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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, FOR THE FISCAL YEAR ENDED MARCH 31, 2000, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, FOR THE TRANSITION PERIOD FROM ______ TO .
COMMISSION FILE NUMBER 0-23403
HOLT'S CIGAR HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 51-0350003
(State or other jurisdiction of incorporation (I.R.S. Employer
or Organization) Identification No.)
12270 Townsend Road, Philadelphia, Pennsylvania 19154
Address of principal executive offices) (Zip Code)
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Registrant's telephone number including area code: (215) 676-8778
Securities Registered Pursuant to Section 12(g) of the Act: None
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Title of Securities Exchange on Which Registered
Common Stock, $.01 par value The NASDAQ National Market
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant on June 15, 2000 was $9,497,895
approximately, based upon 1,899,571 such shares outstanding on such date and the
closing sales price for the Common Stock on such date of $5.00 as reported
by the NASDAQ National Market.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date. The number of shares
outstanding of the Registrant's common stock (par value $0.001 per share) was
6,245,593 as of June 15, 2000 of which 397,865 shares are treasury shares.
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
1. Notice and Proxy Statement for the 2000 Annual Meeting Parts III
of Stockholders to be held September 7, 2000.
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INDEX
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PAGE
PART I
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Item 1. Business........................................................ 1
Item 2. Properties...................................................... 11
Item 3. Legal Proceedings............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............. 12
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.......................................... 13
Item 6. Selected Financial Data......................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
Item 8. Financial Statements and Supplementary Data..................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 16
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 17
Item 11. Executive Compensation.......................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 17
Item 13. Certain Relationships and Related Transactions.................. 17
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K..................................................... 17
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PART I
ITEM 1. BUSINESS
GENERAL
Holt's Cigar Holdings, Inc. (the "Company", which may be referred to as "we",
"us" or "our") is a leading distributor and retailer of brand name premium
cigars. Through our wholesale division, we are the exclusive wholesale
distributor of Ashton premium cigars and Ashton cigar-related accessories, which
brand we own, as well as Sosa brand of premium cigars, owned by Antillian Cigar
Corporation. In addition, we are now the exclusive United States distributor of
Peterson's Pipes, who manufactures a full line of premium, hand-crafted pipes
imported from Ireland. We believe 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. Our retail
operations consist of a mail order catalog, our Flagship retail store in
Philadelphia, Pennsylvania and our Northeast Philadelphia retail store, as well
as the Holt's retail cigar store and cigar club operated by others at the First
Union National Center, a venue for numerous concerts and other events as well as
the arena where the Philadelphia Flyers hockey team and the Philadelphia 76ers
basketball team play their home games. We sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products.
We have focused on the distribution and sale of premium cigars, which generally
sell at retail prices above $1.00 as opposed to mass-market and little cigars,
which generally sell at retail prices below $1.00.
Holt's Cigar Holding's, Inc. is a holding company owning 100% of the outstanding
capital stock of each of Holt's Cigar Company, Inc., Ashton Distributors, Inc.,
Holt's Company, Ashton Pipe Company, Inc. and Holt's Mail Order, Inc.
MARKETING AND DISTRIBUTION
Wholesale Operations. We distribute premium cigars, cigar cases, travel humidors
and other smoking accessories which are marketed under brand names and feature
the brand name logos. Our wholesale activities are serviced by a direct sales
force of 10 employees who represent our Ashton brand and the Sosa, Sosa Family,
Imperio Cubano and Premium Dominicana brands for which we are the exclusive
distributor. We increased the size of our direct sales force to: (i) increase
sales by placing more of our products at our existing wholesale accounts, and
helping them to more effectively advertise and sell our products; (ii) increase
the number of our wholesale accounts by opening new accounts; and (iii) manage
the distribution of our products to protect the overall integrity and image of
these brands. We also entered into a five year agreement with Kapp and Peterson
Limited to serve as the exclusive distributor in the United States for Peterson
of Dublin Pipes. In June 1999, we entered into an exclusive distribution
agreement with Antillian Cigar to become the exclusive United States distributor
for Sosa, Sosa Family and Imperio Cubano brand premium cigars. The Sosa brand
has 9 different sizes and shapes with retail prices generally between $3.50 and
$6.75 per cigar. The Sosa Family brand also has 9 different sizes and shapes
with retail prices generally between $3.00 and $7.00 per cigar. The Imperio
Cubano brand has 15 different sizes and shapes with retail prices generally
between $4.00 and $9.00 per cigar. In addition, from time to time our wholesale
division will sell certain other brands which are occasionally available in
limited supplies for limited times.
