========== ===========
</TABLE>
F-9
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Stock Options
The Company applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans.
Net Income Per Share
Net income per share is presented on a pro forma basis only. See Note 15.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Holt's Cigar Company, Inc. (Holt's) and Ashton Holdings, Inc. (Holdings)
are subchapter C corporations and therefore subject to federal and state
corporate income taxes.
Ashton Distributors, Inc. (Ashton) has elected to be taxed under the
provisions of subchapter S of the Internal Revenue Code and Pennsylvania Tax
Reform Code. Under these provisions, Ashton does not pay federal or state income
taxes on its taxable income. Instead, Ashton's income, losses and credits are
included in the individual tax return of Ashton's stockholder.
Interim Financial Statements
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
interim period and are prepared on the same basis as the audited annual
financial statements.
Advertising
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotions costs amounted to $228,029, $328,111, $329,057 and
$111,064 (unaudited) for the years ended March 31, 1995, 1996 and 1997 and the
three months ended June 30, 1997, respectively.
Recently Issued Accounting Standards
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This Statement establishes a fair
value method of accounting for, or disclosing, stock-based compensation plans.
The Company adopted the disclosure provisions of SFAS No. 123 which require
disclosing the pro forma effect on net income and earnings per share of the fair
value method of accounting for stock-based compensation. The adoption of the
disclosure provisions did not affect the Company's combined financial condition,
results of operations, or cash flows. See Note 13.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS No. 128"). This statement requires companies to present basic earnings
per share, and if applicable, diluted earnings per share instead of primary and
fully diluted earnings per share. Basic earnings per share include the weighted
average number of common shares outstanding during the period, and does not
include common stock equivalents. Under SFAS No. 128, diluted earnings per share
include the weighted average number of shares outstanding and common stock
equivalents. SFAS No. 128 must be adopted by the Company in the third quarter of
fiscal year 1998. Early adoption of SFAS No. 128 is
F-10
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
not permitted. Adoption of SFAS 128 is not expected to have material effect on
the Company's earnings per share.
2. LOAN RECEIVABLE -- OFFICER
Loan receivable -- officer represents a short-term advance to an officer
with no interest being charged.
3. INCOME TAXES
As discussed in Note 1, the Company utilizes the liability method of
accounting for income taxes in accordance with SFAS 109. The effective tax rates
differ from the statutory rate primarily due to the Company's historical
corporate structure. The income recorded in Ashton Distributors, Inc. was not
subject to corporate taxation, rather the tax consequences were the
responsibility of the individual stockholder, resulting in a permanent
difference. The historical income tax expense is detailed as follows on a
separate company basis, after the effects of eliminations:
For the year ended March 31, 1997:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................ $1,399,619 $1,603,634 $(154,130) $2,849,123
Current tax provision
Federal income tax...... 435,000 -- -- 435,000
State income tax........ 141,600 -- -- 141,600
---------- ---------- --------- ----------
Income tax expense........... 576,600 -- -- 576,600
---------- ---------- --------- ----------
Net income (loss)............ $ 823,019 $1,603,634 $(154,130) $2,272,523
========== ========== ========= ==========
</TABLE>
For the year ended March 31, 1996:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................. $752,139 $261,512 $(167,401) $846,250
Current tax provision
Federal income tax.......... 237,500 -- -- 237,500
State income tax............ 77,300 -- -- 77,300
Deferred income taxes......... 3,400 -- -- 3,400
-------- -------- --------- --------
Income tax expense............ 318,200 -- -- 318,200
-------- -------- --------- --------
Net income (loss)............. $433,939 $261,512 $(167,401) $528,050
======== ======== ========= ========
</TABLE>
F-11
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES -- (CONTINUED)
For the year ended March 31, 1995:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................. $494,210 $296,531 $(118,686) $672,055
Current tax provision
Federal income tax.......... 160,400 -- -- 160,400
State income tax............ 49,000 -- -- 49,000
-------- -------- --------- --------
Income tax expense............ 209,400 -- -- 209,400
-------- -------- --------- --------
Net income (loss)............. $284,810 $296,531 $(118,686) $462,655
======== ======== ========= ========
</TABLE>
The historical losses in Ashton Holdings, Inc. result in a net operating
loss carryforward for tax purposes of $63,000. The tax loss carryforward is less
than the historical book losses due to the effects of the elimination of
intercompany transactions. The Company has recorded a valuation allowance
against the entire deferred tax asset of $25,830.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment is detailed as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------- JUNE 30,
1996 1997 1997
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Equipment.................................. $122,295 $ 223,963 $ 240,238
Furniture and fixtures..................... 185,800 205,800 205,800
Leasehold improvements..................... 617,224 636,638 832,622
-------- ---------- ----------
925,319 1,066,401 1,278,660
Accumulated depreciation................... (107,381) (218,175) (239,694)
-------- ---------- ----------
Property and equipment, net................ $817,938 $ 848,226 $1,038,966
======== ========== ==========
</TABLE>
Depreciation expense amounted to $16,768, $80,049, $110,794 and $21,519
(unaudited) in the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
5. STOCKHOLDERS' EQUITY
Stockholders' equity comprised the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Common stock
Holt's Cigar Company, Inc. -- No par value, $1
stated value, 100,000 shares authorized,
90,000 shares issued and 72,000
outstanding.................................. $ 90,000 $ 90,000 $ 90,000
Ashton Holdings, Inc. -- $.01 par value, 20,000
shares authorized, 10,000 shares issued and
outstanding.................................. 114 114 114
Ashton Distributors, Inc. -- No par value, 1,000
shares authorized, issued and outstanding.... 1,000 1,000 1,000
---------- ---------- ----------
$ 91,114 $ 91,114 $ 91,114
========== ========== ==========
</TABLE>
F-12
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Additional paid-in capital
Holt's Cigar Company, Inc....................... $ 4,721 $ 4,721 $ 4,721
Ashton Holdings, Inc............................ 298,886 298,886 298,886
---------- ---------- ----------
$ 303,607 $ 303,607 $ 303,607
========== ========== ==========
Retained earnings (accumulated deficit)
Holt's Cigar Company, Inc....................... $1,196,096 $2,019,115 $2,474,395
Ashton Holdings, Inc............................ (149,572) (303,702) (392,693)
Ashton Distributors, Inc........................ 261,641 964,475 1,224,592
---------- ---------- ----------
$1,308,165 $2,679,888 $3,306,294
========== ========== ==========
</TABLE>
6. OTHER ASSETS
Other assets include several intangible assets including restrictive
covenants, trademarks, trade name, customer list and organization costs. The
assets are being amortized over periods ranging from five to twenty years.
7. BORROWINGS
Lines of Credit
The Company maintained a line of credit of $200,000 with a bank, payable on
demand of which $5,000 was outstanding at March 31, 1996. Interest was payable
at the bank's prime rate (8.25% at March 31, 1996) plus 1%. The line was
collateralized by the personal guarantee of a stockholder. The line was
terminated in 1997.
The Company maintains another line of credit of $400,000 with a bank,
payable on demand of which no amounts were outstanding at March 31, 1996 and
1997. Interest is payable at the bank's prime rate (8.5% at both March 31, 1997
and 1996). The line is collateralized by Company assets and the personal
guarantee of a stockholder.
F-13
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------- JUNE 30,
1996 1997 1997
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable -- bank -- due in monthly payments of $1,042
plus interest at the bank's prime rate (8.25% at both
March 31, 1997 and 1996) plus 1%, collateralized by
inventory, property and the guarantee of a stockholder. $ 36,450 $ 22,894 $ 18,726
Payments extend through February, 1999....................
Notes payable -- equipment -- due in various monthly
payments ranging from $148 to $709 including interest from
9.9% to 14%, collateralized by equipment. Payments extend
through March, 1999....................................... 22,273 25,841 21,803
Note payable -- bank-- due in monthly payments of $1,208
including interest at 8.5% (using a twenty-five year
amortization), collateralized by a second mortgage on the
retail location property owned by the stockholder, an
insurance policy on the life of a stockholder and the
guarantee of a stockholder. In June, 2000 the interest
rate changes to the prime rate plus 1%. Payments extend
through June, 2020........................................ 148,811 147,078 146,613
Note payable -- bank -- due in monthly payments of $4,042
including interest at 9%. Monthly payments increased to
$9,470 in September, 1996. Collateralized by the
assignment of rents on the real property at the retail
location, accounts receivable, inventory and a mortgage on
the retail location property, along with the guarantee of
a stockholder. Payments extend through April, 1998........ 284,127 116,068 90,268
Note payable -- bank -- construction loan agreement --
Maximum amount available -- $450,000. Interest is charged
at 8.75% for the initial thirty months, prime plus .25%
for the next thirty months, adjusted thereafter based on
prime for each thirty month period. Payable over a ten and
a half year period. First six monthly payments interest
only -- monthly installments of principal and accrued
interest begin January 1, 1998. Secured by a third lien on
the accounts receivable, inventory and property and
guaranteed by a stockholder. Payments extend through
December, 2008............................................ -- -- 170,000
--------- --------- ---------
Total..................................................... 491,661 311,881 447,410
Less: current portion..................................... (148,666) (129,441) (122,470)
--------- --------- ---------
Long-term debt............................................ $ 342,995 $ 182,440 $ 324,940
========= ========= =========
</TABLE>
F-14
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
The following is a schedule of long-term debt maturities as of March, 31,
1997:
1998.............................. $129,441
1999.............................. 39,734
2000.............................. 2,492
2001.............................. 2,712
2002.............................. 2,951
Thereafter........................ 134,551
--------
$311,881
========
Total interest expense amounted to $18,486, $50,048, $73,184 and $7,467
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
8. LEASE COMMITMENTS
The Company leases warehouse space in Philadelphia under a noncancelable
operating lease expiring in December, 1998. The lease also requires payment of
the tenant's common area maintenance expenses. The Company also leases retail
space from a stockholder under an operating lease expiring in October, 2004. The
lease includes a five year renewal option.
The Company leases various office and warehouse equipment and an automobile
under operating leases expiring through April, 2002. The Company entered into an
operating lease agreement for a new office and warehouse facility in
Philadelphia expiring in June, 2002 with one five year renewal option.
The following is a schedule of future minimum rental payments required
under the above operating leases as of March 31, 1997:
1998.............................. $161,976
1999.............................. $181,896
2000.............................. $158,400
2001.............................. $153,303
2002.............................. $152,268
Rental expense amounted to $67,244, $100,008, $103,044 and $31,898
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
9. PROFIT SHARING PLAN
The Company sponsors a 401(k) contributory qualified profit sharing plan
covering substantially all of its employees. Under the Plan, the Company's
contributions are based upon the employee's elective deferral contribution. The
Company's contribution is equal to 50% of the employee's contribution up to 6%
of the employee's pre-tax salary. Contributions for the years ended March 31,
1995, 1996 and 1997 and the three months ended June 30, 1997, amounted to
$8,397, $18,463, $23,233 and $6,442 (unaudited), respectively.
10. MAJOR SUPPLIERS
During fiscal years 1995, 1996 and 1997, the Company purchased
approximately 37%, 39% and 47%, respectively, of its cigars from one supplier.
At March 31, 1996, 1997 and June 30, 1997, amounts due to the supplier were
approximately $504,000, $713,800 and $491,000 (unaudited), respectively and are
included in due to related party. This supplier is a company controlled by an
affiliate of a stockholder of the Company. During fiscal 1997, approximately 18%
of the Company's
F-15
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR SUPPLIERS -- (CONTINUED)
purchases were from one other supplier. At March 31, 1997, approximately
$256,000 was due to the other supplier and included in accounts payable.
11. COMMITMENTS
The Company is required to pay royalties to an unaffiliated individual
related to the purchase of the "Ashton" name. Royalties are based on 1% of all
purchases of cigars bearing the Ashton name through January 1, 2000. Royalties
incurred for the years ended March 31, 1995, 1996 and 1997 and the three months
ended June 30, 1997 were $12,000, $16,150, $31,616 and $16,190 (unaudited),
respectively.
The Company has guaranteed certain debt of the controlling stockholder. The
balance on such debt was $443,714 and $436,783 at March 31, 1996 and 1997,
respectively.
The Company has certain employment contracts for executives which extend
for up to five years.
12. RELATED PARTY TRANSACTIONS
The Company has a loan receivable due from the controlling stockholder (see
Note 2).
The controlling stockholder guarantees certain debt of the Company (see
Note 7).
The Company guarantees certain debt of the controlling stockholder (see
Note 11).
The Company paid rent of approximately $0, $48,000, $54,000 and $18,750
(unaudited) to the controlling stockholder for the years ended March 31, 1995,
1996 and 1997 and the three months ended June 30, 1997, respectively (see Note
8).
The major supplier mentioned in Note 10 is a company controlled by a
stockholder of the Company. Amounts due to the related party are separately
shown on the face of the balance sheet.
13. STOCK OPTIONS
Effective January 1, 1996, three individuals were granted stock options to
purchase common stock of each of the three companies at estimated fair market
value. The individuals were an employee, an outside director, and a member of
the controlling stockholder's immediate family, respectively. After giving
effect to the reorganization, an aggregate of 482,400 shares are issuable
pursuant to these options at an exercise price of $.50 per share. The Company
has adopted the disclosure-only provisions of SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). The options expire on December 31,
2005. If the Company had elected to recognize compensation cost consistent with
the method prescribed by SFAS 123, net income and earnings per share would not
have been significantly different than reported. The controlling stockholder has
agreed that upon exercise of any such options he will contribute to the capital
of the Company one share of common stock for each share purchased pursuant to
those options.
14. CAPITAL STRUCTURE (UNAUDITED)
As discussed in Note 1, the Company reorganized in September 1997. After
the reorganization, Holt's Cigar Holdings, Inc. has one class of common stock
with a par value of $.001. The Company, after reorganization, will have options
outstanding for the purchase of 711,900 shares of common stock. In addition, the
Company is authorized to issue 1,000,000 shares of preferred stock, the features
of which are subject to designation by the Board of Directors.
F-16
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED)
Pro Forma Balance Sheet Information
The unaudited pro forma balance sheet reflects the S Corporation estimated
distribution of $2,700,000 and the related effects of the revised capital
structure including the termination of the Company's S Corporation status
assuming such termination had occurred at June 30, 1997. No deferred taxes
resulted from such termination.
The pro forma balance sheet also includes the goodwill resulting from the
application of purchase accounting to option holder minority interests in Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. acquired in the reorganization
described in Note 1 utilizing an estimated $13.00 per share offering price. The
pro forma balance sheet includes reclassifications of certain stockholders'
equity accounts to reflect the Company's capital structure after the
reorganization.
Pro Forma Income Before Income Taxes
Pro forma net income per share is based on net income per share decreased
to give effect to the increased amortization costs of $12,217 for the year ended
March 31, 1997 and $3,054 for the three months ended June 30, 1997, and which
would have resulted if the goodwill created at the reorganization had existed at
March 31, 1996. Such goodwill is being amortized over 20 years.
Pro Forma Income Taxes
As discussed in Note 1 and reported in Note 3, Ashton Distributors, Inc.
does not pay federal or state income tax. Upon consummation of the
reorganization Ashton will terminate its S Corporation status and be subject to
federal and state income taxes. The pro forma provision for income taxes
represents the income tax provisions that would have been reported had the
Company been a combined C Corporation during the year ended March 31, 1997 and
the three months ended June 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- ------------------
(UNAUDITED)
<S> <C> <C>
Pro forma income before taxes................... $2,836,906 $1,367,358
Current tax provisions
Federal income tax......................... 965,000 465,000
State income tax........................... 170,000 82,000
---------- ----------
Income tax expense......................... 1,135,000 547,000
---------- ----------
Pro forma net income............................ $1,701,906 $ 820,358
========== ==========
</TABLE>
F-17
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED) -- (CONTINUED)
The reconciliation between the effective pro forma income tax rate and the
U.S. federal statutory rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- ------------------
<S> <C> <C>
U.S. Federal taxes at statutory rate............ 34.0% 34.0%
State and local taxes, net...................... 5.9 6.3
---- ----
Income tax provision............................ 39.9% 40.3%
==== ====
</TABLE>
Pro Forma Net Income Per Share
The computation of pro forma earnings per share is based on the weighted
average number of outstanding common shares during the period plus common stock
equivalents, if dilutive. Pursuant to the requirements of the Securities and
Exchange Commission, the weighted average number of outstanding common shares
includes the effects of the incremental number of shares required to fund
distributions to the shareholder of Ashton Distributors, Inc. in excess of
earnings for the preceding 12 months (including the estimated distribution of
$2,700,000). As discussed in Note 1, the Company reorganized in September 1997.
