- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 1997 Commission file number 0-23403
----------------- -------
HOLT'S CIGAR HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 51-0350003
------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12270 Townsend Road
Philadelphia, Pennsylvania 19154
------------------------------ ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 676-8778
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes __ No X
The number of shares outstanding of the Registrant's common stock (par
value $0.001 per share) was 5,770,000 as of February 12, 1998.
<PAGE>
HOLT'S CIGAR HOLDINGS, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1997 (Unaudited) 3
Consolidated Statements of Operations for the Three Month
Periods ended December 31, 1996 and 1997 and the Nine Month
Periods ended December 31, 1996
and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Month Periods ended December 31, 1996 and
1997 (Unaudited) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 9
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
-2-
<PAGE>
Holt's Cigar Holdings, Inc. and Subsidiaries
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1997
March 31, 1997 (unaudited)
-------------- -----------------
<S> <C> <C>
Current assets:
Cash $ 515,520 $ 16,708,905
Accounts receivable - net of allowance
for doubtful accounts of $34,500 and
$100,000 (unaudited) at March 31, 1997,
and December 31, 1997 1,235,669 1,395,320
Inventory 2,583,877 3,318,910
Loan receivable - officer 23,396 --
Prepaid expenses and other current assets 51,408 152,290
------------ ------------
Total current assets 4,409,870 21,575,425
Property and equipment, net 848,226 1,495,583
Deposits 15,495 15,495
Goodwill -- 243,742
Other assets - net of accumulated amortization of
$104,036 and $126,229 (unaudited) at March 31,
1997 and December 31, 1997 131,919 126,194
------------ ------------
Total assets $ 5,405,510 $ 23,456,439
------------ ------------
Current liabilities:
Current portion of long-term debt $ 129,441 $ --
Accounts payable 892,999 912,302
Due to related party 713,800 453,336
Accrued expenses and other current liabilities 165,870 479,595
Income taxes payable 296,351 863,595
Short-term debt - stockholder distribution -- 240,000
------------ ------------
Total current liabilities 2,198,461 2,948,828
Long-term debt - less current portion 182,440 --
Stockholders' equity:
Preferred stock $.001 par value,
1,000,000 shares authorized, none issued -- --
Common stock $.001 par value,
25,000,000 shares authorized 5,770,000 issued
and outstanding 91,114 5,770
Additional paid-in capital 303,607 17,609,374
Retained earnings 2,679,888 2,892,467
------------ ------------
3 ,074,609 20,507,611
Treasury stock, 18,000 shares at cost (50,000) --
------------ ------------
Total stockholders' equity 3,024,609 20,507,611
------------ ------------
Total liabilities and stockholders' equity $ 5,405,510 $ 23,456,439
============ ============
</TABLE>
See accompanying notes to financial statements
3
<PAGE>
Holt's Cigar Holdings, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------------------------- -----------------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 4,957,383 $ 8,591,984 $12,567,716 $22,016,387
Cost of goods sold 2,730,380 4,759,196 6,875,557 12,078,075
----------- ----------- ----------- -----------
Gross profit 2,227,003 3,832,788 5,692,159 9,938,312
Operating expenses 1,186,955 2,135,227 3,430,534 5,029,381
----------- ----------- ----------- -----------
Income from operations 1,040,048 1,697,561 2,261,625 4,908,931
Other income 7,608 34,600 18,876 67,915
----------- ----------- ----------- -----------
Income before income tax expense 1,047,656 1,732,161 2,280,501 4,976,846
Income tax expense 135,574 396,806 682,652 1,272,618
----------- ----------- ----------- -----------
Net income $ 912,082 $ 1,335,355 $ 1,597,849 $ 3,704,228
----------- ----------- ----------- -----------
Pro forma income data:
Income before income tax expense, as reported $ 1,047,656 $ 1,732,161 $ 2,280,501 $ 4,976,846
Pro forma amortization of goodwill 3,000 3,000 9,000 9,000
----------- ----------- ----------- -----------
Pro forma income before income tax expense 1,044,656 1,729,161 2,271,501 4,967,846
Pro forma income taxes 417,862 691,664 908,600 1,987,138
----------- ----------- ----------- -----------