We intend to invest in further brand and product promotion in national
publications, trade magazines and other publications. In addition to our United
States sales, we have two distributors of Ashton premium cigars on a limited
basis in Europe. Wholesale operation sales increased 24.1% from $14.1 million
for the fiscal year ended March 31, 1999 ("Fiscal 1999") to $17.5 million for
the fiscal year ended March 31, 2000 ("Fiscal 2000"), representing 46.2% and
53.1% of net sales, respectively.
Retail Operations. We sell a broad selection of premium cigar and related
accessories through our mail order operation and our three Philadelphia retail
stores. We are committed to high quality customer service and we provide a 100%
Guarantee of Satisfaction for every product sold.
Mail Order Catalog. Our mail order catalog markets a large selection of premium
cigars and accessories. We
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distributed approximately 100,000 copies of our most recent Spring/Summer
catalog. Each of our four-color glossy catalogs contains photographs of the our
products and features premium cigars and other special offerings. We mail our
catalogs to a list of cigar smokers, cigar purchasers and others evidencing
interest in cigar products we own. In addition, we produce other mailings that
are sent to prospective customers several times a year. Our call center operates
from 8:00 a.m. to 8:00 p.m. Monday to Friday, Eastern Time, and from 9:00 a.m.
to 3:00 p.m., Eastern Time, on Saturdays.
Retail Stores. Our Flagship retail store is located in Center City Philadelphia,
Pennsylvania. This Flagship store contains a large, walk-in, open-display
humidor, smoking lounge, cigar lockers and accessory retail space and we believe
that it has become a destination store for cigar buyers in the Philadelphia
region. We also operate a retail store in Northeast Philadelphia at our
corporate office and distribution facility. In addition, we have a Holt's Cigar
Store and the Holt's Cigar Club at the First Union National Center in
Philadelphia, Pennsylvania (the "Arena"). We licensed the Holt's name for use in
connection with the Holt's retail cigar store and the Holt's Smoking Club at the
Arena, both of which are managed by Aramark Leisure Services, Inc., the
exclusive concessionaire at the Arena. The Arena is the home to the Philadelphia
76ers basketball team and the Philadelphia Flyers hockey team and hosts concerts
and other events. Pursuant to the agreement, we: (i) have made a payment of
$450,000 (of which $100,000 is being held in escrow pending satisfactory
completion of changes to the air handling equipment in the Smoking Club); (ii)
are the exclusive supplier of cigars and related accessories at the Arena; and
(iii) are entitled to share in the net income of the Holt's retail cigar store
and the membership fees and humidor rental fees at the Holt's Smoking Club. In
addition, this agreement provides us with up to $40,000 in advertising on the
Comcast SportsNetwork per year for the balance of the six year term.
Distribution. We maintain our own distribution center, a 21,360 square foot
facility located in Northeast Philadelphia, Pennsylvania. This facility also
contains our corporate offices, wholesale and mail order operations, and a
retail cigar and accessory store. The humidified and climate controlled cigar
storage warehouse at this facility is approximately 5,000 square feet. The
specific products in stock vary from time to time depending upon our ability 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. We have, on occasion, used rented climate controlled trailers in addition
to our cigar storage warehouse, to contain additional cigars purchased in bulk
at discounted prices.
E-Commerce. We used outside consultants working with IBM to develop our
interactive E-Commerce site located at www.holts.com. Our site, launched in
February 2000 provides us with the ability to market and sell our products
through the internet as a new distribution channel. While orders made on our
site are currently entered into our enterprise software system by hand, we
expect to fully integrate our site with our order processing system during the
second quarter of fiscal 2001.
PRODUCTS
We sell a broad selection of premium cigars and related accessories. A small
percentage of our sales are derived from the sale of mass market cigars. Premium
cigars accounted for approximately 95.0% and 98.0% of our net sales in Fiscal
1999 and Fiscal 2000, respectively.
Premium Cigars. Premium cigars are generally imported, hand-made or hand-rolled
cigars made with long filler and 100% natural tobacco leaf which generally sell
at retail prices above $1.00 per cigar. We use only tobaccos of the finest
grades for our Ashton brand cigars. These 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 us undergo numerous quality control procedures at each stage of the
manufacturing, aging and packaging process.