After the reorganization, Holt's Cigar Holdings, Inc. has one class of common
stock with a par value of $.001. As discussed in Note 13, the Company, after
reorganization, will have options outstanding for the purchase of 482,400 shares
of common stock. The controlling stockholder has agreed that upon exercise of
any such options he will contribute to the capital of the Company one share of
common stock for each share purchased pursuant to those options, thereby
reducing his ownership interest. Historical net income per share data has not
been presented since such amounts are not deemed to be meaningful due to the
significant change in the Company's capital structure which is to occur in
connection with the Offering.
Supplemental Pro Forma Net Income Per Share
The supplemental pro forma net income per share is based on pro forma net
income, (i) increased to give effect to the reduction in interest costs of
$44,000 for the year ended March 31, 1997, $11,000 for the three months ended
June 30, 1996, $4,400 for the three months ended June 30, 1997 (net of the
applicable income taxes), which would have resulted assuming the application of
a portion of the net proceeds from the Offering were used to repay certain
indebtedness of the Company and (ii) divided by proforma weighted average shares
plus the incremental shares issued to repay the debt.
16. SUBSEQUENT EVENTS (UNAUDITED)
In September 1997, the Board of Directors approved an Employee Stock Option
Plan. The plan allows for options to purchase up to 300,000 shares of common
stock to be granted, at their fair market value on the date of grant. The
Company expects to grant options to purchase an aggregate of 169,500 shares at
the effective date of the Offering.
In September 1997, the Board of Directors approved a "Non-Management
Directors Stock Option Plan" which allows for options to purchase up to 180,000
shares. The Company expects to grant outside directors options to purchase an
aggregate of 60,000 shares at the effective date of the Offering. Such options
will vest immediately and will be granted at their fair market value on the date
of grant.
F-18
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Reorganization of the Company................... 16
Use of Proceeds................................. 17
Dividend Policy................................. 17
Capitalization.................................. 18
Dilution........................................ 19
Selected Financial Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business........................................ 26
Management...................................... 36
Certain Transactions............................ 40
Principal and Selling Shareholders.............. 41
Description of Capital Stock.................... 42
Shares Eligible for Future Sale................. 45
Underwriting.................................... 47
Legal Matters................................... 48
Experts......................................... 48
Change in Independent Accountants............... 49
Additional Information.......................... 49
Index to Financial Statements................... F-1
1,750,000 Shares
HOLT'S CIGAR
HOLDINGS, INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
November , 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered hereby, other than underwriting discounts and
commissions, are itemized below.
Securities and Exchange Commission registration fee......... $ 8,538
NASD filing fee............................................. 3,318
Nasdaq National Market listing fee.......................... 50,000
Accounting Fees and Expenses................................ 150,000
Legal fees and expenses..................................... 175,000
Printing and engraving expenses............................. 120,000
Blue Sky fees and expenses (including legal fees)........... 2,500
Transfer Agent and Registrar fees and expenses.............. 10,000
Miscellaneous............................................... 30,644
--------
Total.................................................. $550,000
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertakes to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually and
reasonably incurred in connection therewith. The indemnification provided is not
deemed to be exclusive of any other rights to which an officer or director may
be entitled under any corporation's by-law, agreement, vote or otherwise.
The Company's Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of their fiduciary duty to the
maximum extent permitted by the DGCL. The DGCL does not permit liability to be
eliminated (i) for any breach of a director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions, as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. In addition, as permitted in Section 145
of the DGCL, the Certificate of Incorporation and By-Laws of the Company provide
that the Company shall
II-1
<PAGE>
indemnify its directors and officers to the fullest extent permitted by the
DGCL, including those circumstances in which indemnification would otherwise be
discretionary, subject to certain exceptions. The By-Laws also provide that the
Company shall advance expenses to directors and officers incurred in connection
with an action or proceeding as to which they may be entitled to
indemnification, subject to certain exceptions.
The indemnification provisions in the Company's Certificate of
Incorporation and By-Laws may permit indemnification for liabilities arising
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company currently expects to carry director and officer liability
insurance following this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following shares were sold by the Company
without registration under the Securities Act of 1933, as amended (the "Act").
All references to shares of the Company's Common Stock give effect to the
Reorganization.
The Company relied on the exemption from registration set forth in Section
4(2) of the Act. No fees were paid in connection with the foregoing sales of
securities.
During December 1995, the Company sold 234,497 shares of Common Stock for
an aggregate purchase price of $49,500 to Fuente Investment Partnership pursuant
to the exercise of an option.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
1 Form of Underwriting Agreement
2 Plan of Reorganization*
3.1 Amended Articles of Incorporation*
3.2 By-Laws*
4 Form of Option Agreement*
5 Opinion re: Legality and Consent of Fox, Rothschild, O'Brien
& Frankel, LLP*
10.1 Employment Agreement dated October 1, 1997, with Robert G.
Levin*
10.2 Employment Agreement dated October 1, 1997, with Michael
Pitkow*
10.3 Employment Agreement dated October 1, 1997, with Robert H.
Levitt*
10.4 Private Label Manufacturing Agreement dated April 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.*
10.5 Exclusive Distributorship Agreement dated
between Ashton Distributors, Inc. and Fuente Cigar Ltd.*
10.6 Lease Agreement dated March 20, 1997 between the Company and
P. D'Andrea, Inc.*
10.7 Lease Agreement between Robert G. Levin and Suzanne J. Levin
and Holt's Cigar Company Inc. dated as of November 1, 1994*
10.8 License Agreement dated May 4, 1993 between Ashton Holdings
Inc. and William Ashton Taylor*
10.9 1997 Employee Stock Option Plan
10.10 Non-Management Director Stock Plan
10.11 Shareholder Agreement*
II-2
<PAGE>
11.1 Computation of Pro Forma Net Income Per Share
11.2 Computation of Supplemental Pro Forma Net Income Per Share
16 Letter re change in certifying accountant
23.1 Consent of Schmeltzer Master Group, P.C.
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Fox, Rothschild, O'Brien & Frankel, LLP, included
as Exhibit 5*
27 Financial Data Schedule
- ------------------
* To be filed by amendment.
(b) No Financial Statements Schedules are filed as part of this Registration
Statement
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on September 24, 1997.
HOLT'S CIGAR HOLDINGS, INC.
By: /s/ ROBERT G. LEVIN
----------------------------------
Robert G. Levin,
Chairman of the Board, Chief
Executive
Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Robert G. Levin and Michael Pitkow, and
each or any of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and other registration
statements and amendments thereto relating to the Offering contemplated by this
Registration Statement (including registration statements under Rule 462
promulgated under the Securities Act of 1933, as amended), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their, his or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
their capacities and on the date signed.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT G. LEVIN Chairman of the Board, Chief September 24, 1997
- ------------------------------- Executive Officer and President
Robert G. Levin
/s/ MICHAEL PITKOW Director, Chief Operating Officer September 24, 1997
- ------------------------------- and Executive Vice President
Michael Pitkow
/s/ MARVIN B. SHARFSTEIN Director September 24, 1997
- -------------------------------
Marvin B. Sharfstein
/s/ CARLOS A. FUENTE, SR. Director September 24, 1997
- -------------------------------
Carlos A. Fuente, Sr.
/s/ CARLOS P. FUENTE, JR. Director September 24, 1997
- -------------------------------
Carlos P. Fuente, Jr.
/s/ HARVEY W. GROSSMAN Director September 24, 1997
- -------------------------------
Harvey W. Grossman
/s/ ROBERT H. LEVITT Chief Financial Officer September 24, 1997
- ------------------------------- (Principal Financial
Robert H. Levitt and Accounting Officer)
</TABLE>
II-4
HOLT'S CIGAR HOLDINGS, INC.
_______Shares*
Common Stock
UNDERWRITING AGREEMENT
__________ __, 1997
PRUDENTIAL SECURITIES INCORPORATED
JANNEY MONTGOMERY SCOTT, INC.
As Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Holt's Cigar Holdings, Inc., a Delaware corporation (the "Company") and
Robert Levin (the "Securityholder") hereby confirm their agreement with the
several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom
you have been duly authorized to act as representatives (in such capacities, the
"Representatives"), as set forth below. If you are the only Underwriters, all
references herein to the Representatives shall be deemed to be to the
Underwriters.
1. Securities. Subject to the terms and conditions herein contained,
the Company proposes to issue and sell to the several Underwriters an aggregate
of _____ shares (the "Firm Securities") of the Company's Common Stock, par value
$______ per share ("Common Stock"). The Securityholder also proposes to sell to
the several Underwriters not more than _______________ additional shares of
Common Stock if requested by the Representatives as provided in Section 3 of
this Agreement. Any and all shares of Common Stock to be purchased by the
Underwriters pursuant to such option are referred to herein as the "Option
Securities," and the Firm Securities and any Option Securities are collectively
referred to herein as the "Securities".
- -------------------
* Plus an option to purchase from the Selling Securityholder up to
_____________ additional shares to cover over-allotments.
<PAGE>
2. Representations and Warranties of the Company and the
Securityholder. (a) The Company represents and warrants to, and agrees with,
each of the several Underwriters that:
(i) A registration statement on Form S-1 (File No. 333-_________) with
respect to the Securities, including a prospectus subject to completion, has
been filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and one
or more amendments to such registration statement may have been so filed. After
the execution of this Agreement, the Company will file with the Commission
either (A) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (1) if the
Company relies on Rule 434 under the Act, a Term Sheet (as hereinafter defined)
relating to the Securities, that shall identify the Preliminary Prospectus (as
hereinafter defined) that it supplements containing such information as is
required or permitted by Rules 434, 430A and 424(b) under the Act or (2) if the
Company does not rely on Rule 434 under the Act, a prospectus in the form most
recently included in an amendment to such registration statement (or, if no such
amendment shall have been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act, and in the case of either clause (A)(1) or (A)(2) of
this sentence as have been provided to and approved by the Representatives prior
to the execution of this Agreement, or (B) if such registration statement, as it
may have been amended, has not been declared by the Commission to be effective
under the Act, an amendment to such registration statement, including a form of
prospectus, a copy of which amendment has been furnished to and approved by the
Representatives prior to the execution of this Agreement. The Company may also
file a related registration statement with the Commission pursuant to Rule
462(b) under the Act for the purpose of registering certain additional
Securities, which registration shall be effective upon filing with the
Commission. As used in this Agreement, the term "Original Registration
Statement" means the registration statement initially filed relating to the
Securities, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Rule 462(b) Registration
Statement" means any registration statement filed with the Commission pursuant
to Rule 462(b) under the Act (including the Registration Statement and any
Preliminary Prospectus or Prospectus incorporated therein at the time such
Registration Statement becomes effective); the term "Registration Statement"
includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective); the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed pursuant to Rule
424(b)(7) under the Act,
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<PAGE>
together with the Preliminary Prospectus identified therein that such
Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the
Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the requirements
of Rule 434 under the Act. Any reference herein to the "date" of a Prospectus
that includes a Term Sheet shall mean the date of such Term Sheet.
(ii) The Commission has not issued any order preventing or suspending
use of any Preliminary Prospectus. When any Preliminary Prospectus was filed
with the Commission it (A) contained all statements required to be stated
therein in accordance with, and complied in all material respects with the
requirements of, the Act and the rules and regulations of the Commission
thereunder and (B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (A) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder and (B) did not or will not include any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading. When the Prospectus or any Term
Sheet that is a part thereof or any amendment or supplement to the Prospectus is
filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part
thereof or such amendment or supplement is not required to be so filed, when the
Registration Statement or the amendment thereto containing such amendment or
supplement to the Prospectus was or is declared effective) and on the Firm
Closing Date and any Option Closing Date (both as hereinafter defined), the
Prospectus, as amended or supplemented at any such time, (A) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder and (B) did not
or will not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (ii) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives specifically for use therein.
-3-
<PAGE>
(iii) If the Company has elected to rely on Rule 462(b) and the Rule
462(b) Registration Statement has not been declared effective (A) the Company
has filed a Rule 462(b) Registration Statement in compliance with and that is
effective upon filing pursuant to Rule 462(b) and has received confirmation of
its receipt and (B) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
Rule 462(b) Registration Statement, in compliance with Rule 111 promulgated
under the Act or the Commission has received payment of such filing fee.
(iv) The Company and each of its subsidiaries have been duly organized
and are validly existing as corporations in good standing under the laws of
their respective jurisdictions of incorporation and are duly qualified to
transact business as foreign corporations and are in good standing under the
laws of all other jurisdictions where the ownership or leasing of their
respective properties or the conduct of their respective businesses requires
such qualification, except where the failure to be so qualified does not amount
to a material liability or disability to the Company and its subsidiaries, taken
as a whole.
(v) The Company and each of its subsidiaries have full power (corporate
and other) to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus; and the Company has full power (corporate and other) to
enter into this Agreement and to carry out all the terms and provisions hereof
to be carried out by it.
(vi) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of any
security interests, liens, encumbrances, equities or claims.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus. All of the issued shares of
capital stock of the Company, including the Option Securities, have been duly
authorized and validly issued and are fully paid and nonassessable. The Firm
Securities have been duly authorized and at the Firm Closing Date, after payment
therefor in accordance herewith, will be validly issued, fully paid and
nonassessable. No holders of outstanding shares of capital stock of the Company
are entitled as such to any preemptive or other rights to subscribe for any of
the Securities, and no holder of securities of the Company has any right which
has not been fully exercised or waived to require the Company to register the
offer or sale of any securities owned by such holder under the Act in the public
offering contemplated by this agreement.
(viii) The capital stock of the Company conforms to the description
thereof contained in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus.
-4-
<PAGE>
(ix) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no
outstanding (A) securities or obligations of the Company or any of its
subsidiaries convertible into or exchangeable for any capital stock of the
Company or any such subsidiary, (B) warrants, rights or options to subscribe for
or purchase from the Company or any such subsidiary any such capital stock or
any such convertible or exchangeable securities or obligations, or (C)
obligations of the Company or any such subsidiary to issue any shares of capital
stock, any such convertible or exchangeable securities or obligations, or any
such warrants, rights or options.
(x) The consolidated financial statements and schedules of the Company
and its consolidated subsidiaries included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) fairly present the financial position of the Company and
its consolidated subsidiaries and the results of operations and changes in
financial condition as of the dates and periods therein specified. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles consistently applied throughout the
periods involved (except as otherwise noted therein). The selected financial
data set forth under the caption "Selected Financial Data" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein. The pro forma
consolidated financial statements of the Company and its consolidated
subsidiaries together with the related notes thereto included under the captions
"Summary Historical and Pro Forma Combined Financial Data," "Selected Financial
Data" and elsewhere in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) present
fairly the information contained therein, have been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements and have been properly presented on the pro forma basis described
therein, and the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(xi) Each of Price Waterhouse, L.L.P. and Schmeltzer, Master & Gorsky,
P.C., who have certified certain financial statements of the Company and its
consolidated subsidiaries and delivered their reports with respect to their
respective audited consolidated financial statements and schedules included in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act and the applicable rules and regulations
thereunder.
(xii) The execution and delivery of this Agreement have been duly
authorized by the Company and this Agreement has been duly executed and
delivered by the Company, and is the valid and binding agreement of the Company,
enforceable against the Company in accordance with its terms.
-5-
<PAGE>
(xiii) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are required to be described
in the Registration Statement or the Prospectus and are not described therein
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), and no such proceedings have been threatened against the Company or
any of its subsidiaries or with respect to any of their respective properties;
and no contract or other document is required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) or filed as required.
(xiv) The issuance, offering and sale of the Firm Securities to the
Underwriters by the Company pursuant to this Agreement, the compliance by the
Company with the other provisions of this Agreement and the consummation of the
other transactions herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or any
of its subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company or any of its subsidiaries.
(xv) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus, neither the Company
nor any of its subsidiaries has sustained any material loss or interference with
their respective businesses or properties from fire, flood, hurricane, accident
or other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding and there has not been any
material adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management, business
prospects, net worth, or results of the operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus.