Pro forma net income $ 626,794 $ 1,037,497 $ 1,362,901 $ 2,980,708
----------- ----------- ----------- -----------
Pro forma net income per share
(basic and diluted) $ .16 $ .23 $ .34 $ .71
----------- ----------- ----------- -----------
Pro forma weighted average number of shares 4,020,000 4,603,000 4,020,000 4,214,443
</TABLE>
See accompanying notes to financial statements
4
<PAGE>
Holt's Cigar Holdings, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
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<TABLE>
<CAPTION>
Nine Months Ended
December 31
----------------------
1996 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,597,849 $ 3,704,228
Adjustments to reconcile net income
to net cash provided by operations:
Allowance for doubtful accounts -- 65,500
Depreciation and amortization 114,192 105,680
Increase in:
Accounts receivable (409,710) (225,151)
Inventory (575,890) (735,033)
Prepaid expenses and other (26,195) (100,882)
Increase (decrease) in: --
Accounts payable and due to related party 367,000 (241,161)
Accrued expenses and other current liabilities (16,724) 399,616
Income taxes payable (14,889) 567,244
------------ ------------
Net cash provided by operating activities 1,035,633 3,540,041
------------ ------------
Cash flows from investing activities:
Purchase of property, equipment and other assets (141,372) (722,762)
Proceeds from (advances on) loan receivable-officer (4,566) 23,396
------------ ------------
Net cash used in investing activities (145,938) (699,366)
------------ ------------
Cash flows from financing activities:
Payments on long-term debt (191,606) (3,461,881)
Proceeds from issuance of common stock 17,902,500
Expenses paid in connection with common stock offering (570,909)
Stockholder distributions (254,500) (3,667,000)
Proceeds from long-term debt -- 3,150,000
------------ ------------
Net cash provided by (used in) financing activities (446,106) 13,352,710
------------ ------------
Net increase in cash 443,589 16,193,385
------------ ------------
Cash - beginning of period 639,450 515,520
Cash - end of period $ 1,083,039 $ 16,708,905
------------ ------------
Supplemental disclosures:
Interest paid $ 63,433 $ 46,137
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Income taxes paid $ 307,180 $ 683,151
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Supplementary information regarding non-cash
investing and financing activities:
Non-cash acquisition of property $ 20,000 $ --
------------ ------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) Basis of Presentation
The consolidated financial statements included herein include the accounts
Holt's Cigar Holdings, Inc. and its wholly owned subsidiaries (the Company). The
Company is engaged in the wholesale and retail sale of premium cigars and
cigar-related accessories.
These financial statements have been prepared by management without audit but in
accordance with generally accepted accounting principals applicable to interim
financial statements. These financial statements should be read in conjunction
with the more complete disclosures contained in the audited combined financial
statements and notes thereto for the year ended March 31, 1997 contained in the
Company's Registration Statement on Form S-1 (Registration No. 333-36263) dated
November 24, 1997 as filed with the Securities and Exchange Commission. The
accompanying financial statements reflect, in the opinion of management, all
adjustments necessary for a fair presentation of the interim financial
statements. In the opinion of management, all such adjustments are of a normal
and recurring nature. The results of operations for the three month and nine
month periods ended December 31, 1996 and 1997 are not necessarily indicative of
the operating results to be expected for a full year.
(2) Management Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reported period and related disclosures.
(3) Adoption of Recently Issued Accounting Standard
The Company has adopted Statement of Financial Accounting Standard No. 128
"Earnings Per Share" (SFAS No. 128) for the periods ended December 31, 1997, as
required. This statement requires companies to present basic earnings per share,
and if applicable, diluted earnings per share. Comparable prior periods have
been restated in accordance with the standard's transition provisions.