We market over 170 brands of premium cigars, ranging in price from approximately
$1.00 to $28.00 per cigar. Of these, we own the Ashton and Holt's brands. The
growth in the sales of our wholesale division has been primarily due to an
increase in the popularity of the Ashton brand and the introduction of the
Ashton VSG (Virgin Sun Grown) line of full bodied premium cigars. In addition,
sales increased because we became the exclusive distributor in the United
States for the SOSA Brand. The Ashton brand, which was introduced in 1986, is
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comprised of 30 different sizes and shapes with retail prices generally between
$4.50 and $17.00 per cigar. We believe that our 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 brand premium cigars are sold by us exclusively through our catalog and
Philadelphia retail stores. The Holt's brand comprises 18 different sizes and
shapes with retail prices generally between $2.75 and $4.50 per cigar. We target
the Holt's brand premium cigars at the middle of the premium cigar market.
Accessories. We offer a broad range of cigar accessories such as humidors, cigar
cutters, cigar cases, lighters and ashtrays. These include accessories by brand
name manufacturers, as well as accessories incorporating the Ashton trademark.
Accessories represent a small component of our overall business, but we believe
that their inclusion in the our overall product mix enhances the appeal of the
Company's mail order catalog and retail stores.
Other Tobacco Products. We also offer a limited selection of other tobacco
products, including mass market cigars, smokeless tobacco, pipes and pipe
tobacco for sale through our mail order catalog and retail stores, as well as a
limited number of imported cigarettes which are sold only through our retail
stores. Pipes, pipe tobacco and pipe accessories are also sold through our
wholesale operations.
SUPPLIERS
We have 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 61% and 58% of all premium cigars purchased, on a dollar
basis, by us during Fiscal 1999 and Fiscal 2000, respectively. General Cigar
Company acquired Villazon & Co., Inc. in January 1997, and, on a combined basis,
supplied approximately 14% and 7% of all premium cigars purchased, on a dollar
basis, by the Company in Fiscal 1999 and Fiscal 2000, respectively. No other
supplier accounted for more than 10% of our premium cigar purchases during these
periods. Other than our agreements with Fuente Cigar, we have no agreements
relating to the supply of premium cigars.
Private Label Manufacturing Agreement with Fuente Cigar ("PLMA"). In April 1997,
we entered into the PLMA with Fuente Cigar. Pursuant to the PLMA, Fuente Cigar
agreed to sell us a minimum of 5 million premium cigars per year for an initial
term of ten years and we agreed to use our best reasonable efforts to purchase
at least 5 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 us additional
cigars in excess of the 5 million per year. The premium cigars supplied by
Fuente include our Ashton and Holt's brand premium cigars, as well as any other
premium cigars manufactured by Fuente Cigar under its trademarks. The particular
mix of brands, sizes and shapes will be made by Fuente Cigar. The purchase price
for these cigars is set by Fuente Cigar as the market price at the time of sale.
The PLMA specifies that while we own the trademark to the name Ashton, Fuente
Cigar owns the formula used to blend the tobacco contained in Ashton cigars. The
PLMA allows for failures of Fuente Cigar to sell us 5 million cigars a year for
various reasons, including, a shortage of labor or the inability to secure
tobacco and supplies at reasonable prices. The PLMA provides that it is to be
interpreted and enforced under Florida law. However, the agreement specifically
prohibits us from suing to force Fuente Cigar to force them to comply with the
terms of the PLMA or for damages to us if they do not perform. 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, we entered into an
exclusive distributorship agreement with Fuente Cigar where they agreed to work
with us to develop up to three new premium cigar brands to be manufactured by
Fuente Cigar, and to be exclusively distributed by us on a worldwide basis.
Cigars manufactured for us under this agreement will be applied to the annual
minimum requirement under the PLMA. The initial term of this agreement
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expires on August 31, 2007. The Company is obligated to use its best reasonable
efforts to promote these new brands.
SALES AND ADVERTISING
As of March 31, 2000, we employed 10 direct sales personnel supported by 6
inside sales associates in connection with our wholesale operations, 7 telephone
sales associates in our mail order catalog call center and 17 sales people in
our retail operations, 8 of whom are part-time employees.