(xvi) The Company has not, directly or indirectly, (A) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (B) since the filing of the
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Registration Statement (1) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities or (2) paid or agreed
to pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(xvii) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), (A) the Company and
its subsidiaries have not incurred any material liability or obligation, direct
or contingent, nor entered into any material transaction not in the ordinary
course of business; (B) the Company has not purchased any of its outstanding
capital stock, nor declared, paid or otherwise made any dividend or distribution
of any kind on its capital stock; and (C) there has not been any material change
in the capital stock, short-term debt or long-term debt of the Company and its
consolidated subsidiaries, except in each case as described in or contemplated
by the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xviii) The Company and each of its subsidiaries have good and
marketable title in fee simple to all items of real property and marketable
title to all personal property owned by each of them, in each case free and
clear of any security interests, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect the value of such
property and do not interfere with the use made or proposed to be made of such
property by the Company or such subsidiary, and any real property and buildings
held under lease by the Company or any such subsidiary are held under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made or proposed to be made of such property and
buildings by the Company or such subsidiary, in each case except as described in
or contemplated by the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(xix) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and its subsidiaries, except
as described in or contemplated by the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xx) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such subsidiary has received any
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and
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its subsidiaries, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxi) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxii) No subsidiary of the Company is currently prohibited, directly
or indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxiii) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiv) The Company will conduct its operations in a manner that will
not subject it to registration as an investment company under the Investment
Company Act of 1940, as amended, and this transaction will not cause the Company
to become an investment company subject to registration under such Act.
(xxv) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its subsidiaries) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being
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contested in good faith or as described in or contemplated by the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(xxvi) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to occupational safety and
health or to the storage, handling or transportation of hazardous or toxic
materials and the Company and its subsidiaries have received all permits,
licenses or other approvals required of them under applicable federal and state
occupational safety and health and environmental laws and regulations to conduct
their respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals which would not,
singly or in the aggregate, result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(xxvii) Each certificate signed by any officer of the Company and
delivered to the Representatives or counsel for the Underwriters shall be deemed
to be a representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
(xxviii) Except for the shares of capital stock of each of the
subsidiaries owned by the Company and such subsidiaries, neither the Company nor
any such subsidiary owns any shares of stock or any other equity securities of
any corporation or has any equity interest in any firm, partnership, association
or other entity, except as described in or contemplated by the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(xxix) There are no holders of securities of the Company, who, by
reason of the filing of the Registration Statement, have the right (and have not
waived such right) to request the Company to register under the Act, or to
include in the Registration Statement, securities held by them.
(xxx) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (A)
transactions are executed in accordance with management's general or specific
authorizations; (B) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (C) access to assets is
permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxxi) No default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default in the due performance and
observance of
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any term, covenant or condition of any indenture, mortgage, deed of trust, lease
or other agreement or instrument to which the Company or any of its subsidiaries
is a party or by which the Company or any of its subsidiaries or any of their
respective properties is bound or may be affected in any material adverse
respect with regard to property, business or operations of the Company and its
subsidiaries.
(xxxii) The reorganization of the Company as described in the
Registration Statement in the Section "Reorganization of the Company" (the
"Reorganization") has been consummated as described therein and was made in
compliance with the provisions of the Company's and its subsidiaries' respective
charter documents and by-laws and in compliance with all applicable laws.
(xxxiii) Each of the Amended and Restated Private Label Manufacturing
Agreement dated as of April 27, 1997 by and between Fuente Cigar Ltd. and Ashton
Distributors, Inc. (the "PLMA") and the Exclusive Distributorship Agreement
dated as of __________ by and between Fuente Cigar Ltd. and Ashton Distributors,
Inc. (the "Distributorship Agreement") has been duly authorized, executed and
delivered by the Company and the other parties thereto, constitutes a legal,
valid and binding agreement enforceable in accordance with its terms and is in
full force and effect on the date hereof. A complete and correct copy of each of
the PLMA and the Distributorship Agreement has been delivered to you and no
changes have been made therein prior to the date hereof.
(xxxiv) The Company has not distributed and, prior to the later of (A)
the Closing Date and (B) the completion of the distribution of the Securities,
will not distribute any offering material in connection with the offering and
sale of the Securities other than the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or other materials, if any permitted by the Act.
(b) The Securityholder represents and warrants to, and agrees with,
each of the several Underwriters that:
(i) The Securityholder has full power to enter into this Agreement and
to sell, assign, transfer and deliver to the Underwriters the Option Securities
to be sold by the Securityholder hereunder (if requested by the Representatives
as provided in Section 3 of this Agreement) in accordance with the terms of this
Agreement; and this Agreement has been duly executed and delivered by the
Securityholder and constitutes the legal, valid and binding agreement of the
Securityholder enforceable in accordance with its terms.
(ii) The Securityholder is the lawful owner of the Option Securities to
be sold by the Securityholder hereunder and upon sale and delivery of, and
payment for, such Securities, as provided herein, the Securityholder will convey
good and marketable title to such Securities, free and clear of any security
interests, liens, encumbrances, equities, claims or other defects.
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(iii) The Securityholder has not, directly or indirectly, (A) taken any
action designed to cause or result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (B) since the filing of the Registration Statement (1) sold, bid
for, purchased, or paid anyone any compensation for soliciting purchases of, the
Securities or (2) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company (except for
the sale of Securities by the Securityholder under this Agreement).
(iv) To the extent that any statements or omissions are made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with written
information furnished to the Company by the Securityholder specifically for use
therein, such Preliminary Prospectus did, and the Registration Statement and the
Prospectus and any amendments or supplements thereto, when they become effective
or are filed with the Commission, as the case may be, will conform in all
material respects to the requirements of the Act and the respective rules and
regulations of the Commission thereunder and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they are made, not misleading. The Securityholder has
reviewed the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and the Registration Statement, and the
information regarding the Securityholder set forth therein under the caption
"Principal and Selling Shareholder" is complete and accurate.
(v) The sale by the Securityholder of Option Securities pursuant hereto
is not prompted by any adverse information concerning the Company that is not
set forth in the Registration Statement or the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus).
(vi) The sale of the Option Securities to the Underwriters by the
Securityholder pursuant to this Agreement, the compliance by the Securityholder
with the other provisions of this Agreement and the consummation of the other
transactions herein contemplated do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained, such as may be required under
state securities or blue sky laws and, if the registration statement filed with
respect to the Securities (as amended) is not effective under the Act as of the
time of execution hereof, such as may be required (and shall be obtained as
provided in this Agreement) under the Act, or (B) conflict with or result in a
breach or violation of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease or other agreement
or instrument to which the Securityholder is a party or by which the
Securityholder or any of the Securityholder's properties are bound, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Securityholder.
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(vii) The Securityholder has not distributed and, prior to the later of
(A) the Closing Date and (B) the completion of the distribution of the
Securities, will not distribute any offering material in connection with the
offering and sale of the Securities other than the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or other materials, if any permitted by the Act.
3. Purchase, Sale and Delivery of the Securities. (a) On the basis of
the representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to
issue and sell to each of the Underwriters, and each of the Underwriters,
severally and not jointly, agrees to purchase from the Company, at a purchase
price of $________ per share, the number of Firm Securities set forth opposite
the name of such Underwriter in Schedule 1 hereto. One or more certificates in
definitive form for the Firm Securities that the several Underwriters have
agreed to purchase hereunder, and in such denomination or denominations and
registered in such name or names as the Representatives request upon notice to
the Company at least 48 hours prior to the Firm Closing Date, shall be delivered
by or on behalf of the Company to the Representatives for the respective
accounts of the Underwriters, against payment by or on behalf of the
Underwriters of the purchase price therefor by wire transfer in same-day funds
(the "Wired Funds") to the account of the Company. Such delivery of and payment
for the Firm Securities shall be made at the offices of Fulbright & Jaworski
L.L.P., 666 Fifth Avenue, New York, New York 10103 at 9:30 A.M., New York time,
on __________, 1997, or at such other place, time or date as the Representatives
and the Company may agree upon or as the Representatives may determine pursuant
to Section 9 hereof, such time and date of delivery against payment being herein
referred to as the "Firm Closing Date". The Company will make such certificate
or certificates for the Firm Securities available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at least 24
hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Securityholder hereby grants to the several Underwriters an
option to purchase, severally and not jointly, the Option Securities. The
purchase price to be paid for any Option Securities shall be the same price per
share as the price per share for the Firm Securities set forth above in
paragraph (a) of this Section 3. The option granted hereby may be exercised as
to all or any part of the Option Securities from time to time within thirty (30)
days after the date of the Prospectus (or, if such 30th day shall be a Saturday
or Sunday or a holiday, on the next business day thereafter when the New York
Stock Exchange is open for trading). The Underwriters shall not be under any
obligation to purchase any of the Option Securities prior to the exercise of
such option. The Representatives may from time to time exercise the option
granted hereby by giving notice in writing or by telephone (confirmed in
writing) to the Company and the Securityholder setting forth the aggregate
number of Option Securities as to which the several Underwriters are then
exercising the option and the date and time for delivery
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of and payment for such Option Securities. Any such date of delivery shall be
determined by the Representatives but shall not be earlier than two business
days or later than five business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representatives and the Securityholder may agree upon or as the Representatives
may determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Securities. Upon exercise of the option as
provided herein, the Securityholder shall become obligated to sell to each of
the several Underwriters, and, subject to the terms and conditions herein set
forth, each of the Underwriters (severally and not jointly) shall become
obligated to purchase from the Securityholder, the same percentage of the total
number of the Option Securities as to which the several Underwriters are then
exercising the option as such Underwriter is obligated to purchase of the
aggregate number of Firm Securities, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares. If the option is
exercised as to all or any portion of the Option Securities, one or more
certificates in definitive form for such Option Securities, and payment
therefor, shall be delivered on the related Option Closing Date in the manner,
and upon the terms and conditions, set forth in paragraph (a) of this Section 3,
except that reference therein to the Firm Securities and the Firm Closing Date
shall be deemed, for purposes of this paragraph (b), to refer to such Option
Securities and Option Closing Date, respectively.
(c) Each of the Company and the Securityholder hereby acknowledges that
the wire transfer by or on behalf of the Underwriters of the purchase price for
any Securities does not constitute closing of a purchase and sale of the
Securities. Only execution and delivery of a receipt for Securities by the
Underwriters indicates completion of the closing of a purchase of the Securities
from the Company or the Securityholder, as the case may be. Furthermore, in the
event that the Underwriters wire funds to the Company or the Securityholder
prior to the completion of the closing of a purchase of Securities, each of the
Company and the Securityholder hereby acknowledges that until the Underwriters
execute and deliver a receipt for the Securities, by facsimile or otherwise, the
Company or the Securityholder, as the case may be, will not be entitled to the
wired funds and shall return the wired funds to the Underwriters as soon as
practicable (by wire transfer of same-day funds) upon demand. In the event that
the closing of a purchase of Securities is not completed and the wire funds are
not returned by the Company or the Securityholder, as the case may be, to the
Underwriters on the same day the wired funds were received by the Company or the
Securityholder, as the case may be, each of the Company and the Securityholder
agrees to pay to the Underwriters in respect of each day the wire funds are not
returned by it, in same-day funds, interest on the amount of such wire funds in
an amount representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated.
(d) It is understood that either of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Securities to be purchased by
such
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<PAGE>
Underwriter or Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release
of the Firm Securities, the several Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus.
5. Covenants. (a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rules 434 and 424(b) under the
Act. During any time when a prospectus relating to the Securities is required to
be delivered under the Act, the Company (A) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (B) will not file with the
Commission the Prospectus, Term Sheet or the amendment referred to in the second
sentence of Section 2(a)(i) hereof, any amendment or supplement to such
Prospectus, Term Sheet or any amendment to the Registration Statement or any
Rule 462(b) Registration Statement of which the Representatives previously have
been advised and furnished with a copy for a reasonable period of time prior to
the proposed filing and as to which filing the Representatives shall not have
given their consent. The Company will prepare and file with the Commission, in
accordance with the rules and regulations of the Commission, promptly upon
request by the Representatives or counsel for the Underwriters, any amendments
to the Registration Statement or amendments or supplements to the Prospectus
that may be necessary or advisable in connection with the distribution of the
Securities by the several Underwriters, and will use its best efforts to cause
any such amendment to the Registration Statement to be declared effective by the
Commission as promptly as possible. The Company will advise the Representatives,
promptly after receiving notice thereof, of the time when the Registration
Statement or any amendment thereto has been filed or declared effective or the
Prospectus or any amendment or supplement thereto has been filed and will
provide evidence satisfactory to the Representatives of each such filing or
effectiveness.
(ii) The Company will advise the Representatives, promptly after
receiving notice or obtaining knowledge thereof, of (A) the issuance by the
Commission of any stop order suspending the effectiveness of the Original
Registration Statement or any Rule 462(b) Registration Statement or any
amendment thereto or any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
(B) the suspension of the qualification of the Securities for offering or sale
in any jurisdiction, (C) the institution, threatening or
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<PAGE>
contemplation of any proceeding for any such purpose or (D) any request made by
the Commission for amending the Original Registration Statement or any Rule
462(b) Registration Statement, for amending or supplementing the Prospectus or
for additional information. The Company will use its best efforts to prevent the
issuance of any such stop order and, if any such stop order is issued, to obtain
the withdrawal thereof as promptly as possible.
(iii) The Company will arrange for the qualification of the Securities
for offering and sale under the securities or blue sky laws of such
jurisdictions as the Representatives may designate and will continue such
qualifications in effect for as long as may be necessary to complete the
distribution of the Securities, provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation or to
execute a general consent to service of process in any jurisdiction.
(iv) If, at any time prior to the later of (A) the final date when a
prospectus relating to the Securities is required to be delivered under the Act
or (B) the Option Closing Date, any event occurs as a result of which the
Prospectus, as then amended or supplemented, would include any untrue statement
of a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or if for any other reason it is necessary at any time to
amend or supplement the Prospectus to comply with the Act or the rules or
regulations of the Commission thereunder, the Company will promptly notify the
Representatives thereof and, subject to Section 5(a)(i) hereof, will prepare and
file with the Commission, at the Company's expense, an amendment to the
Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(v) The Company will, without charge, provide (A) to the
Representatives and to counsel for the Underwriters a signed copy of the
registration statement originally filed with respect to the Securities and each
amendment thereto (in each case including exhibits thereto) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, (B) to each other Underwriter, a conformed copy of
such registration statement or any Rule 462(b) Registration Statement and each
amendment thereto (in each case without exhibits thereto) and (C) so long as a
prospectus relating to the Securities is required to be delivered under the Act,
as many copies of each Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto as the Representatives may reasonably request; without
limiting the application of clause (C) of this sentence, the Company, not later
than (A) 6:00 PM, New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 10:00 A.M., New
York City time, on such date or (B) 2:00 PM, New York City time, on the business
day following the date of determination of the public offering price, if such
determination occurred after 10:00 A.M., New York City time, on such date, will
deliver to the Underwriters, without charge, as many copies of the Prospectus
and any amendment or supplement thereto as the Representatives may reasonably
request for purposes of confirming
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orders that are expected to settle on the Firm Closing Date. The Company will
provide or cause to be provided to each of the Representatives, and to each
Underwriter that so requests in writing, a copy of each report on Form SR filed
by the Company as required by Rule 463 under the Act.
(vi) The Company, as soon as practicable, will make generally available
to its securityholders and to the Representatives a consolidated earnings
statement of the Company and its subsidiaries that satisfies the provisions of
Section 11(a) of the Act and Rule 158 thereunder.
(vii) The Company will apply the net proceeds from the sale of the
Securities as set forth under "Use of Proceeds" in the Prospectus.
(viii) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date hereof, except pursuant to this Agreement
and except for issuances pursuant to the exercise of outstanding employee stock
options and pursuant to options granted under the Company's stock option plans.
(ix) The Company will not, directly or indirectly, (A) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (B) (1) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (2) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company.
(x) The Company will obtain the agreements described in Section 7(j)
hereof prior to the Firm Closing Date.
(xi) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after notice from you advising the Company to the
effect set forth above, forthwith prepare, consult with you concerning the
substance of, and disseminate a press release or other public statement,
reasonably satisfactory to you, responding to or commenting on such rumor,
publication or event.
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(xii) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in compliance
with Rule 462(b) and pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of (A) 10:00 P.M. Eastern time on the
date of this Agreement and (B) the time confirmations are sent or given, as
specified by Rule 462(b)(2).