(4) Equity Offering
In November 1997, the Company completed its reorganization and an initial public
offering of 1,750,000 shares of its common stock. The net proceeds to the
Company, after deducting underwriting discounts and commissions and expenses
were $17,031,500. The net proceeds were recorded as an increase to additional
paid in capital and common stock. The proceeds were used, in part, to retire
long-term debt and short-term debt to fund the stockholder distribution made in
conjunction with the reorganization.
(5) Pro Forma Information
Pro Forma Income Taxes
On November 24, 1997 the Company terminated the S Corporation status of Ashton
Distributors, Inc. (one of the wholly owned subsidiaries) and converted it to C
Corporation status. As an S Corporation, the net income of this entity for
federal and state income tax purposes was taxable directly to the Company's
shareholder. The Company's future earnings will be subject to corporate income
taxes.
The pro forma provision for income taxes represents the income tax provisions
that would have been reported had the Company been a C Corporation for each of
the periods.
6
<PAGE>
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. The Company has certain stock options (for 482,400
shares) outstanding with exercise prices less than the current market price for
which 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.
(6) Supplemental Pro Forma Earnings Per Share Information
In accordance with SFAS No. 128, the Company has presented basic and diluted
earnings per share in its consolidated statements of operations. The Securities
and Exchange Commission requires that the Company disclose 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.
The inclusion of such additional shares would decrease pro forma earnings per
share by $.01 and $.02 per share for the three and nine month periods ended
December 31, 1997, respectively.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain forward-looking
statements. These forward-looking statements do not constitute facts and involve
risks and uncertainties. Actual results could differ materially from those
referred to in the forward-looking statements due to a number of factors. For
information concerning factors that could cause actual results to differ
materially from the information contained herein, reference is made to the
information under the heading "Risk Factors" in the Company's registration
statement on Form S-1 (Registration No. 333-36263) dated November 24, 1997 as
filed with the Securities and Exchange Commission.
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:
Three months ended Nine months ended
December 31, December 31,
------------------ ------------------
1996 1997 1996 1997
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 55.1 55.4 54.7 54.9
---- ---- ---- ----
Gross profit 44.9 44.6 45.3 45.1
Operating
expenses 23.9 24.8 27.3 22.8
---- ---- ---- ----
Income from 21.0 19.8 18.0 22.3
operations
Other income 0.1 0.4 0.2 0.3
--- --- --- ---
Income before
income tax
expense 21.1% 20.2% 18.2% 22.6%
===== ===== ===== =====
Three Months Ended December 31, 1997 Compared to Three Months Ended
December 31, 1996
Net sales increased approximately $3.6 million or 73.3% from $5.0 million in the
three months ended December 31, 1996 to $8.6 million in the three months ended
December 31, 1997. Net sales increased primarily as a result of the $3.7 million
increase in net sales of premium cigars from $4.2 million for the three months
ended December 31, 1996 to $7.9 million for the comparable period in 1997. Of
such increase, $1.3 million was attributable to increased retail sales of
premium cigars and $2.4 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) continued strong demand for
premium cigars, and (iii) increases in the average selling price per cigar of
premium cigars.
Gross profit increased approximately $1.6 million or 72.1% from $2.2 million in
the three months ended December 31, 1996 to $3.8 million in the three months
ended December 31, 1997. Gross profit, as a percentage of sales was 44.9% for
the three months ended December 31, 1996 and 44.6% for the three months ended
December 31, 1997.
-8-
<PAGE>
Operating expenses increased approximately $948,000 or 79.9% from $1.2 million
in the three months ended December 31, 1996 to $2.1 million in the three months
ended December 31, 1997. As a percentage of net sales, operating expenses
increased from 23.9% in the three months ended December 31, 1996 to 24.8% in the
three months ended December 31, 1997. This increase was primarily due to
increases in various expense items including insurance, payroll and related
employee expenses, catalog costs and advertising.