Catalogs are our primary means of marketing to retail customers. We target
potential customers by developing our own mailing list and keeping it current by
removing names who have not made a purchase in two years. To support our retail
sales, we utilize local print advertising, radio advertising during local
sporting events, we attend or sponsor numerous cigar related events and we
advertise through the Holt's website at www.holts.com. We also advertise through
full-page advertisements in Cigar Aficionado and Wine Spectator magazines and
through participation or sponsorship of cigar related marketing events such as
the 'Big Smokes' sponsored by Cigar Aficionado. Additionally, we rely 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.
The Holt's website is now operated and managed by in-house personnel, and
includes weekly promotions, complete product price lists and other relevant
information for cigar consumers and purchasers.
INFORMATION SYSTEMS
We substantially upgraded our information systems over the past year to
integrate all of our financial, accounting and operational functions. We
selected Great Plains Software as the platform to integrate these functions and
PricewaterhouseCoopers, LLP is currently finalizing the installation of the
operating software and enhancements. The financial and accounting systems became
active February 1, 2000 and the sales order processing and inventory control
became active June 1, 2000. The full integration with the E-Commerce site will
become active early in our second quarter. These upgrades will significantly
improve our ability to monitor inventory and sales on a real-time basis. We
continually evaluate the need for new hardware and software, and may upgrade or
replace existing systems as merited.
INTELLECTUAL PROPERTY
We own the Ashton and Holt's trademarks and have registered them with the U.S.
Patent and Trademark Office. As we believe our existing trademarks, particularly
the Ashton trademark, are critical to our continued success, we intend to
vigorously defend these trademarks against any potential infringement.
COMPETITION
The market for our products is highly competitive and subject to rapid consumer
change and frequent new product introductions and extensions. Recently, it has
also been characterized by consolidation resulting in even a smaller number of
larger, international cigar companies. Our wholesale distribution business faces
competition from these 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 a number of new entrants to the marketplace.
Although many of the newer brands introduced over the past several years have
been discontinued, competition remains strong as there is significant
competition to differentiate premium cigars in the marketplace and to establish
brand loyalty in a fewer number of cigar smokers. Our retail sales compete with
a large number of other mail order companies, some of which are larger and
better financed than we are. We also face significant competition from a large
number of existing retail stores and smoking establishments selling the same
branded products we sell. Although some of the many new retail stores
established over the last several years have closed, we find our retail stores
facing stiff competition for a limited number of cigar buyers, many of whom now
purchase their cigars through mail order or by e-commerce. Existing or future
competitors may develop or offer the same or similar premium cigars which may
result in decreases in our sales of premium cigars. Some of these competitors
have longer operating histories and significantly greater financial, managerial,
creative, sales and marketing and other resources than we do. Our ability to
retain existing customers and attract new customers depends on the quality of
our premium cigars, the availability of product, our reputation in the industry,
and our ability to maintain
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customer satisfaction. Our Ashton brand competes on the basis of quality and
consistency of its premium cigars and service to its wholesale customers. Our
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
requires 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 services used for the delivery of nicotine. The
Fourth Circuit Court of Appeals ruled last year that the FDA lacked the
authority to regulate tobacco and tobacco products and the U.S. Supreme Court on
March 21, 2000 ruled that the FDA lacks the power to regulate tobacco products.
In addition, a majority of states restrict or prohibit smoking in certain public
places and restrict the 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. Numerous proposals also have been considered and
enacted at the state and local level restricting smoking in certain public
areas.
In addition, effective January 1, 1998, smoking, including cigar smoking, has
been banned by the State of California in all bars, taverns and clubs where food
and alcohol is served. Other legislation recently introduced in Massachusetts
would, if enacted, require warning labels on cigar boxes. The states of
Minnesota and Texas have recently enacted legislation which 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
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. In February 1998, the National Institute of Health published Monograph
9 in its Smoking and Tobacco Control Series entitled "Cigars, Health Effects and
Trends." This Monograph examines many aspects of the cigar industry including
trends in consumption, chemistry, toxicology, disease consequences,
pharmacology, effects on indoor air quality, marketing and promotion of cigars
and governmental policies, legislation and taxation relating to cigars. This
Monograph may focus anti-smoking effects on the cigar industry and may be used
as a basis or rationale for additional legislation and regulation.
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.