(xiii) The Company will cause the securities to be included for
quotation on The Nasdaq Stock Market's National Market (the "Nasdaq National
Market") prior to the Firm Closing Date. The Company will ensure that the
Securities remain included for quotation on the Nasdaq National Market following
the Firm Closing Date.
(b) The Securityholder covenants and agrees with each of the several
Underwriters that:
(i) Such Securityholder will not, directly or indirectly, (A) take any
action designed to cause or result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Securities or (B) (1) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Securities or (2) pay or agree to pay to any
person any compensation for soliciting another to purchase any other securities
of the Company other than as provided by this Agreement.
(ii) The Securityholder will not, directly or indirectly, without the
prior written consent of Prudential Securities Incorporated, offer, sell, offer
to sell, contract to sell, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, grant of
any option to purchase or other sale or disposition) of any Securities legally
or beneficially owned by such Securityholder or any securities convertible into,
or exchangeable or exercisable for, Securities for a period of 180 days after
the date hereof, except for up to an aggregate of _____ shares of Common Stock
that may be sold by the Securityholder pursuant to options previously granted to
Michael Pitkow, Marvin B. Sharfstein and Carol Cohen.
(iii) As soon as the Securityholder is advised thereof, the
Securityholder will advise the Representatives (and immediately thereafter
confirm such advise in writing), (A) of receipt by the Securityholder or by any
representative or agent of the Securityholder, of any communication from the
Commission relating to the Registration Statement, the Prospectus or any
Preliminary Prospectus, or any notice or order of the Commission relating to the
Company or the Securityholder in connection with the transactions contemplated
by this Agreement and (B) of the happening of any event which makes or may make
any statement of a material fact made in the Registration Statement, the
Prospectus or any Preliminary Prospectus relating to the Securityholder untrue
or that requires the making of any change in the Registration Statement,
Prospectus or Preliminary Prospectus, as the case may be, in order to make such
statement, in light of the circumstances in which it was made, not misleading.
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<PAGE>
6. Expenses. The Company will pay all costs and expenses incident to
the performance of its and the Securityholder's obligations under this
Agreement, whether or not the transactions contemplated herein are consummated
or this Agreement is terminated pursuant to Section 11 hereof, including all
costs and expenses incident to (i) the printing or other production of documents
with respect to the transactions, including any costs of printing the
registration statement originally filed with respect to the Securities and any
amendment thereto, any Rule 462(b) Registration Statement, any Preliminary
Prospectus and the Prospectus and any amendment or supplement thereto, this
Agreement and any blue sky memoranda, (ii) all arrangements relating to the
delivery to the Underwriters of copies of the foregoing documents, (iii) the
fees and disbursements of the counsel, the accountants and any other experts or
advisors retained by the Company, (iv) preparation, issuance and delivery to the
Underwriters of any certificates evidencing the Securities, including transfer
agent's and registrar's fees, (v) the qualification of the Securities under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission and the National Association of Securities Dealers, Inc.
relating to the Securities, (vii) any quotation of the Securities on the Nasdaq
National Market, (viii) any meetings with prospective investors in the
Securities (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters), and (ix) advertising
related to the offering of the Securities (other than as shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the Underwriters set
forth in Section 7 hereof is not satisfied, because this Agreement is terminated
pursuant to Section 11 hereof or because of any failure, refusal or inability on
the part of the Company to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand for all out-of-pocket expenses (including counsel fees and
disbursements) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. The Company shall not in any event
be liable to any of the Underwriters for the loss of anticipated profits from
the transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Firm Securities shall be
subject, in the Representatives' sole discretion, to the accuracy of the
representations and warranties of the Company and the Securityholder contained
herein as of the date hereof and as of the Firm Closing Date, as if made on and
as of the Firm Closing Date, to the accuracy of the statements of the Company's
officers made pursuant to the provisions hereof, to the performance by the
Company of its covenants and agreements hereunder and to the following
additional conditions:
(a) If the Original Registration Statement or any amendment thereto
filed prior to the Firm Closing Date has not been declared effective as of the
time of execution hereof, the Original Registration Statement or such amendment
and, if the Company has elected to rely upon Rule 462(b), the Rule 462(b)
Registration Statement
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<PAGE>
shall have been declared effective not later than the earlier of (i) 11:00 A.M.,
New York time, on the date on which the amendment to the registration statement
originally filed with respect to the Securities or to the Registration
Statement, as the case may be, containing information regarding the initial
public offering price of the Securities has been filed with the Commission and
(ii) the time confirmations are sent or given as specified by Rule 462(b)(2), or
with respect to the Original Registration Statement, or such later time and date
as shall have been consented to by the Representatives; if required, the
Prospectus or any Term Sheet that constitutes a part thereof and any amendment
or supplement thereto shall have been filed with the Commission in the manner
and within the time period required by Rules 434 and 424(b) under the Act; no
stop order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Fox, Rothschild, O'Brien & Frankel, LLP, counsel for the
Company, to the effect that:
(i) the Company and each of its subsidiaries listed in Exhibit
21 to the Registration Statement (the "Subsidiaries") have been duly
organized and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation and
are duly qualified to transact business as foreign corporations and are
in good standing under the laws of all other jurisdictions where the
ownership or leasing of their respective properties or the conduct of
their respective businesses requires such qualification, except where
the failure to be so qualified does not amount to a material liability
or disability to the Company and the Subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have corporate
power to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement and
the Prospectus, and the Company has corporate power to enter into this
Agreement and to carry out all the terms and provisions hereof to be
carried out by it;
(iii) the issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully
paid and nonassessable and are owned beneficially by the Company free
and clear of any perfected security interests or, to the best knowledge
of such counsel, any other security interests, liens, encumbrances,
equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus; all of the issued shares
of capital stock of the Company, including the Option Securities, have
been duly
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authorized and validly issued and are fully paid and nonassessable,
have been issued in compliance with all applicable federal and state
securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase
securities; the Firm Securities have been duly authorized by all
necessary corporate action of the Company and, when issued and
delivered to and paid for by the Underwriters pursuant to this
Agreement, will be validly issued, fully paid and nonassessable; the
Securities have been duly included for trading on the Nasdaq National
Market; no holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to
subscribe for any of the Securities; and no holders of securities of
the Company are entitled to have such securities registered under the
Registration Statement;
(v) the statements set forth under the heading "Description of
Capital Stock" in the Prospectus, insofar as such statements purport to
summarize certain provisions of the capital stock of the Company,
provide a fair summary of such provisions; and the statements set forth
under the headings "Risk Factors - Extensive and Increasing Regulation
of Tobacco Products" and "- Tobacco Industry Litigation,"
"Reorganization of the Company," "Business - Intellectual Property,"
"Business - The Tobacco Industry" and "Description of Capital Stock" in
the Prospectus, insofar as such statements constitute a summary of the
legal matters, documents or proceedings referred to therein, provide a
fair summary of such legal matters, documents and proceedings;
(vi) the execution and delivery of this Agreement have been
duly authorized by all necessary corporate action of the Company and
this Agreement has been duly executed and delivered by the Company;
(vii) to the best knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company or any of the
Subsidiaries is a party or to which the property of the Company or any
of the Subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not described therein
and no such proceedings have been threatened against the Company or any
of the Subsidiaries or with respect to any of their respective
properties and (B) no contract or other document is required to be
described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement that is not described
therein or filed as required;
(viii) the issuance, offering and sale of the Securities to
the Underwriters by the Company pursuant to this Agreement, the
compliance by the Company with the other provisions of this Agreement
and the consummation of the other transactions herein contemplated do
not (A) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as
have been obtained and such as may be required under state securities
or blue sky laws, or (B) conflict with or result in a breach or
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<PAGE>
violation of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other
agreement or instrument, known to such counsel, to which the Company or
any of the Subsidiaries is a party or by which the Company or any of
the Subsidiaries or any of their respective properties are bound, or
the charter documents or by-laws of the Company or any of the
Subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator known to such counsel and applicable to the Company or
Subsidiaries;
(ix) the Reorganization was consummated as described in the
Registration Statement and was in compliance with the provisions of the
Company's and the Subsidiaries' respective charter documents and
by-laws and in compliance with all applicable laws and all required
filings with federal or state authorities necessary to consummate the
Reorganization have been made;
(x) the Registration Statement is effective under the Act; any
required filing of the Prospectus, or any Term Sheet that constitutes a
part thereof, pursuant to Rules 434 and 424(b) has been made in the
manner and within the time period required by Rules 434 and 424(b); and
no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or threatened or, to the best
knowledge of such counsel, are contemplated by the Commission; and
(xi) the Registration Statement originally filed with respect
to the Securities and each amendment thereto, any Rule 462(b)
Registration Statement and the Prospectus (in each case, other than the
financial statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to form in
all material respects with the applicable requirements of the Act and
the rules and regulations of the Commission thereunder.
(xii) if the Company elects to rely on Rule 434, the
Prospectus is not "materially different", as such term is used in Rule
434, from the prospectus included in the Registration Statement at the
time of its effectiveness or an effective post-effective amendment
thereto (including such information that is permitted to be omitted
pursuant to Rule 430A).
Such counsel shall also state that they have no reason to believe that
the Registration Statement, as of its effective date, contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or the date of such opinion, included or
includes any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
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<PAGE>
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (b) shall include any amendment or supplement thereto at the date of
such opinion.
(c) The Securityholder shall have furnished to the Representatives the
opinion of Fox, Rothschild, O'Brien & Frankel, LLP, counsel for the
Securityholder, dated the Closing Date, to the effect that:
(i) the Securityholder has full power to enter into this
Agreement and to sell, transfer and deliver the Option Securities in
the manner provided in this Agreement and to perform his obligations
under this Agreement; this Agreement has been duly executed and
delivered by the Securityholder and is the legal, valid, binding and
enforceable agreement of the Securityholder, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights
generally and subject, as to enforceability, to general principles of
equity (regardless of whether enforcement is sought in a proceeding in
equity or at law);
(ii) the delivery by the Securityholder to the several
Underwriters of certificates for the Option Securities against payment
therefor as provided herein, will convey good and marketable title to
such Securities to the several Underwriters, free and clear of all
security interests, liens, encumbrances, equities, claims or other
defects;
(iii) the sale of the Option Securities to the Underwriters by
the Securityholder pursuant to this Agreement, the compliance by the
Securityholder with the other provisions of this Agreement and the
consummation of the other transactions herein contemplated do not (A)
require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as
have been obtained and such as may be required under state securities
or blue sky laws, or (B) conflict with or result in a breach or
violation of any of the terms and provisions of, or constitute a
default under any indenture, mortgage, deed of trust, lease or other
agreement or instrument to which the Securityholder is a party or by
which the Securityholder or any of the Securityholder's properties are
bound, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any
arbitrator applicable to the Securityholder.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
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<PAGE>
References to the Registration Statement and the Prospectus in this
paragraph (c) shall include any amendment or supplement thereto at the date of
such opinion.
[(d) Placeholder for Dominican Republic counsel opinion]
(e) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Fulbright & Jaworski L.L.P., New York, New York, counsel for
the Underwriters, with respect to the issuance and sale of the Firm Securities,
the Registration Statement and the Prospectus, and such other related matters as
the Representatives may reasonably require, and the Company shall have furnished
to such counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters.
(f) The Representatives shall have received from Price Waterhouse,
L.L.P. a letter or letters dated, respectively, the date hereof and the Firm
Closing Date, in form and substance satisfactory to the Representatives, to the
effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act
and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(iii) on the basis of a reading of the latest available
interim unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries, carrying out certain
specified procedures (which do not constitute an examination made in
accordance with generally accepted auditing standards) that would not
necessarily reveal matters of significance with respect to the comments
set forth in this paragraph (iii), a reading of the minute books of the
shareholders, the board of directors and any committees thereof of the
Company and each of its consolidated subsidiaries, and inquiries of
certain officials of the Company and its consolidated subsidiaries who
have responsibility for financial and accounting matters, nothing came
to their attention that caused them to believe that: (A) the unaudited
consolidated condensed financial statements of the Company and its
consolidated subsidiaries included in the Registration Statement and
the Prospectus do not comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
rules and regulations thereunder or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus; (B) at a specific date not more than five business days
prior to the date of such letter, there were any changes in the capital
stock
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<PAGE>
or long-term debt of the Company and its consolidated subsidiaries or
any decreases in net current assets or stockholders' equity of the
Company and its consolidated subsidiaries, in each case compared with
amounts shown on the September 30, 1997 unaudited consolidated balance
sheet included in the Registration Statement and the Prospectus, or for
the period from October 1, 1997 to such specified date total revenues,
gross profit, operating income, net income and income per share of the
Company and its consolidated subsidiaries were not at least ________%
of the comparable amounts for the comparable period in the prior year,
except in all instances for changes, decreases or increases set forth
in such letter;
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and the Prospectus under the
captions "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Capitalization," "Dilution," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Management," "Certain Transactions,"
"Principal and Selling Stockholder," and "Description of Capital
Stock," and in Exhibit 11 to the Registration Statement, and have
compared such amounts, percentages and financial information with such
records of the Company and its consolidated subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation; and
(v) on the basis of a reading of the unaudited pro forma
consolidated financial statements included in the Registration
Statement and the Prospectus, carrying out certain specified procedures
that would not necessarily reveal matters of significance with respect
to the comments set forth in this paragraph (v), inquiries of certain
officials of the Company and its consolidated subsidiaries who have
responsibility for financial and accounting matters and proving the
arithmetic accuracy of the application of the pro forma adjustments to
the historical amounts in the unaudited pro forma consolidated
financial statements, nothing came to their attention that caused them
to believe that the unaudited pro forma consolidated condensed
financial statements do not comply in form in all material respects
with the applicable accounting requirements of Rule 11-02 of Regulation
S-X or that the pro forma adjustments have not been properly applied to
the historical amounts in the compilation of such statements.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with
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<PAGE>
the purchase and delivery of the Securities as contemplated by the Registration
Statement, as amended as of the date hereof.
References to the Registration Statement and the Prospectus in this
paragraph (f) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(g) The Representatives shall have received from Schmeltzer, Master &
Gorsky, P.C. a letter or letters dated, respectively, the date hereof and the
Firm Closing Date, in form and substance satisfactory to the Representatives, to
the effect that:
(i) they are independent accountants with respect to the
Company and its consolidated subsidiaries within the meaning of the Act
and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the
Registration Statement and the Prospectus comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations; and
(iii) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting
records of the Company and its consolidated subsidiaries and are
included in the Registration Statement and the Prospectus under the
captions "Prospectus Summary," "Risk Factors," "Use of Proceeds,"
"Capitalization," "Dilution," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," "Business," "Management," "Certain Transactions,"
"Principal and Selling Stockholder," and "Description of Capital
Stock," and in Exhibit 11 to the Registration Statement, and have
compared such amounts, percentages and financial information with such
records of the Company and its consolidated subsidiaries and with
information derived from such records and have found them to be in
agreement, excluding any questions of legal interpretation.
In the event that the letters referred to above set forth any such
changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
Reference to the Registration Statement and the Prospectus in this
paragraph (g) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
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<PAGE>
(h) The Representatives shall have received a certificate, dated the
Firm Closing Date, of the principal executive officer and the principal
financial or accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing
Date, does not include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the
Firm Closing Date, does not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants
and agreements and satisfied all conditions on its part to be performed
or satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement or any amendment thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to
the best of the Company's knowledge, are contemplated by the
Commission; and
(iii) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries has sustained any
material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any material
adverse change, or any development involving a prospective material
adverse change, in the condition (financial or otherwise), management,
business prospects, net worth or results of operations of the Company
or any of its subsidiaries, except in each case as described in or
contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(i) The Representatives shall have received a certificate from the
Securityholder, signed by the Securityholder, dated the Closing Date, to the
effect that:
(i) the representations and warranties of the Securityholder
in this Agreement are true and correct as if made on and as of the
Closing Date;
(ii) the Registration Statement, as amended as of the Closing
Date, does not include any untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein not
misleading, and the Prospectus, as amended or supplemented as of the
Closing Date, does not include any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; and
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<PAGE>
(iii) the Securityholder has performed all covenants and
agreements on its part to be performed or satisfied at or prior to the
Closing Date.