Nine Months Ended December 31, 1997 Compared to Nine Months Ended
December 31, 1996
Net sales increased approximately $9.4 million or 75.2% from $12.6 million in
the nine months ended December 31, 1996 to $22.0 million in the nine months
ended December 31, 1997. Net sales increased primarily as a result of the
increase in net sales of premium cigars from $10.8 million in the nine months
ended December 31, 1996 to $20.2 million in the nine months ended December 31,
1997. Of such increase, $4.5 million was attributable to increased retail sales
of premium cigars and $4.8 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) continued
strong demand for premium cigars, and (iii) increases in the average selling
price per cigar of premium cigars.
Gross profit increased approximately $4.2 million or 74.6% from $5.7 million in
the nine months ended December 31, 1996 to $9.9 million in the nine months ended
December 31, 1997. Gross profit as a percentage of sales decreased from 45.3% in
the nine months ended December 31, 1996 to 45.1% in the nine months ended
December 31, 1997.
Operating expenses increased approximately $1.6 million or 46.6% from $3.4
million in the nine months ended December 31, 1996 to $5.0 million in the nine
months ended December 31, 1997. This increase was primarily due to an increased
number of employees which increased payroll and related employee expenses, and
an increase in catalog costs, insurance and advertising expenses. As a
percentage of net sales, operating expenses decreased from 27.3% in the nine
months ended December 31, 1996 to 22.8% in the nine months ended December 31,
1997. This decrease was primarily due to net sales increasing at a higher rate
than the increase in expenses.
Liquidity and Capital Resources
The Company has historically financed its business through a combination of cash
generated from operations and bank debt. Net cash provided by operations for the
nine months ended December 31, 1997 and 1996 of $3.5 million and $958,000,
respectively, consisted primarily of net income and increases in accrued
expenses and income taxes payable, offset by increases in accounts receivable
and inventory.
On October 24, 1997, Ashton Distributors, Inc. declared a distribution of $2.7
million to Robert G. Levin, its then sole shareholder and Chairman of the Board,
Chief Executive Officer and President of the Company, such amount being
estimated to equal the accumulated but undistributed earnings of Ashton
Distributors, Inc. as of the date of the Company's initial public offering which
have or would have been taxed to Mr. Levin. Ashton Distributors, Inc. borrowed
this amount from Jefferson Bank pursuant to a demand note due no later than
December 1, 1997 with interest accruing at the rate of 6%. This note was
guaranteed by Mr. Levin and was repaid with the proceeds of the offering.
The Company believes that cash generated from its operating activities and
available bank borrowings along with proceeds from the offering will be
sufficient to fund its operations and expansion programs for the foreseeable
future.
Impact of Inflation
The Company does not believe that inflation has had a material impact on its net
sales or results of operations.
Part II Other Information
Item 2. Changes in Securities and Use of Proceeds
(d) The Company filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (Registration No. 333-36263) for the sale of
Common Stock in the Company's initial public offering (the "Offering"). The
Company registered 1,750,000 shares of Common Stock. The effective date of the
Registration Statement was November 24, 1997. The Offering commenced on November
25, 1997 and was terminated after the sale of all securities registered. The
managing underwriters for the Offering were Prudential Securities Incorporated
and Janney Montgomery Scott, Inc. The aggregate price to the public of the
1,750,000 shares of Common Stock registered
-9-
<PAGE>
was $19,250,000. The Company completed the Offering, selling all 1,750,0000
shares of Common Stock registered for the aggregate offering price of
$19,250,000.
The Company incurred the following expenses in connection with
the issuance and distribution of its Common Stock in the Offering:
Underwriting Discounts and Commissions $1,347,500
Other Expenses 871,000
----------
Total Expenses $2,218,500
All payments of expenses were direct or indirect payments to
persons other than directors or officers of the Company or their associates,
persons owning ten percent or more of any class of equity securities of the
Company, or affiliates of the Company, except for $20,000 payable to Cogen
Sklar, LLP, an accounting firm in which Harvey W.
Grossman, a director of the Company, is a principal.