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In late 1999, Congress instructed the FTC to develop health warning labels for
cigar packaging and advertising. The objective is the adoption of uniform
national health warnings in lieu of diverse and often conflicting warnings in
the states discussed above. On June 26, 2000, seven of the largest U.S. cigar
companies announced that they had entered into proposed consent orders with the
FTC. Upon approval by the FTC, the consent orders will require these cigar
companies to include five rotating Surgeon General warnings about the health
risks associated with cigar use in all advertising and packaging nationwide. The
five warnings which would be rotated on cigar packaging and advertising, as
specified by the FTC, are as follows: (1) "SURGEON GENERAL WARNING: Cigar
smoking can cause cancers of the mouth and throat, even if you do not inhale";
(2) "SURGEON GENERAL WARNING: Cigar smoke can cause lung cancer and heart
disease"; (3) "SURGEON GENERAL WARNING: Cigars are not a safe alternative to
cigarettes"; (4) "SURGEON GENERAL WARNING: Tobacco use increases the risk of
infertility, stillbirth and low birth weight"; and (5) "SURGEON GENERAL WARNING:
Tobacco smoke increases the risk of lung cancer and heart disease, even in
nonsmokers". We have not decided how we will proceed in light of these recent
events. In addition, the "Cigars Are No Safe Alternative Act," reintroduced
in Congress in 1999, contains a provision which would require the FDA to develop
a warning label for cigars.
We believe that our customers are adults who are aware of the risks involved
with smoking any tobacco product, including cigars. Moreover, all of our product
packages have contained warnings relevant to the hazards associated with cigar
smoking. Nevertheless, it is impossible to predict the effect upon the sales of
our cigars, if any, resulting from the adoption of the warning label scheme in
the FTC consent orders.
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. Two juries 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. In one suit the jury awarded the plaintiffs a total of
$750,000 in damages and in the second suit, the jury awarded $500,000 in
compensatory damages and $700,000 in punitive damages. In addition, a class
action litigation on behalf of cigarette smokers in Florida resulted in a jury
verdict against the cigarette manufactures on liability issues and authorized
punitive damage awards. The second and third phases of the trial,
determining actual damages to individual plaintiffs, are proceeding. In
addition, two cases have been brought by non-smokers alleging harm due to
"second-hand" smoke. One of these cases was brought as a class action by airline
flight attendants, which resulted in a settlement which was approved by a
Florida appellate court. Two of our subsidiaries are currently defendants in
litigation brought in California under Proposition 65 (see Item 3, "Legal
Proceedings"). In this matter, People of the State of California v. General
Cigar Co., Inc., et al, numerous cigar manufacturers, distributors and mail
order companies have been sued by municipalities and a private citizen alleging
that cigar companies have failed to comply with the requirements of Proposition
65 in that they failed to adequately warn individuals potentially confronted
with "second-hand" smoke of the alleged health dangers which may be associated
with exposure. We are working with a group of cigar defendants to aggressively
defend this litigation and believe that earlier court settlements requiring
certain advertising and disclosures (which we comply with) effectively preclude
the maintenance of these claims against us.
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.
Prior to November 1998, the major United States cigarette companies had reached
settlements of litigation brought by four states to recover the costs associated
with health care related to cigarette smoking which require payments totaling
$40 billion over the next 25 years. In November 1998 the major United States
cigarette manufacturers effectively settled all litigation instituted or
threatened by the remaining 46 states in a package settlement worth $206 billion
over the next 25 years (the "Multi-State Settlement"). The terms of the
Multi-State Settlement also prohibit (1) the sale of apparel and merchandise
with brand-name logos, (2) the use of cartoon characters in cigarette
advertisements or promotions, (3) cigarette brand-name advertising at stadiums
and arenas, and (4) payment for placement of cigarette
6
<PAGE> 10
products in television shows, theatrical performances, video games and movies.
However, unlike the global federal settlement discussed in 1997 and 1998, the
Multi-State Settlement does not grant the federal government authority to
regulate tobacco products as drug delivery devices.
Excise Taxes. Cigars long have been subject to federal, state and local excise
taxes, and such taxes frequently have been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 18.06% of the manufacturer's selling price, up to a maximum
of $42.50 per thousand cigars.
Based on scheduled increases to the federal excise tax on cigarettes, which
result in proportionate tax increases to the federal excise tax on all other
tobacco products, the tax on large cigars is scheduled to be raised to 20.71% of
the manufacturer's selling price, up to a maximum of $48.75 per thousand large
cigars on January 1, 2002.