(j) The Representatives shall have received from each person who is a
director or officer of the Company, who owns Common Stock or who has an option
to acquire Common Stock an agreement to the effect that such person will not,
directly or indirectly, without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of an option to purchase or other sale or disposition) of any
shares of Common Stock or any securities convertible into, or exchangeable or
exercisable for, shares of Common Stock for a period of 180 days after the date
of this Agreement.
(k) On or before the Firm Closing Date, the Representatives and counsel
for the Underwriters shall have received such further certificates, documents or
other information as they may have reasonably requested from the Company.
(l) Prior to the commencement of the offering of the Securities, the
Securities shall have been included for trading on the Nasdaq National Market.
(m) The PLMA and the Distributorship Agreement shall be in full force
and effect and no changes or amendments shall have been made thereto.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
The respective obligations of the several Underwriters to purchase and
pay for any Option Securities shall be subject, in their discretion, to each of
the foregoing conditions to purchase the Firm Securities, except that all
references to the Firm Securities and the Firm Closing Date shall be deemed to
refer to such Option Securities and the related Option Closing Date,
respectively.
8. Indemnification and Contribution. (a) The Company and the
Securityholder jointly and severally agree to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934 (the "Exchange Act"), against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon:
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<PAGE>
(i) any untrue statement or alleged untrue statement made by
the Company or the Securityholder in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto or (B) any application or other
document, or any amendment or supplement thereto, executed by the
Company or the Securityholder or based upon written information
furnished by or on behalf of the Company or the Securityholder filed in
any jurisdiction in order to qualify the Securities under the
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application"),
(iii) the omission or alleged omission to state in the
Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or
any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in
connection with the marketing of the Securities, including without
limitation, slides, videos, films, tape recordings,
and will reimburse, as incurred, each Underwriter and each such
controlling person for any legal or other expenses reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending against or appearing as a third-party witness in connection with any
such loss, claim, damage, liability or action; provided, however, that the
Company and the Securityholder will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or any
Application in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein; and provided, further, that the Company and the
Securityholder will not be liable to any Underwriter or any person controlling
such Underwriter with respect to any such untrue statement or omission made in
any Preliminary Prospectus that is corrected in the Prospectus (or any amendment
or supplement thereto) if the person asserting any such loss, claim, damage or
liability purchased Securities from such Underwriter but was not sent or given a
copy of the Prospectus (as amended or supplemented) at or prior to the written
confirmation of the sale of such Securities to such person in any case where
such delivery of the Prospectus (as amended or supplemented) is required by the
Act, unless such failure to deliver the Prospectus (as amended or supplemented)
was a result of noncompliance by the Company with Section 5(a)(iv) or 5(a)(v) of
this Agreement. This indemnity agreement will be in addition to
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<PAGE>
any liability which the Company and the Securityholder may otherwise have.
Neither the Company nor the Securityholder will, without the prior written
consent of the Underwriter or Underwriters purchasing, in the aggregate, more
than fifty percent (50%) of the Securities, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder (whether
or not any such Underwriter or any person who controls any such Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is
a party to such claim, action, suit or proceeding), unless such settlement,
compromise or consent includes an unconditional release of all of the
Underwriters and such controlling persons from all liability arising out of such
claim, action, suit or proceeding.
(b) Each Underwriter will, severally and not jointly, indemnify and
hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Securityholder and each person, if any,
who controls the Company or the Securityholder within the meaning of Section 15
of the Act or Section 20 of the Exchange Act against any losses, claims, damages
or liabilities to which the Company, any such director or officer of the
Company, the Securityholder or any such controlling person of the Company or the
Securityholder may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement or
any amendment thereto, any Preliminary Prospectus or the Prospectus or any
amendment or supplement thereto, or any Application or (ii) the omission or the
alleged omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or any Application or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein; and, subject to the
limitation set forth immediately preceding this clause, will reimburse, as
incurred, any legal or other expenses reasonably incurred by the Company, any
such director, officer or controlling person or the Securityholder in connection
with investigating or defending any such loss, claim, damage, liability or any
action in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein
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<PAGE>
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party; provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be one or more
legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnifying party shall not have the right to direct the defense of such action
on behalf of such indemnified party or parties and such indemnified party or
parties shall have the right to select separate counsel to defend such action on
behalf of such indemnified party or parties. After notice from the indemnifying
party to such indemnified party of its election so to assume the defense thereof
and approval by such indemnified party of counsel appointed to defend such
action, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses, other than reasonable
costs of investigation, subsequently incurred by such indemnified party in
connection with the defense thereof, unless (i) the indemnified party shall have
employed separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that in connection with such action the
indemnifying party shall not be liable for the expenses of more than one
separate counsel (in addition to local counsel) in any one action or separate
but substantially similar actions in the same jurisdiction arising out of the
same general allegations or circumstances, designated by the Representatives in
the case of paragraph (a) of this Section 8, representing the indemnified
parties under such paragraph (a) who are parties to such action or actions) or
(ii) the indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party, the
indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Securities or (ii) if the allocation provided
by the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Securityholder on the one hand and the
Underwriters on the other shall be deemed
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<PAGE>
to be in the same proportion as the total proceeds from the offering (before
deducting expenses) received by the Company and the Securityholder bear to the
total underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company, the Securityholder or the Underwriters, the parties'
relative intents, knowledge, access to information and opportunity to correct or
prevent such statement or omission, and any other equitable considerations
appropriate in the circumstances. The Company, the Securityholder and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation that does not take into account the equitable considerations
referred to above in this paragraph (d). Notwithstanding any other provision of
this paragraph (d), no Underwriter shall be obligated to make contributions
hereunder that in the aggregate exceed the total public offering price of the
Securities purchased by such Underwriter under this Agreement, less the
aggregate amount of any damages that such Underwriter has otherwise been
required to pay in respect of the same or any substantially similar claim, and
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute hereunder are several in proportion to their respective underwriting
obligations and not joint, and contributions among Underwriters shall be
governed by the provisions of the Prudential Securities Incorporated Master
Agreement Among Underwriters. For purposes of this paragraph (d), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter, and each director of the Company, each officer of the Company
who signed the Registration Statement and each person, if any, who controls the
Company or the Securityholder within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, shall have the same rights to contribution as
the Company or the Securityholder, as the case may be.
(e) The liability of the Securityholder under this Section 8 shall not
exceed an amount equal to the sum of (i) the aggregate public offering price of
any Option Securities sold by the Securityholder to the Underwriters plus (ii)
the aggregate amount of S Corporation distributions paid to the Securityholder
by the Company or its subsidiaries subsequent to July 1, 1997.
9. Default of Underwriters. If one or more Underwriters default in
their obligations to purchase Firm Securities or Option Securities hereunder and
the aggregate number of such Securities that such defaulting Underwriter or
Underwriters agreed but failed to purchase is ten percent or less of the
aggregate number of Firm Securities or Option Securities to be purchased by all
of the Underwriters at such time hereunder, the other Underwriters may make
arrangements satisfactory to the Representatives for the purchase of such
Securities by other persons (who may include
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<PAGE>
one or more of the non-defaulting Underwriters, including the Representatives),
but if no such arrangements are made by the Firm Closing Date or the related
Option Closing Date, as the case may be, the other Underwriters shall be
obligated severally in proportion to their respective commitments hereunder to
purchase the Firm Securities or Option Securities that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Securities that
is more than ten percent of the aggregate number of Firm Securities or Option
Securities, as the case may be, to be purchased by all of the Underwriters at
such time hereunder, and if arrangements satisfactory to the Representatives are
not made within 36 hours after such default for the purchase by other persons
(who may include one or more of the non-defaulting Underwriters, including the
Representatives) of the Securities with respect to which such default occurs,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company other than as provided in Section 10
hereof. In the event of any default by one or more Underwriters as described in
this Section 9, the Representatives shall have the right to postpone the Firm
Closing Date or the Option Closing Date, as the case may be, established as
provided in Section 3 hereof for not more than seven business days in order that
any necessary changes may be made in the arrangements or documents for the
purchase and delivery of the Firm Securities or Option Securities, as the case
may be. As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 9. Nothing herein shall
relieve any defaulting Underwriter from liability for its default.
10. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, its officers, the
Securityholder and the several Underwriters set forth in this Agreement or made
by or on behalf of them, respectively, pursuant to this Agreement shall remain
in full force and effect, regardless of (i) any investigation made by or on
behalf of the Company, any of its officers or directors, the Securityholder, any
Underwriter or any controlling person referred to in Section 8 hereof and (ii)
delivery of and payment for the Securities. The respective agreements,
covenants, indemnities and other statements set forth in Sections 6 and 8 hereof
shall remain in full force and effect, regardless of any termination or
cancellation of this Agreement.
11. Termination. (a) This Agreement may be terminated with respect to
the Firm Securities or any Option Securities in the sole discretion of the
Representatives by notice to the Company and the Securityholder given prior to
the Firm Closing Date or the related Option Closing Date, respectively, in the
event that the Company or the Securityholder shall have failed, refused or been
unable to perform all obligations and satisfy all conditions on its part to be
performed or satisfied hereunder at or prior thereto or, if at or prior to the
Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the
sole judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or
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<PAGE>
other calamity, whether or not covered by insurance, or from any labor
dispute or any legal or governmental proceeding or there shall have
been any material adverse change, or any development involving a
prospective material adverse change (including without limitation a
change in management or control of the Company), in the condition
(financial or otherwise), business prospects, net worth or results of
operations of the Company and its subsidiaries, except in each case as
described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New
York or United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or
material adverse change in general economic, political or financial
conditions having an effect on the U.S. financial markets that, in the
sole judgment of the Representatives, makes it impractical or
inadvisable to proceed with the public offering or the delivery of the
Securities as contemplated by the Registration Statement, as amended as
of the date hereof.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Information Supplied by Underwriters. The statements set forth in
the last paragraph on the front cover page and under the heading "Underwriting"
in any Preliminary Prospectus or the Prospectus (to the extent such statements
relate to the Underwriters) constitute the only information furnished by any
Underwriter through the Representatives to the Company for the purposes of
Sections 2(a)(ii) and 8 hereof. The Underwriters confirm that such statements
(to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if
sent to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company or the Securityholder, shall be
delivered or sent by mail, telex or facsimile transmission and confirmed in
writing to the Company or the Securityholder at 12270 Townsend Road,
Philadelphia, Pennsylvania 19154.
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<PAGE>
14. Successors. This Agreement shall inure to the benefit of and shall
be binding upon the several Underwriters, the Company, the Securityholder and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company and the Securityholder contained in Section 8 of
this Agreement shall also be for the benefit of any person or persons who
control any Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act and (ii) the indemnities of the Underwriters contained in
Section 8 of this Agreement shall also be for the benefit of the directors of
the Company, the officers of the Company who have signed the Registration
Statement and any person or persons who control the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act and the
Securityholder. No purchaser of Securities from any Underwriter shall be deemed
a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to any provisions relating to conflicts of laws.
16. Consent to Jurisdiction and Service of Process. All judicial
proceedings arising out of or relating to this Agreement may be brought in any
state or federal court of competent jurisdiction in the State of New York, and
by execution and delivery of this Agreement, each of the Company and the
Securityholder accepts for itself and in connection with its properties,
generally and unconditionally, the nonexclusive jurisdiction of the aforesaid
courts and waives any defense of forum non conveniens and irrevocably agrees to
be bound by any judgment rendered thereby in connection with this Agreement.
Each of the Company and the Securityholder designates and appoints
__________________, and such other persons as may hereafter be selected by the
Company or the Securityholder irrevocably agreeing in writing to so serve, as
its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Company and the Securityholder to be effective and binding service in every
respect. A copy of any such process so served shall be mailed by registered mail
to the Company and the Securityholder at its address provided in Section 13
hereof; provided, however, that, unless otherwise provided by applicable law,
any failure to mail such copy shall not affect the validity of service of such
process. If any agent appointed by the Company or the Securityholder refuses to
accept service, each of the Company and the Securityholder hereby agrees that
service of process sufficient for personal jurisdiction in any action against
the Company or the Securityholder in the State of New York may be made by
registered or certified mail, return receipt requested, to the Company or the
Securityholder at its address provided in Section 13 hereof, and the Company and
the Securityholder hereby acknowledges that such service shall be effective and
binding in every respect. Nothing herein shall affect the right to serve process
in any other manner permitted by law or shall limit the
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<PAGE>
right of any Underwriter to bring proceedings against the Company or the
Securityholder in the courts of any other jurisdiction.
17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
If the foregoing correctly sets forth our understanding, please
indicate your acceptance thereof in the space provided below for that purpose,
whereupon this letter shall constitute an agreement binding the Company and each
of the several Underwriters.
Very truly yours,
HOLT'S CIGAR HOLDINGS, INC.
By
----------------------------------
[Title]
-------------------------------------
Robert Levin
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
PRUDENTIAL SECURITIES INCORPORATED
JANNEY MONTGOMERY SCOTT, INC.
By PRUDENTIAL SECURITIES INCORPORATED
By
------------------
Jean-Claude Canfin
Managing Director
For itself and on behalf of the Representatives.
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<PAGE>
SCHEDULE 1
UNDERWRITERS
Number of Firm
Securities to
Underwriter be Purchased
- ----------- --------------
Prudential Securities Incorporated. . . . . . .
Janney Montgomery Scott, Inc. . . . . . . . . .
---------------
Total ..............
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Exhibit 10.9
HOLT'S CIGAR HOLDINGS, INC
1997 INCENTIVE STOCK OPTION PLAN
1. Purpose
Holt's Cigar Holding's, Inc. (the "Company") has adopted the 1997 Stock
Option Plan (the "Plan"), effective as of October 1,1997.
The purpose of the Plan is to enable the Company to attract, retain and
reward key employees and officers (collectively referred to as "Key Employees")
by offering them an opportunity to have a greater proprietary interest in and
closer identity with the Company and its financial success. The Plan will
provide a means whereby such Key Employees may purchase shares of the Company's
no par value common stock (or any class of stock into which the common stock is
converted or reclassified as provided in Section 21 hereof) (the "Common Stock")
pursuant to (i) options which qualify as incentive stock options ("ISO") under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"); or
(ii) non-qualified stock options ("NSO") (collectively, the ISO's and the NSO's
are referred to as "Options"). An Option that is not an ISO shall be an NSO.
2. Administration
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), which, to the extent it shall determine, may delegate its powers
with respect to the administration of the Plan (except its powers pursuant to
Section 22, below) to a committee of Directors. In the event that the Board
chooses to appoint such a Committee of Directors, references herein to the Board
(except solely with respect to Section 22, below) shall be deemed to refer to
such Committee.
Subject to the provisions of the Plan, the Board shall have authority: (i)
to construe and interpret the Plan; (ii) to define the terms used herein; (iii)
to prescribe, amend and rescind rules and regulations relating to the Plan; (iv)
to determine the individuals to whom, and the time or times at which Options
shall be granted, whether such Options shall be incentive stock options or
nonqualified stock options, the number of shares to be subject to each Option,
the Option price, the vesting period for each Option, the number of
installments, if any, in which each Option may be exercised, and the duration of
each Option; (v) to approve and determine the duration of leaves of absence
which may be granted to participants in the Plan ("Participants") without
constituting a termination of Employment for the purposes of the Plan; and (vi)
to make all other determinations necessary or advisable for the administration
of the Plan. All determinations and interpretations made by the Board shall be
binding and conclusive on all Participants in the Plan and
<PAGE>
their legal representatives and beneficiaries. No member of the Board shall be
liable for any action taken or determined to be in good faith.
3. Shares Subject to the Plan
Subject to adjustment as provided for in Section 21, below, the shares to
be offered under the Plan shall consist of the Company's authorized but unissued
no par value Common Stock, and the aggregate number of shares of such Common
Stock which may be issued upon the exercise of all Options under the Plan shall
not exceed 300,000 shares. If any Option granted under the Plan shall expire or
terminate for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for Options to be granted under
the Plan.
4. Eligibility and Participation.
All officers and other key employees of the Company, or any of its
subsidiary corporations hereinafter created shall be eligible for selection to
participate in the Plan. For all purposes of the Plan, subsidiary corporations
shall have the meaning provided in Section 424(f) of the Code. An individual who
has been granted an Option may, if such individual is otherwise eligible, be
granted an additional Option or Options if the Board shall so determine, subject
to the other provisions of the Plan. No ISO may be granted to any person who, at
the time the ISO is granted, is not an employee of the Company.