The Company used the net proceeds of the Offering ($17,031,500
after deducting total expenses set forth above) for the following purposes:
Repayment of outstanding bank indebtedness $3,352,000
Payment of S Corporation Distribution 240,000
Temporary investments 13,439,500
-----------
Total $17,031,500
The payment with respect to the S Corporation Distribution was
made to Robert G. Levin, a shareholder owning more than 10% of the Common Stock
of the Company and the Chairman of the Board, Chief Executive Officer and
President and a director of the Company. Payment of $2,700,000 of the
outstanding bank indebtedness was in satisfaction of a loan to the Company to
fund a distribution to Mr. Levin of undistributed earnings of Ashton
Distributors, Inc. prior to the reorganization of the Company undertaken on
November 19, 1997 in contemplation of the initial public offering of the
Company's Common Stock on November 25, 1997. All other payments were direct or
indirect payments to persons other than directors or officers of the Company or
their associates, persons owing ten percent or more of any class of equity
securities of the Company, or affiliates of the Company.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
11.1 Statements regarding computation of per share earnings
27.1 Financial Data Schedule
99.1 Financial Statements and Accompanying Notes incorporated by
reference from the Company's Registration Statement on
Form S-1(Registration No. 333-36263) pursuant to
Rule 12b-23(a)(3)
99.2 Risk factors incorporated by reference from the Company's
Registration Statement on Form S-1 (Registration
No. 333-36263) pursuant to Rule 12b-23(a)(3)
b. The Company did not file any reports on Form 8-K during the three
months ended December 31, 1997.
-10-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLT'S CIGAR HOLDINGS, INC.
/s/ Robert G. Levin
--------------------------------------
Robert G. Levin, President and Chairman
/s/ Robert H. Levitt
---------------------------------------
Robert H. Levitt, Chief Financial Officer
Date: February , 1998
-11-
Holt's Cigar Holdings, Inc. and Subsidiaries
Pro Forma Net Income Per Share Exhibit 11.1
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
----------------------- ---------------------
1996 1997 1996 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma net income $ 626,794 $1,037,407 $1,362,901 $2,980,708
---------- ---------- ---------- ----------
Pro forma shares outstanding-beginning of period 4,020,000 4,020,000 4,020,000 4,020,000
Weighted average shares attributable to Offering -- 583,000 -- 194,443
---------- ---------- ---------- ----------
Pro forma weighted average shares outstanding 4,020,000 4,603,000 4,020,000 4,214,443
---------- ---------- ---------- ----------
Pro forma net income per share-basic and diluted $ .16 $ .23 $ .34 $ .71
---------- ---------- ---------- ----------
Supplemental Pro forma Net Income Per Share
Pro forma weighted average shares outstanding 4,603,000 4,214,443
Incremental shares necessary to fund shareholder
distribution in excess of current earnings 70,000 93,334
--------- -----------
4,673,000 4,307,777
========= =========
Supplemental pro forma net income per share $.22 $.69
========= ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1997 DEC-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 516 16,709
<SECURITIES> 0 0
<RECEIVABLES> 1,270 1,495
<ALLOWANCES> 35 100
<INVENTORY> 2,584 3,319
<CURRENT-ASSETS> 4,410 21,575
<PP&E> 1,066 1,797
<DEPRECIATION> 218 302
<TOTAL-ASSETS> 5,406 23,456
<CURRENT-LIABILITIES> 2,198 2,949
<BONDS> 182 0
0 0
0 0
<COMMON> 91 6
<OTHER-SE> 2,934 20,502
<TOTAL-LIABILITY-AND-EQUITY> 5,406 23,456
<SALES> 17,278 22,016
<TOTAL-REVENUES> 17,278 22,016
<CGS> 9,566 12,078
<TOTAL-COSTS> 9,566 12,078
<OTHER-EXPENSES> 4,895 5,029
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73 46
<INCOME-PRETAX> 2,849 4,977
<INCOME-TAX> 577 1,273
<INCOME-CONTINUING> 2,273 3,704
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,273 3,704
<EPS-PRIMARY> .41 .71
<EPS-DILUTED> .41 .71
</TABLE>