The Clinton administration recently proposed additional increases in the federal
excise tax on cigarettes which, if enacted as proposed, would proportionately
increase the tax on large cigars by approximately an additional 64.1% over the
already scheduled increases. In addition, the administration has proposed
accelerating the effective date of the scheduled January 1, 2002 increase to
become effective October 1, 2000. We believe that the enactment of significantly
increased excise taxes could seriously harm our business. We are unable to
predict the likelihood of the passage or the enactment of future increases in
tobacco excise taxes as they relate to cigars.
Tobacco products also are subject to certain state and local taxes. As evidenced
by the passage of the Proposition 10 referendum in California, an act used to
fund early childhood development programs, children's health and development
concerns at the state level exert pressure to increase tobacco taxes.
Proposition 10, which became effective on January 1, 1999, raised the tax on
cigars in California from 26.17% of the manufacturer's selling price to 61.53%.
This has a serious impact on the sale of all cigars, including our cigars, into
the California market.
The number of states that impose excise taxes on cigars is currently 44. Of the
states without tobacco taxes, a proposal to add such taxes is pending in West
Virginia. State cigar excise taxes are not subject to maximums similar to the
federal excise tax. From time to time, the imposition of state and local taxes
has had some impact on sales regionally. The enactment of new state excise taxes
and the increase in existing state excise taxes are likely to harm our regional
sales as cigar consumption generally declines.
EMPLOYEES
As of March 31, 2000, we had a total of 62 full time and 8 part time employees,
all of whom are based in the United States. Of this total, 38 full time and 8
part time employees were engaged in sales and marketing, 13 full time employees
were employed in administration and finance, and 11 full time employees were
employed in shipping and receiving. None of our employees is represented by a
labor union. We have not experienced any work stoppages and consider our
relations with employees to be good.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
OUR DISCLOSURE AND ANALYSIS IN THIS REPORT AND IN OUR 2000 ANNUAL REPORT TO
SHAREHOLDERS CONTAIN SOME FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS
GIVE OUR CURRENT EXPECTATIONS AND FORECASTS OF FUTURE EVENTS. YOU CAN IDENTIFY
THESE STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR
CURRENT FACTS.
WHEN WE USE THE WORDS "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE,"
"ESTIMATE," "PROJECT," "INTEND", "PLAN" AND SIMILAR EXPRESSIONS, WE INTEND TO
IDENTIFY FORWARD-LOOKING STATEMENTS WHICH SPEAK ABOUT SEVERAL THINGS, INCLUDING:
(I) TRENDS AFFECTING OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS; (II) OUR
BUSINESS AND GROWTH STRATEGIES; (III) OUR RELATIONSHIP WITH FUENTE CIGAR AND
OTHER MANUFACTURERS; (IV) THE USE OF THE NET PROCEEDS OF OUR INITIAL PUBLIC
OFFERING OF COMMON STOCK IN NOVEMBER 1997; (V) TRENDS IN THE PREMIUM CIGAR
INDUSTRY; (VI) GOVERNMENT REGULATIONS; (VII) OUR FINANCING PLANS; AND (VIII) THE
DECLARATION AND PAYMENT OF DIVIDENDS. READERS OF THIS REPORT 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
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<PAGE> 11
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DESCRIBED IN THIS REPORT.
FROM TIME TO TIME, WE MAY ALSO PROVIDE ORAL OR WRITTEN FORWARD-LOOKING
STATEMENTS IN OTHER MATERIALS WE RELEASE TO THE PUBLIC AND IN SPEECHES AND TALKS
GIVEN BY OUR EXECUTIVE EMPLOYEES.
WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE FORWARD-LOOKING STATEMENTS,
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU ARE
ADVISED, HOWEVER, TO CONSULT ANY FURTHER DISCLOSURES WE MAKE IN OUR 10-Q AND 8-K
REPORTS TO THE SEC. ALSO NOTE THAT WE PROVIDE THE FOLLOWING CAUTIONARY
DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT
TO OUR BUSINESS. THESE ARE FACTORS THAT WE THINK COULD CAUSE OUR ACTUAL RESULTS
TO DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS. OTHER FACTORS THEN
THOSE LISTED HERE COULD ALSO ADVERSELY AFFECT THE COMPANY. THIS DISCUSSION IS
PROVIDED AS PERMITTED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
- DEPENDENCE ON FUENTE CIGAR LTD. In Fiscal 1998, Fiscal 1999 and Fiscal
2000, we purchased, on a dollar basis, approximately 55%, 61% and 58%,
respectively, of our premium cigars from Fuente Cigar. Purchases from
Fuente Cigar include all of our Ashton brand cigars, a significant
percentage of our proprietary Holt's brand cigars, as well as proprietary
Fuente Cigar brands, including Premium Dominicana, which we distribute
exclusively. We have entered into a Private Label Manufacturing Agreement
with Fuente Cigar (the `PLMA') pursuant to which Fuente Cigar has agreed to
sell to us 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 us. However, we are uncertain that such minimum supply of cigars
will be provided to us. The PLMA permits noncompliance with the Minimum
Amount for various reasons 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 us to satisfy the Minimum
Amount, including Ashton, Holt's, Premium Dominicana or cigars sold under
any Fuente Cigar owned brand names. We cannot be certain that the various
sizes and brands sold by Fuente Cigar to us will coincide with the
preferences of our customers.