5. Option.
The following provisions shall apply to each Option granted to a Key
Employee:
(a) Options may be granted to Key Employees at any time and from time to
time as shall be determined by the Board. The Board shall have complete
discretion in determining the number of shares of Common Stock subject
to Options granted to each Key Employee. The Board may grant any type
of Option to purchase Common Stock that is permitted by law at the time
of the grant, including ISO's. Unless otherwise expressly provided at
the time of grant, Options granted under the Plan will not be ISO's.
(b) Each Option shall be evidenced by a written agreement specifying, at a
minimum, the following: the type of Option granted; the Option exercise
price; the terms for payment of the exercise price; the duration of the
Option; and the number of shares of Common Stock to which the Option
pertains (the "Option Agreement"). The Option agreement may also
contain
2
<PAGE>
a vesting schedule, a noncompetition agreement, a confidentiality
provision, provisions for forfeiture in the event of termination of Key
Employee's employment by the Company and such conditions and
restrictions and other terms as the Board shall determine. Option
Agreements need not be identical.
(c) The Board, in its discretion, shall have the power to accelerate
the dates for exercise of any or all Options, or any part thereof,
granted to a Key Employee under the Plan.
6. Required Terms and Conditions of ISO's.
The provisions of each ISO granted to a Key Employee under this Section 6
shall be interpreted in a manner consistent with the provisions of Section 422
of the Code and with all regulations issued thereunder. Each ISO granted to a
Key Employee shall be in such form and subject to such restrictions and
conditions and other terms as the Board may determine at the time of the grant,
subject to the general provisions of the Plan, Section 422 of the Code, the
applicable Option Agreement and the following specific rules:
(a) Exercise Price. Except as otherwise provided, the per share
exercise price of each ISO shall be at least one hundred (100%) percent
of the Fair Market Value of the Common Stock at the time such ISO is
granted, provided that in the case of an ISO granted to a Key Employee
who at the time of the grant owns (as defined in Section 424(d) of the
Code) stock of the Company or its subsidiaries, if any, possessing more
then ten (10%) percent of the total combined voting power of all
classes of stock of any such corporation, the exercise price shall be
at least one hundred ten (110%) percent of the Fair Market Value of the
Common Stock subject to the ISO at the time such ISO is granted and the
ISO by its terms shall not be exercisable after the expiration of five
(5) years from the date the ISO is granted. In no event may the
exercise price be less than the par value of the Common Stock subject
to such ISO.
(b) Maximum Term. Subject to earlier termination as
provided in Section 10, below, each ISO shall expire on the date
determined in the applicable Option Agreement at the time the ISO is
granted, provided that no ISO shall be exercisable after the expiration
of ten (10) years from the date it is granted, except as otherwise
provided in subsection (a) next above.
3
<PAGE>
(c) Time of the Essence. The Board shall specify in each Option Agreement,
at the time each ISO is granted, that the duration of each ISO and the
time or times within which (during the term of the ISO) all or portions
of each ISO may be exercised, except to the extent other terms of
exercise specifically provided by other provisions of the Plan.
(d) Value of Shares. The aggregate Fair Market Value (determined at the
time of the grant) of Common Stock with respect to which ISO's are
exercisable for the first time by a Key Employee during any calendar
year (under all option plans of the Company, or of any corporation,
which, at the time such ISO is granted, is a parent or subsidiary of
the Company, or is a predecessor corporation of any such corporation)
shall not exceed One Hundred Thousand ($100,000) Dollars. If the
aggregate Fair Market Value (determined at the time of the grant) of
the stock subject to an Option, which first becomes exercisable in any
calendar year and during this period exceeds the limitation of this
subsection, so much of the Option that does not exceed the applicable
dollar limit shall be an ISO and the remainder shall be an NSO; but in
all other respects, the original Option Agreement shall remain in full
force and effect.
(e) Conversion. The Board may, in its sole discretion, cause the Company
to convert an ISO to an NSO upon such terms and conditions and in such
manner as the Board deems equitable.
7. Required terms and Conditions of NSO's.
(a) Exercise Price. The number of shares of Common Stock subject to each
NSO and the per share exercise price of each NSO shall be determined by
the Board at the time the NOS is granted, provided that such exercise
price shall not be less than one hundred (100%) percent of the Fair
Market Value of the Common Stock on the date the NSO is granted. In no
event may the exercise price be less than the par value of the Common
Stock subject to such NSO.
(b) Maximum Term. Subject to earlier termination as provided in Section 8,
below, each NSO shall expire on the date determined in the applicable
Option Agreement at the time the NSO is granted, provided that no NSO
shall be exercisable after the expiration of ten (10) years from the
date it is granted.
(c) Time of the Essence. The Board shall specify in each Option
Agreement, at the time each NOS is granted, that the duration of
<PAGE>
each NSO and the time or times within which (during the term of the
NSO) all or portions of each NSO may be exercised, except to the extent
other terms of exercise specifically provided by other provisions of
the Plan.
8. Expiration of Options Granted to Key Employees: Termination of
Employment, Disability, Death, or Retirement and Expiration of Restrictions
upon Occurrence of Specific Events.
(a) General Rule. Except with respect to Options expiring pursuant to
subsection 8(b) or (c), below, each Option granted to a Key Employee shall,
unless sooner expired pursuant to subsection 10(e) below, expire on the
expiration date or dates set forth in the applicable Option Agreement. Each
Option expiring pursuant to subsection 10(b), (c) or (d) below shall expire on
the date set forth in subsection 8(b) or (c) notwithstanding any restrictions
and conditions that may be contained in a Key Employee's Option Agreement.
(b) Expiration Upon Termination of Employment. An Option granted to a Key
Employee shall expire on the first to occur of: (i) the applicable date or dates
determined pursuant to subsection 8(a); or (ii) the date that the employment of
the Key Employee with the Company or its subsidiaries (if any) terminates for
any reason other than death or disability pursuant to subsection 8(c).
Notwithstanding the preceding provisions of this subsection 8(b), the Board, in
its sole discretion, may permit a Key Employee (1) to exercise an Option that is
exercisable immediately prior to termination of employment, notwithstanding any
restrictions and conditions that may be contained in such Key Employee's Option
Agreement, during a period not to exceed ninety (90) days following such Key
Employee's termination of employment, and/or (2) to exercise an Option that
becomes exercisable after termination of employment and prior to the expiration
of such ninety (90) day period, during such period. In no event, however, may
the Board permit such Key Employee to exercise an Option under this subsection
8(b) after the expiration date or dates set forth in the applicable Option
Agreement.
(c) Expiration Upon Disability or Death. If the employment of a Key
Employee with the Company and its subsidiaries (if any) terminates by reason of
disability (as determined by the Board) or death, such Key Employee's unexpired
Options or portions thereof, if any, held on the date of disability or death
that would expire pursuant to the terms of such Key
5
<PAGE>
Employee's Option Agreement or Agreement during the twelve (12) month period
commencing on the date of disability or death, shall expire on the last day of
such twelve (12) month period. During such twelve (12) month period, any such
Option or portion thereof referred to in the preceding sentence may be exercised
by such Key Employee, or the person specified in Section 9, below, with respect
to the same number of shares and in the same manner and to the same extent as if
the Key Employee had continued as a full-time employee of the Company or its
subsidiaries (if any) during such twelve (12) month period. Any unexpired
Option or portion thereof held by a Key Employee on the date of disability or
death, that would expire pursuant to the terms of such Key Employee's Option
Agreement on a date more than twelve (12) months after the date of disability
or death, shall expire unexercised on the date of disability or death.
9. Method of Exercise of Options.
Any Option granted under the Plan may be exercised by the Participant, by a
legatee or legatees of such Option under the Participant's Last Will, by his
executors, personal representatives or distributees, or by his assignee or
assignees as provided in Section 11, below, by delivering to the Secretary of
the Company written notice of the number of shares of Common Stock with respect
to which the Option is being exercised, accompanied by full payment to the
Company of the exercise price of the shares being purchased under such Option,
and by satisfying all other conditions provided for in the Plan. Except as
otherwise provided in the Plan, the exercise price of Common Stock upon exercise
of any Option by a Key Employee shall be paid in full in cash; or at the Board's
discretion in any of the following manners: (i) in Common Stock valued at its
Fair Market Value on the date of Exercise; (ii) in cash by a broker-dealer to
whom the holder of the Option has submitted an exercise notice consisting of a
fully endorsed Option; (iii) by agreeing to surrender to the Company Options
then exercisable by such Key Employee valued at the excess of aggregate Fair
Market Value of the Common Stock subject to such Options on the date of exercise
over the aggregate option price of such Common Stock; (iv) by directing the
Company to withhold such number of shares of Common Stock otherwise issuable
upon exercise of such Option having an aggregate Fair Market Value on the date
of exercise equal to the exercise price of such Option; or (vi) by such other
medium of payment as the Board, in its discretion, shall authorize, or any
combination of the foregoing at the discretion of the Board, or in any manner
6
<PAGE>
provided in an Option Agreement. In the case of payment pursuant to (i), (ii),
(iii) or (iv), above, the Participant's election must be made on or prior to the
date of the exercise of the Option and must be irrevocable.
10. Terms and Conditions of Options.
(a) Each Key Employee shall agree to such restrictions and conditions and
other terms in connection with the exercise of an Option, including restrictions
and conditions on the disposition of the Common Stock acquired upon the
exercise, grant or sale thereof, as the Board may deem appropriate. The
certificates delivered to a Participant or to the Secretary of the Company
evidencing the shares of Common Stock acquired upon the exercise of an Option,
shall bear a legend referring to the conditions and restrictions and other terms
contained in the respective Option Agreement and the Plan, and the Company may
place a stop-transfer order with its transfer agent (if any) against the
transfer of such shares. If requested to do so by the Board at the time of
exercise of an Option, each Participant shall execute a written instrument
stating that such Participant is purchasing the Common Stock for investment and
not with any present intention to sell same. In addition, if at the time an
Option is exercised the Company's shares of Common Stock are not publicly traded
on a national securities exchange or market, the Participant shall be required
to execute a Stock Restriction Agreement in a form acceptable to the Board,
which among other things, restricts the sale or transfer of the shares of Common
Stock issued upon an exercise of an Option and grants to the Company a right to
repurchase the shares until such time as the shares of the Company's Common
Stock are publicly traded on a national securities exchange or market.
(b) The obligations of the Company to sell and deliver the Common Stock
under the Plan shall be subject to all applicable laws, regulations, rules and
approvals, including, but not by way of limitation, the effectiveness of a
registration statement under the Securities Act of 1933, if deemed necessary or
appropriate by the Board, of the Common Stock, Options and other securities
reserved for issuance or that may be offered under the Plan. A Participant shall
have no rights as a stockholder with respect to any shares covered by an Option
granted to, or exercised by such Participant, until the date of delivery of a
stock certificate to such Participant for such shares. No adjustment shall be
made for dividends or rights for which the record date is prior to the date such
stock certificate is delivered.
7
<PAGE>
11. Nontransferability.
(a) Except as provided in subsection (b) next below, Options granted under
the Plan and any rights and privileges pertaining thereto, may not be
transferred, assigned, pledged or hypothecated in any manner, by operation of
law or otherwise, other than by will or be the laws of descent and distribution
and shall not be subject to execution, attachment or similar process. The
granting of an Option shall impose no obligation upon the applicable Participant
to exercise such Option.
(b) Notwithstanding the provisions of subsection (a) above, a Participant,
at any time prior to his death, may assign all or any portion of an Option
granted to him (other than an ISO) to: (i) his spouse or lineal descendant; (ii)
the trustee of a trust for the sole benefit of his spouse and lineal
descendants; or (iii) a partnership of which his spouse and lineal descendants
are the only partners, In such event, the spouse, lineal descendants, trustees
or partnership will be entitled to all of the rights of the Participant with
respect to the assigned portion of such Options, and such portions of the
Options will continue to be subject to all the terms, conditions and
restrictions applicable to the Options, as set forth herein and in the related
Option Agreements, immediately prior to the effective date of the assignment.
Any such assignment will be permitted only if: (A) the Participant does not
receive any consideration for such assignment; and (B) the assignment is
expressly permitted by the applicable Option Agreement as approved by the Board.
Any such assignment shall be evidenced by an appropriate written document
executed by the Participant, and a copy thereof shall be delivered to the
Company on or prior to the effective date of the assignment in a form acceptable
to the Board.
12. Indemnification of the Board.
In addition to such other rights of indemnification as they may have as
members of the Board, or as members of the Committee, or as its delegates, the
members of the Board, and its delegatees shall be indemnified by the Company
against: (a) the reasonable expenses (as such expenses are incurred), including
attorney's fees actually and necessarily incurred in connection with the defense
of any action, suit or proceeding (or in connection with any appeal thereto), to
which they or any of them may be a party by reason of any action
8
<PAGE>
taken or failure to act under or in connection with the Plan, any Option; and
(b) against all amounts paid by them in settlement thereof (provided such
settlement is approved by independent legal counsel selected by the Company) and
paid by them in satisfaction of any judgment in any such action, suit or
proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit or proceeding that such Board member or delegatee is liable
for gross negligence or misconduct in the performance of his or her duties;
provided that within sixty (60) days after institution of any such action, suit
or proceeding, a Board member or delegatee shall, in writing, offer the Company
the opportunity, at its own expense, to handle and defend same.
13. No Contract of Employment.
Neither the adoption of the Plan nor the grant of any Option shall be
deemed to obligate the Company or any subsidiary (if any) to continue the
employment of any Key Employee for any particular period, nor shall the granting
of any Option constitute a request or consent to postpone the retirement date of
any Key Employee.
14. Termination and Amendment of Plan.
(a) No ISO's shall be granted under the Plan for more than ten (10) years
after the first to occur of: (i) the date the Plan was adopted by the Board; or
(ii) the date the Plan was approved by the stockholders of the Company. The
Board may at any time terminate, suspend or modify the Plan without the
authorization of stockholders to the extent allowed by law.
(b) The Board may at any time suspend or terminate the Plan. The Board may
also at any time amend or revise the terms of the Plan, provided that no such
amendment or revision shall, unless appropriate shareholder approval of such
amendment or revision is obtained, increase the maximum number of shares in the
aggregate which may be sold pursuant to Options granted under the Plan, except
as permitted under the provisions of Section 22, below, or change the minimum
purchase price of ISO's set forth or increase the maximum term of ISO's as
provided for in Section 6, above, or permit the granting of Options to anyone
other than as provided in Section 4, above.
9
<PAGE>
(c) No termination, suspension or modification of the Plan shall adversely
affect any right acquired by any Participant under an Option granted before the
date of such termination, suspension or modification, unless such Participant
shall consent; but it shall be conclusively presumed that any adjustment for
changes in capitalization as provided for herein does not adversely affect any
such right. Any Member of the Board who is an officer or employee of the Company
shall be without vote on any proposed amendment to the Plan, or any other matter
which might affect that member's individual interest under the Plan.
15. Effective Date of Plan.
The Plan shall become effective upon the adoption by the Board; provided
however, that it shall be submitted for approval by the holders of a majority of
the outstanding shares of Common Stock of the Company present, or represented,
and entitled to vote at a stockholders' meeting (or submitted for approval by an
Action by Unanimous Consent of such shareholders) within twelve (12) months of
the date of Board adoption. Any Option granted prior to such shareholder
approval shall be null and void if such stockholder approval is not obtained.
16. Withholding Taxes.
Whenever the Company proposes or is required to transfer or issue shares of
Common Stock to a Participant under the Plan, the Company shall have the right
to require the Participant to remit to the Company an amount sufficient to
satisfy all federal, state and local withholding tax requirements prior to the
delivery of any certificate or certificates evidencing such shares. If such
certificates have been delivered prior to the time a withholding obligation
arises, the Company shall have the right to require the Participant to remit to
the Company an amount sufficient to satisfy all federal, state and local
withholding tax requirements at the time such obligation arises and to withhold
from other amounts payable to such Participant, as compensation or otherwise, as
necessary to satisfy any withholding requirements. Whenever payments under the
Plan are to be made to a Participant in cash, such payments shall be net of any
amounts sufficient to satisfy all federal, state and local withholding tax
requirements.
10
<PAGE>
If the holder of shares of Common Stock purchased in connection with the
exercise of an ISO disposes of such shares within two (2) years from the date
such ISO was granted; or within one (1) year of the exercise of any ISO, such
Participant shall immediately notify the Company of such disposition and remit
such amounts as are necessary to satisfy applicable withholding requirements
including those arising under federal income tax laws. If such holder does not
remit such amount, the Company may withhold all or any portion of any salary,
bonus or other compensation payments then or in the future owed to such holder
as necessary to satisfy such requirements.
17. Leaves of Absence.
The Board shall be entitled to make such rules, regulations and
determinations as it deems appropriate under the Plan regarding any leave of
absence taken by a Key Employee who is the recipient of any Option. Without
limiting the generality of the foregoing, the Board shall be entitled to
determine (a) whether or not such leave of absence shall constitute a
termination of employment within the meaning of the Plan, and (b) the impact, if
any, of any such leave of absence on Options under the Plan theretofore made to
any Key Employee who takes such leave of absence.
18. Governing Law.
The Plan, and all Option Agreements hereunder, shall be construed in
accordance with and governed by the laws of the Commonwealth of Pennsylvania,
and in the case of ISO's, Section 422 of the Code and regulations issued
thereunder.
19. Fair Market Value.
"Fair Market Value" as of a given date for all purposes of the Plan and any
Option Agreement, means: (a) if the Common Stock is listed on a national
securities exchange, the average of the closing price prices of the Common Stock
on the composite tape for the five (5) consecutive trading days immediately
preceding such given date; (b) if the Common Stock is traded on an exchange or
market in which prices are reported on a bid and asked price basis, the average
of the mean between the bid and asked prices for the Common Stock at the close
of trading for the five (5) consecutive trading days immediately preceding such
given date; and (c) if the Common Stock is not listed
11
<PAGE>
on a national securities exchange nor traded on the over-the-counter market,
such value as the Board, in good faith, shall determine. Notwithstanding any
provision of the Plan to the contrary, no determination made with respect to the
Fair Market Value of Common Stock subject to an ISO shall be inconsistent with
Section 422 of the Code or regulations issued thereunder.
20. Successors.
In the event of a sale of substantially all of the assets of the Company,
or a merger, consolidation or share exchange involving the Company, all
obligations of the Company under the Plan with respect to Options granted
hereunder shall be binding on the successor to the transaction. Employment of a
Key Employee with such a successor shall be considered employment of the Key
Employee with the Company for purposes of the Plan.
21. Notices.
Notices given pursuant to the Plan shall be in writing and shall be deemed
received when personally delivered, when delivered by a nationally recognized
overnight delivery or courier service; or when received as evidenced by a return
receipt when such notice is delivered by United States Postal Service by
registered or certified mail, postage prepaid. Notice to the Company shall be
directed to the President.
22. Adjustments
If the outstanding shares of the Common Stock of the Company (or any other
class of shares or securities which shall have become eligible for grant under
the Plan pursuant to this sentence) are increased, decreased, changed into or
exchanged for a different number or kind of shares or securities of the Company
through reorganization, reclassification, stock dividend, stock split, reverse
stock split or similar transaction, an appropriate and proportionate adjustment
shall be made in the maximum number and kind of shares as to which Options may
be granted under the Plan. A corresponding adjustment changing the number and
kind of shares allocated to unexercised Options or portions thereof, which shall
have been granted prior to any such change, shall likewise be made. Any such
adjustment in the outstanding Options shall be made without change in the
12
<PAGE>
aggregate purchase price applicable to the unexercised portion of the Options
but with a corresponding adjustment in the price for each share or other unit of
any security covered by such Options.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of substantially all of the property or more than eighty (80%)
percent of the then outstanding stock of the Company to another corporation(s),
the Plan shall terminate, and all Options theretofore granted hereunder shall
terminate; provided, however, that not withstanding the foregoing, the Board
shall provide in writing in connection with such transaction for any or all of
the following alternatives (separately or in combinations): (i) for the Options
theretofore granted to become immediately exercisable notwithstanding the
provisions of Section 7, above; (ii) for the assumption by the successor
corporation of the Options theretofore granted or the substitution by such
corporation for such Options and rights of new Options and rights covering the
stock of the successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices; (iii)
for the continuance of the Plan by such successor corporation in which event the
Plan and the Options theretofore granted shall continue in the manner and under
the terms so provided; or (iv) for the payment of cash or stock in lieu of and
in complete satisfaction of such Options.
Adjustments under this Section 22 shall be made by the Board, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under the Plan on any such adjustment.
13
<PAGE>
HOLT'S CIGAR HOLDINGS, INC.
INCENTIVE STOCK OPTION AGREEMENT
An incentive stock option ("Stock Option") is hereby granted by, Holt's
Cigar Holdings, Inc., a Delaware corporation ("Company"), to the key employee
named below ("Key Employee"), for and with respect to common stock of the
Company, no par value per share ("Common Stock"), subject to the following terms
and conditions:
1. Subject to the provisions set forth herein and the terms and conditions
of the Company's 1997 Stock Option Plan ("Plan"), the terms of which are hereby
incorporated by reference, and in consideration for the agreements of Key
Employee herein provided, the Company hereby grants to Key Employee a Stock
Option intended to be an Incentive Stock Option within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended, to purchase from the
Company the number of shares of Common Stock, at the purchase price per share,
and on the schedule, all as set forth below. At the time of exercise of the
Stock Option, payment of the purchase price must be made in cash, or if the
Board of Directors in its discretion agrees at such time to so accept, then by
the delivery to the Company of other Common Stock owned by Key Employee, valued
at its fair market value on the date of exercise, or in some combination of cash
and such Common Stock so valued. Upon the exercise of a Stock Option, the Board
of Directors shall have the right to require the Key Employee to remit to the
Company, in any such manner or combination or manners permitted under the terms
of the Plan, an amount sufficient to satisfy all federal, state and local
withholding tax requirements prior to the delivery by the Company of any
certificate for share of Common Stock.
Name of Key Employee:
Number of Shares Subject to Stock Option:
Exercise Price Per Share:
Date of Grant
<TABLE>
<CAPTION>
2. Exercise Schedule Commencement Date Expiration Date
----------------- ----------------- ---------------
<S> <C> <C>
Number of Shares of 1 year from date of grant 5 years from date of grant
Common Stock Subject to 2 years from date of grant 5 years from date of grant
Stock Option 3 years from date of grant 5 years from date of grant
</TABLE>
14
3. The exercise of the Stock Option is conditioned upon the acceptance by
Key Employee of the terms hereof as evidenced by his execution of this Agreement
and the return of an executed copy to the Secretary of the Company no later than
__________________________________.
(a) If Key Employee's employment with the Company and any subsidiaries is
terminated for any reason other than for death or disability, the Stock Option
shall expire on the date of termination of employment; provided that the Board
in its sole discretion, by written notice given to Key Employee, may permit Key
Employee to exercise the Stock Option during a period ending on the earlier of:
(i) ninety (90) days after such termination of employment; or (ii) the date the
Stock Option expires in accordance with its terms. During such periods, the
Stock Options may be exercised by Key Employee with respect to the same number
of shares of Common Stock, in the same manner, and to the same extent, which the
Key Employee could have exercised on the date of termination, and the Stock
Option shall be cancelled with respect to all remaining shares of Common Stock
(b) If Key Employee's employment with the Company and any subsidiaries is
terminated due to his disability or death, the Stock Option may be exercised by
the Key Employee with respect to the same number of shares of Common Stock, in
the same manner, and to the same extent as if Key Employee had continued
employment for the twelve (12) month period after his termination of employment
and the Stock Option shall be cancelled with respect to all remaining shares of
Common Stock; provided that in the event Key Employee shall die at a time when
the Stock Option, or a portion thereof, is exercisable by him, the Stock Option
shall be exercisable in whole or in part during the applicable period set forth
herein by legatee or legatees of the Key Employee under Key Employee's will, or
by his executors, personal representatives or distributee.
(c) Written notice of an election to exercise any portion of the Stock
Option, specifying the portion thereof being exercised and the exercise date,
shall be given by Key Employee, or his personal representative in the event of
Key Employee's death, by delivering such notice to the Secretary of the Company
at the principal executive offices of the Company no later than the exercise
date: (i) in person; (ii) by a nationally recognized overnight delivery service;
or (iii) by delivery of the United States Postal Service by registered or
certified mail, postage pre-paid with the delivery evidenced by return receipt
4. The Stock Option may be exercised only by Key Employee during his
lifetime and may not be transferred other than by will or the applicable laws of
descent or distribution. The Stock Option shall not otherwise be transferred,
assigned, pledged or hypothecated for any purpose whatsoever and is not subject,
in whole or in part, to execution, attachment, or similar process. Any attempted
assignment, transfer, pledge or hypothecation or
15
<PAGE>
other disposition of the Stock Option, other than in accordance with the terms
set forth herein, shall be void and of no effect.
5. Neither Key Employee nor any other person entitled to exercise the Stock
Option under the terms hereof shall be, or have any of the rights or privileges
of, a shareholder of the Company in respect of any of the shares of Common Stock
issuable on exercise of the Stock Option, unless and until the purchase price
for such shares shall have been paid in full.
6. In the event the Stock Option shall be exercised in whole, this
Agreement shall be surrendered to the Company for cancellation. In the event the
Stock Option shall be exercised in part, or a change in the number or
designation of the Common Stock shall be made, this Agreement shall be delivered
by Key Employee to the Company for the purpose of making appropriate notation
thereon, or of otherwise reflecting, in such manner as the Company shall
determine, the partial exercise or the change in the number or designation of
the Common Stock.
7. The Stock Option shall be exercised in accordance with such
administrative regulations as the Board of Directors shall from time to time
adopt.
8. Confidential Information and Other Matters.
(a) Key Employee acknowledges that the Company has disclosed, and may
disclose to Key Employee, and Key Employee may otherwise become privy to or
develop certain confidential information during the term of employment, such
information being disclosed to Key Employee in order to allow Key Employee to
perform his duties, and other confidential information being developed by Key
Employee in fulfillment of Key Employee's required duties. Key Employee hereby
covenants and agrees that he will not, without the prior written consent of the
Company which may be withheld for any or no reason whatsoever by the Company,
during the term of his employment or at any time thereafter, disclose or permit
to be disclosed to any third party by any method whatsoever any of the
confidential information of the Company. For the purposes herein, "confidential
information" shall include, but not be limited to, any and all records, notes,
memoranda, data, ideas, processes, methods, techniques, systems, formulas,
patents, models, devices, programs, computer software, software architecture,
structure or design, writings, research, personnel information, plans, or any
other information of whatever nature in the possession or control of the Company
which has not been published or disclosed to the general public, or which gives
to the Company an opportunity to obtain an advantage over competitors who do not
know of or use it. Key Employee further agrees that if his employment is
terminated for any reason, he will leave with the Company and will not take
originals or copies of any and all records, papers,
16
<PAGE>
documents, programs, computer software and data and any other matter of whatever
nature, and in whatever form, which bears secret or confidential information of
the Company.
(b) Key Employee will not, during his employment with the Company and for
two (2) years after the termination of his employment; (i) call upon any
customers of the Company for the purpose of selling or soliciting for any
person, corporation or entity other than the Company products or services
competitive with those of the Company; (ii) interfere with the relationship of
the Company and any of its employees, consultants, customers, resellers, service
providers, agents or representatives; or (iii) directly or indirectly divert or
attempt to divert from the Company any business in which the Company has been
engaged nor interfere with the relationships of the Company with its dealers,
distributors, sources of supply or customers.
(c) Key Employee agrees promptly to reduce to writing and to disclose and
assign, and hereby does assign, to the Company, its parent, subsidiaries,
successors, assigns and nominees, all inventions, discoveries, improvements,
copyrightable material, trademarks, programs, computer software, architecture,
structure and design and ideas concerning the same, capable of use in connection
with the business of the Company, which Key Employee may make or conceive,
either solely or jointly with others, during the period of his employment by the
Company, its parent, subsidiaries or successors.
Key Employee agrees, without charge to the Company and at the Company's
expense, to execute, acknowledge and deliver to the Company all such papers,
including applications for patents, applications for copyright and trademark
registrations, and assignments thereof, as may be necessary, and during the
period of his employment assist the Company, its parent, subsidiaries,
successors, assigns and nominees in every proper way to patent or register said
programs, computer software, ideas, inventions, discoveries, improvements,
copyrightable material or trademarks in any and all countries and to vest title
thereto in the Company, its parent, subsidiaries, successors, assigns or
nominees.
Key Employee will promptly report to the Company all discoveries,
inventions, or improvements of whatsoever nature conceived or made by him at any
time he was employed by the Company, its parent, subsidiaries or successors. All
such discoveries, inventions and improvements which are applicable in any way to
the Company's business shall be the sole and exclusive property of the Company.
(d) Key Employee agrees that any violation or breach of any provision of
subparagraphs (a), (b) or (c) of this Paragraph 8 would cause
17
<PAGE>
irreparable harm to the Company and that such harm cannot be adequately
compensated in money damages. Accordingly, any such violation or breach may be
enjoined by any court of competent jurisdiction, without waiving or affecting
claims for damages incurred by the Company in connection with such violation.
All promises relating to actions or restraint of actions in periods subsequent
to the expiration of the employment relationship with the Company shall remain
effective and shall survive any termination of the employment relationship with
the Company.
9. Capitalized terms not defined herein shall have the meaning ascribed to
them in the Plan.
10. The Stock Option and this Agreement shall be construed, administered
and governed by the laws of the Commonwealth of Pennsylvania.
HOLT'S CIGAR HOLDINGS, INC
BY:
---------------------------
ROBERT G. LEVIN, PRES.
The undersigned hereby accepts the foregoing Stock Option and the terms and
conditions hereof.
- ------------------------------
Key Employee
Dated:
---------------------------
HOLT'S CIGAR COMPANY, INC.
1997 NON-MANAGEMENT DIRECTORS STOCK OPTION PLAN
1. Purpose
Holt's Cigar Company, Inc. (the "Company") has adopted the 1997
Non-Management Directors Stock Option Plan (the "Plan"), effective as
of ________________________.
The purpose of the Plan is to enable the Company to attract, retain and
reward non-management Directors (collectively referred to as "Outside
Directors") by offering them an opportunity to have a greater proprietary
interest in and closer identity with the Company and its financial success. The
Plan will provide a means whereby such Outside Directors may purchase shares of
the Company's no par value common stock (or any class of stock into which the
common stock is converted or reclassified as provided in Section 18 hereof) (the
"Common Stock") pursuant to non-qualified stock options ("NSO" or "Options").
2. Administration
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), which, to the extent it shall determine, may delegate its powers
with respect to the administration of the Plan (except its powers pursuant to
Section 18, below) to a committee of Directors. In the event that the Board
chooses to appoint such a Committee of Directors, references herein to the Board
(except solely with respect to Section 18, below) shall be deemed to refer to
such Committee.
Subject to the provisions of the Plan, the Board shall have authority:
(i) to construe and interpret the Plan; (ii) to define the terms used herein;
(iii) to prescribe, amend and rescind rules and regulations relating to the
Plan; (iv) to establish the fair market value of the Company as required under
the Plan; and (v) to make all other determinations necessary or advisable for
the administration of the Plan. All determinations and interpretations made by
the Board shall be binding and conclusive on all Participants in the Plan and
their legal representative and beneficiaries. No member of the Board shall be
liable for any action taken or determined to be in good faith.
3. Shares Subject to the Plan
Subject to adjustment as provided for in Section 18 below, the shares
to be offered under the Plan shall consist of the Company's authorized but
unissued no par value Common Stock, and the aggregate number of shares of such
Common Stock which may be issued upon the exercise of all Options under the Plan
shall not exceed 180,000 shares. If any Option granted under the Plan shall
expire
<PAGE>
or terminate for any reason without having been exercised in full, the
unpurchased shares subject thereto shall again be available for Options to be
granted under the Plan.
4. Eligibility and Participation
All directors of the Company, or any of its subsidiary corporations
hereinafter created who are not, on the date of grant, employees of the Company
shall be eligible for participation in the Plan. For all purposes of the Plan,
subsidiary corporations shall have the meaning provided in Section 424(f) of the
Code.
5. Option
The following provisions shall apply to each Outside Director:
(a) Options to purchase 15,000 shares of the Company's no par
value common stock shall be granted to each Outside
Director who is serving in such capacity on the date of
adoption of this Plan, and on the date of each annual
meeting of the stockholders of the Company after the date
of adoption of this Plan. For the purposes of the
foregoing sentence, Directors who cease serving as
Directors of the Company on the date of any annual
meeting of the stockholders of the Company shall not be
granted any Options hereunder on such date, and any newly
elected Directors who otherwise qualify shall receive a
grant of Options as of such date.
(b) Each Option shall be evidenced by a written agreement
specifying, at a minimum, the following: the type of Option
granted; the Option exercise price; the terms for payment of
the exercise price; the duration of the Option and the number
of shares of Common Stock to which the Option pertains (the
"Option Agreement").
6. Required Terms and Conditions of Options
The provisions of each Option granted to an Outside Director under this
Section 6 shall be in such form and subject to such restrictions and conditions
and other terms as the Board may determine at the time of the grant, the
applicable Option Agreement and the following specific rules:
(a) Exercise Price Except as otherwise provided, the per share
exercise price of each Option shall be equal to one hundred
(100%) percent of the Fair Market Value of the Common Stock
established by the Board of Directors in the manner prescribed
in Section 16 below on a date no more than thirty (30) days
prior to the grant of any Option, in the discretion of the
Board. In no event may the
<PAGE>
exercise price be less than the par value of the Common Stock
subject to such Option.
(b) Maximum Term Subject to earlier termination as provided below,
each Option shall expire and shall not be exercisable after
the expiration of ten (10) years from the date it is granted.
(c) Time of the Essence The Board shall specify in each
Option Agreement, at the time each Option is granted,
that time is of the essence with respect to the duration
of each Option and the time or times within which (during
the term of the Option) all or portions of each Option
may be exercised, except to the extent other terms of
exercise specifically provided by other provisions of the
Plan.
(d) Vesting and Exercise Each Option shall be fully and
indefeasibly vested immediately upon the grant thereof, and
may be exercised at any time during the term of such Option.
(e) Expiration Upon Termination of Directorship An Option granted
hereunder shall expire on the first to occur of: (i) the
applicable date or dates determined pursuant to subsection
6(b); or (ii) ninety (90) days subsequent to the date that the
holder thereof is no longer a director of the Company.
7. Method of Exercise of Options
Any Option granted under the Plan may be exercised by the Participant,
by a legatee or legatees of such Option under the Participant's Last Will, by
his executors, personal representatives or distributees, or by his assignee or
assignees as provided below, by delivering to the Secretary of the Company
written notice of the number of shares of Common Stock with respect to which the
Option is being exercised, accompanied by full payment to the Company of the
exercise price of the shares being purchased under such Option, and by
satisfying all other conditions provided for in the Plan. Except as otherwise
provided in the Plan, the exercise price of Common Stock upon exercise of any
Option by an Outside Director shall be paid in full in cash; or at the Board's
discretion in any of the following manners: (i) in Common Stock valued at its
Fair Market Value on the date of Exercise; (ii) in cash by a broker-dealer to
whom the holder of the Option has submitted an exercise notice consisting of a
fully endorsed Option; (iii) by agreeing to surrender to the Company Options
then exercisable by such Outside Director valued at the excess of aggregate Fair
Market Value of the Common Stock subject to such Options on the date of exercise
over the aggregate option price of
<PAGE>
such Common Stock; (iv) by directing the Company to withhold such number of
shares of Common Stock otherwise issuable upon exercise of such Option having an
aggregate Fair Market Value on the date of exercise equal to the exercise price
of such Option; or (vi) by such other medium of payment as the Board, in its
discretion, shall authorize, or any combination of the foregoing at the
discretion of the Board, or in any manner provided in an Option Agreement. In
the case of payment pursuant to (i), (ii), (iii) or (iv), above, the
Participants' election must be made on or prior to the date of the exercise of
the Option and must be irrevocable.
8. Terms and Conditions of Options
The obligations of the Company to sell and deliver the Common Stock
under the Plan shall be subject to all applicable laws, regulations, rules and
approvals, including, but not by way of limitation, the effectiveness of a
registration statement under the Securities Act of 1933, if deemed necessary or
appropriate by the Board, of the Common Stock, Options and other securities
reserved for issuance or that may be offered under the Plan. A Participant shall
have no rights as a stockholder with respect to any shares covered by an Option
granted to, or exercised by such Participant for such shares. No adjustment
shall be made for dividends or rights for which the record date is prior to the
date such stock certificate is delivered.
9. Nontransferability
(a) Except as provided in subsection (b) next below, Options granted
under the Plan and any rights and privileges pertaining thereto, may not be
transferred, assigned, pledged or hypothecated in any manner, by operation of
law or otherwise, other than by will or be the laws of decent and distribution
and shall not be subject to execution, attachment or similar process. The
granting of an Option shall impose no obligation upon the applicable Participant
to exercise such Option.
(b) Notwithstanding the provisions of subsection (a) above, a
Participant, at any time prior to his death, may assign all or any portion of an
Option granted to him to: (i) his spouse, sibling or lineal descendant; (ii) the
trustee of a trust for the sole benefit of his spouse, sibling and lineal
descendants; or (iii) a partnership of which his spouse, sibling and lineal
descendants are the only partners. In such event, the spouse, siblings, lineal
descendants, trustees or partnership will be entitled to all of the rights of
the Participant with respect to the assigned portion of such Options, and such
portions of the Options will continue to be subject to all the terms, conditions
and restrictions applicable to the Options, as set forth herein and in the
related Option Agreements, immediately prior to the effective date of the
assignment. Any such assignment will be permitted only if: (A) the
<PAGE>
Participant does not receive any consideration for such assignment; and (B) the
assignment is expressly permitted by the applicable Option Agreement as approved
by the Board. Any such assignment shall be evidenced by an appropriate written
document executed by the Participant, and a copy thereof shall be delivered to
the Company on or prior to the effective date of the assignment in a form
acceptable to the Board.
10. Indemnification of the Board
In addition to such other rights of indemnification as they may have as
members of the Board, or as members of the Committee, or as its delegatees, the
members of the Board, and its delegatees shall be indemnified by the Company
against: (a) the reasonable expenses (as such expenses are incurred), including
attorneys' fees actually and necessarily incurred in connection with any appeal
thereto), to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option,
except as the Option holder or such holder's predecessor-in-interest; and (b)
against all amounts paid by them in settlement thereof (provided such settlement
is approved by independent legal counsel selected by the Company and paid by
them in satisfaction of any judgment in any such action, suit or proceeding,
except in relation to matters as to which it shall be adjudged in such action,
suit or proceeding that such Board member or delegatee is liable for gross
negligence or misconduct in the performance of his or her duties; provided that
within sixty (60) days after institution of any such action, suit or proceeding,
a Board member or delegatee shall, in writing, offer the Company the
opportunity, at its own expense, to handle and defend same.
11. No Contract of Employment or Entitlement to Position
Neither the adoption of the Plan nor the grant of any Option shall be
deemed to obligate the Company or any subsidiary (if any) to employ any Outside
Director in any capacity or to entitle any Outside Director to continue in his
capacity as a Director of the Company for any particular period, nor shall the
granting of any Option constitute a request or consent to postpone the
retirement date of any Outside Director.
12. Termination and Amendment of Plan
(a) The Board of Directors may at any time terminate, suspend or modify
the Plan without the authorization or stockholders to the extent allowed by law.
The Board may also at any time amend or revise the terms of the Plan, provided
that no such amendment or revision shall, unless appropriate shareholder
approval of such amendment or revision is obtained, increase the maximum number
of shares in the aggregate which may be sold pursuant to Options granted under
the Plan, except as specifically permitted under the
<PAGE>
Plan, or change the minimum purchase price of Options set forth or increase the
maximum term of the Options as provided for in Section 6, above, or permit the
granting of Options to anyone other than as provided in Section 4 above.
(b) No termination, suspension or modification of the Plan shall
adversely affect any right acquired by any Participant under an Option granted
before the date of such termination, suspension or modification, unless such
Participant shall consent; but it shall be conclusively presumed that any
adjustment for changes in capitalization as provided for herein does not
adversely affect any such right.
13. Effective Date of Plan
The Plan shall be come effective upon the adoption by the Board;
provided however, that it shall be submitted for approval by the holders of a
majority of the outstanding shares of Common Stock of the Company present, or
represented, and entitled to vote at a stockholder's meeting (or submitted for
approval by an Action by Unanimous Consent of such shareholders) within twelve
(12) months of the date of Board adoption. Any Option granted prior to such
shareholder approval shall be null and void if such stockholder approval is not
obtained.
14. Withholding Taxes
Whenever the Company proposes or is required to transfer or issue
shares of Common Stock to a Participant under the Plan, the Company shall have
the right to require the Participant to remit to the Company an amount
sufficient to satisfy all federal, state and local withholding tax requirements
prior to the delivery of any certificate or certificates evidencing such shares.
If such certificates have been delivered prior to the time a withholding
obligation arises, the Company shall have the right to require the Participant
to remit to the Company an amount sufficient to satisfy all federal, state and
local withholding tax requirements at the time such obligation arises and to
withhold from other amounts payable to such Participant, as compensation or
otherwise, as necessary to satisfy any withholding requirements. Whenever
payments under the Plan are to be made to a Participant in cash, such payments
shall be net of any amounts sufficient to satisfy all federal, state and local
withholding tax requirements.
15. Governing Law
The Plan, and all Option Agreements hereunder, shall be construed in
accordance with and governed by the laws of the Commonwealth of Pennsylvania,
and in the case of ISO's, Section 422 of the Code and regulations issued
thereunder.
<PAGE>
16. Fair Market Value
"Fair Market Value" as of a given date for all purposes of the Plan and
any Option Agreement, means: (a) if the Common Stock is listed on a national
securities exchange, the average of the closing price of the Common Stock on the
composite tape for the five (5) consecutive trading days immediately preceding
such given date; (b) if the Common Stock is traded on an exchange or market in
which prices are reported on a bid and asked price basis, the average of the
mean between the bid and asked prices for the Common Stock at the close of
trading for the five (5) consecutive trading days immediately preceding such
given date; and (c) if the Common Stock is not listed on a national securities
exchange nor traded on the over-the-counter market, such value as the Board, in
good faith, shall determine.
16. Successors
In the event of a sale of substantially all of the assets of the
Company, or a merger, consolidation or share exchange involving the Company, all
obligations of the Company under the Plan with respect to Options granted
hereunder shall be binding on the successor to the transaction.
17. Notices
Notices given pursuant to the Plan shall be in writing and shall be
deemed received when personally delivered, when delivered by a nationally
recognized overnight delivery or courier service; or when received as evidenced
by a return receipt when such notice is delivered by United States Postal
Service by registered or certified mail, postage prepaid. Notice to the Company
shall be directed to the President.
18. Adjustments
If the outstanding shares of the Common Stock of the Company (or any
other class of shares or securities which shall have become eligible for grant
under the Plan pursuant to this sentence) are increased, decreased, changed into
or exchanged for a different number or kind of shares or securities of the
Company through reorganization, reclassification, stock dividend, stock split,
reverse stock split or similar transaction, an appropriate and proportionate
adjustment shall be made in the maximum number and kind of shares as to which
Options may be granted under the Plan. A corresponding adjustment changing the
number and kind of shares allocated to unexercised Options or portions thereof,
which shall have been granted prior to any such change, shall likewise be made.
Any such adjustment in the outstanding Options shall be made without change in
the aggregate purchase price applicable to the unexercised portion of the
Options but with a corresponding
<PAGE>
adjustment in the price for each share or other unit of any security covered by
such Options.
Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
or upon the sale of substantially all of the property or more than eighty (80%)
percent of the then outstanding stock of the Company to another corporation(s),
the Plan shall terminate, and all Options theretofore granted hereunder shall
terminate; provided, however, that notwithstanding the foregoing,the Board shall
provide in writing in connection with such transaction for any or all of the
following alternatives (separately or in combinations): (i) for the Options
theretofore granted to become immediately exercisable notwithstanding the
provisions of Section 7 above; (ii) for the assumption by the successor
corporation of the Options theretofore granted or the substitution by such
corporation for such Options and rights of new Options and rights covering the
stock of the successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to the number and kind of shares and prices; (iii)
for the continuance of the Plan by such successor corporation in which event the
Plan and the Options theretofore granted shall continue in the manner and under
the terms so provided; or (iv) for the payment of cash or stock in lieu of and
in complete satisfaction of such Options.
Adjustments under this Section 18 shall be made by the Board, whose
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive. No fractional shares of stock shall be
issued under the Plan on any such adjustment.
<PAGE>
Holt's Cigar Holdings, Inc.
Pro Forma Net Income Per Share
<TABLE>
<CAPTION>
Year Ended Three Months Three Months
March 31, 1997 Ended June 30, 1996 Ended June 30, 1997
-------------- ------------------- -------------------
<S> <C> <C> <C>
Pro forma net income $1,701,906 $ 262,860 $ 820,358
---------- ---------- ----------
Weighted average shares
outstanding 4,020,000 4,020,000 4,020,000
Equivalent shares necessary
to fund distributions to
shareholders in excess of
earnings 144,356 144,356 144,356
---------- ---------- ----------
4,164,356 4,164,356 4,164,356
---------- ---------- ----------
Pro forma net income per
share $ 0.41 $ 0.06 $ 0.20
========== ========== ==========
</TABLE>
Holt's Cigar Holdings, Inc.
Supplemental Pro Forma Net Income Per Share
<TABLE>
<CAPTION>
Year Ended Three Months Three Months
March 31, 1997 Ended June 30, 1996 Ended June 30, 1997
-------------- ------------------- -------------------
<S> <C> <C> <C>
Pro forma net income $1,701,906 $ 262,860 $ 820,358
---------- ---------- ----------
Reversal of interest
expense, net of tax, on
assumed payment of debt as
of beginning of period 44,000 11,000 4,400
Supplemental pro forma
net income $1,745,906 $ 273,860 $ 824,758
---------- ---------- ----------
Weighted average shares
outstanding 4,020,000 4,020,000 4,020,000
Equivalent shares necessary
to fund distributions to
shareholders in excess of
earnings 144,356 144,356 144,356
Equivalent shares necessary
to fund payment of debt 34,119 37,833 32,240
---------- ---------- ----------
Supplemental pro forma weighted
average shares outstanding 4,198,475 4,202,189 4,196,596
---------- ---------- ----------
Supplemental pro forma
net income per share $ 0.42 $ 0.07 $ 0.20
========== ========== ==========
</TABLE>
September 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
Holt's Cigar Holdings, Inc. and Affiliates
We have read Holt's Cigar Holdings, Inc. Form S-1 Registration Statement
dated September 24, 1997 and are in agreement with the statement contained in
the section "Change in Independent Accountants" therein.
Yours Very truly,
- -----------------------------
SCHMELTZER o MASTER GROUP, P.C.
Certified Public Accountant
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated August 13, 1996, relating
to the combined financial statements of Holt's Cigar Holdings, Inc. and
Affiliates, which appears in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
Schmeltzer o Master Group, P.C.
Wyncote, Pennsylvania
September 22, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated July 2, 1997, relating
to the combined financial statements of Holt's Cigar Holdings, Inc. and
Affiliates, which appears in such Prospectus. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
September 22, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 516 841
<SECURITIES> 0 0
<RECEIVABLES> 1,270 1,227
<ALLOWANCES> 35 40
<INVENTORY> 2,584 2,623
<CURRENT-ASSETS> 4,410 4,704
<PP&E> 1,066 1,279
<DEPRECIATION> 218 240
<TOTAL-ASSETS> 5,406 5,887
<CURRENT-LIABILITIES> 2,198 1,912
<BONDS> 182 325
0 0
0 0
<COMMON> 91 91
<OTHER-SE> 2,934 3,560
<TOTAL-LIABILITY-AND-EQUITY> 5,406 5,887
<SALES> 17,278 6,361
<TOTAL-REVENUES> 17,278 6,361
<CGS> 9,566 3,612
<TOTAL-COSTS> 9,566 3,612
<OTHER-EXPENSES> 4,895 1,393
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73 7
<INCOME-PRETAX> 2,849 1,370
<INCOME-TAX> 577 317
<INCOME-CONTINUING> 2,273 1,053
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,273 1,053
<EPS-PRIMARY> .41 .20
<EPS-DILUTED> .41 .20
</TABLE>