We have also entered into an exclusive distributorship agreement with
Fuente Cigar pursuant to which we will be the exclusive wholesale
distributor of new premium cigar brands to be developed with and
manufactured by Fuente Cigar. However, we cannot be certain that we will
successfully develop any such new brands with Fuente Cigar. Both of these
agreements specifically prohibit any actions for specific performance and
damages in the event of a breach by Fuente Cigar. It is unlikely we could
replace Fuente Cigar with a substitute supplier in a timely fashion, and
any failure of Fuente Cigar to supply premium cigars to us in appropriate
numbers and in a timely manner or to develop new premium cigar brands to be
distributed by us would harm our business, results of operations and
financial condition.
- DEPENDENCE ON ASHTON BRAND. In Fiscal 1998, 1999 and 2000, wholesale sales
of Ashton brand premium cigars and accessories represented, on a dollar
basis, approximately, 46%, 46% and 53%, respectively, of net sales. We
estimate that an additional 5%, 4%, and 4% of net sales for Fiscal
1998, 1999 and 2000, respectively, consisted of sales of Ashton brand
premium cigars and accessories through our retail operations. The success
of our 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 our 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., both of whom are our
director. The Fuente Investment Partnership, a partnership whose interests
are beneficially owned by Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. and
Cynthia Fuente Suarez, own approximately 24.4% of the shares of our
outstanding Common Stock. These relationships may present potential
conflicts of interest to Messrs. Fuente in their capacity as members of our
Board of Directors. We have established a policy that we will not enter
into or amend any agreement with 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 our 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 ours and may
compete further with us in the future as Fuente Cigar: (i) makes cigars
under brand names owned by other distributors, including distributors in
which affiliates of Fuente Cigar own a controlling interest; and (ii) makes
cigars under brand names owned by Fuente Cigar or its affiliates which
compete directly with Ashton brand premium cigars.
8
<PAGE> 12
- LIMITED EXPERIENCE IN INTRODUCING NEW CIGAR BRANDS. One element of our
strategy is to introduce and market new premium cigar brands. To date, we
have successfully introduced and marketed one proprietary brand, the Ashton
brand premium cigar, originally launched in 1986. We hope to expand
distribution of cigars we exclusively distribute for Fuente Cigar, and
to exclusively distribute new brands developed with Fuente Cigar. These
brands are to be developed by Fuente Cigar and us and to be manufactured
by Fuente Cigar. Our failure to successfully introduce and market new
brands may harm our results of operations and financial condition.
- LIMITED EXPERIENCE IN OPENING SPECIALTY CIGAR STORES. We may open or
acquire additional retail cigar stores. To date, we have opened and operate
two retail stores, one located in center city Philadelphia and one at our
headquarters in North East Philadelphia. We have also opened a retail store
and Holt's Cigar Club in the First Union National Center in Philadelphia.
Our facilities at the First Union National Center are currently operated by
a third party under written agreements. We cannot assure that the club and
stores will be profitable or that any additional stores we open or acquire
will achieve sales and profitability. 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 with respect to issues such as traffic flow
and competition, hiring, training and integrating 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 we will be able to successfully identify, open and operate
additional retail stores.
- DECLINING MARKET FOR CIGARS THROUGH 1993 AND CURRENT MARKET CONDITIONS.
According to industry sources, the cigar industry experienced declining
unit sales between 1964 and 1993. While the cigar industry experienced
increasing annual unit sales between 1993 and 1998, the current demand for
cigars has leveled off and may be decreasing. We cannot be certain that
recent negative trends will abate or that new customers will remain cigar
smokers in the future. In addition, the market for premium cigars, and
consequently our 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, we expect 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 our business, results of
operations and financial condition would not be materially harmed.
- MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. We have experienced
rapid growth over the last several years and our future operating results
will depend, in part, upon our ability to service a larger customer base
and to manage our overall expansion effectively. Our growth will increase
the responsibilities for both existing and new management personnel, and
will place significant demands on our management, working capital and
systems. We will be required to expand and improve our operational and
financial systems and to expand the number of employees at all levels,
including senior management. Our management information systems, accounting
systems, purchasing systems, inventory control systems, retail sales
systems and internal controls may not be adequate and we may not be able to
upgrade our systems and controls to respond to such growth. Our inability
to successfully upgrade controls and systems could materially harm the
operation of our business, implementation of our growth strategy and future
operating results. If we are unable to manage this growth effectively, our
results of operations and financial condition could be materially harmed.
- SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL TRADE.
The cigars we sell are manufactured outside the United States, principally
in the Dominican Republic, Honduras, Nicaragua, Jamaica and Mexico. As a
result, we are 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 our
business, results of operations or financial conditions.
- DEPENDENCE ON SHIPPERS. We primarily use United Parcel Service to ship our
products. Although the last strike by United Parcel Service employees did
not materially effect us, we cannot be certain that future strikes or
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<PAGE> 13
work stoppages by United Parcel Service or other major shipping carriers
that we may be using will not materially harm our business, results of
operations and financial condition or that alternate shipping carriers will
be immediately available and willing to deliver our shipments in a timely
fashion.
- RELIANCE ON KEY PERSONNEL. Our operations will continue to depend upon the
efforts of our senior personnel, including Robert G. Levin, our Chairman of
the Board, Chief Executive Officer and President, and a well known figure
in the cigar industry, and Michael Pitkow, a member of our Board, Chief
Operating Officer and Executive Vice President. In significant part, our
relationships with our manufacturers, suppliers and customers is based upon
long-term personal relationships with Mr. Levin. The loss of the services
of Mr. Levin, Mr. Pitkow or other senior personnel would materially harm
our business, results of operations and financial condition. Although we
maintain key-man life insurance on Mr. Levin, the proceeds of such
insurance may not be sufficient to compensate the Company for the loss of
his services. Our future performance will also depend to a significant
extent on our ability to identify, attract, train and retain highly skilled
sales, marketing and management personnel. We may not be successful in
identifying, attracting or retaining such personnel, and this would also
materially harm our business, results of operations and financial
condition.
- FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Our 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, our results for any quarter are
not necessarily indicative of the results we 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 our Common
Stock. Additionally, we expect our business to continue to exhibit some
seasonality, with increases in premium cigar and related accessory sales
during the holiday season. See `Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Quarterly Results of
Operations.'
- COMPETITION. The market for our products is highly competitive and subject
to rapid consumer change and frequent new product introductions and
extensions. Recently, it has also been characterized by consolidation
resulting in even a smaller number of larger, international cigar
companies. Our wholesale distribution business faces competition from these
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 a number of new entrants to the marketplace. Although many of
the newer brands introduced over the past several years have been
discontinued, competition remains strong as there is significant
competition to differentiate premium cigars in the marketplace and to
establish brand loyalty in a fewer number of cigar smokers. Our retail
sales compete with a large number of other mail order companies, some of
which are larger and better financed than we are. We also face significant
competition from a large number of existing retail stores and smoking
establishments selling the same branded products we sell. Although some of
the many new retail stores established over the last several years have
closed, we find our retail stores facing stiff competition for a limited
number of cigar buyers, many of whom now purchase their cigars through mail
order or over by e-commerce. Existing or future competitors may develop or
offer the same or similar premium cigars which may result in decreases in
our 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 we do. Our ability
to retain existing customers and attract new customers depends on the
quality of our premium cigars, the availability of product, our reputation
in the industry, and our ability to maintain customer satisfaction.
- RISKS RELATING TO TRADEMARKS. Our success is dependent, in part, on the
brand name Ashton and the Company name, "Holt's Cigar", and in the future,
will be dependent on new brand name trademarks to be developed by us, or
which are used in connection with premium cigars which we expect to
exclusively distribute in the United States. We rely primarily on
trademarks to protect the Ashton and Holt's names. The illegal use of our
trademarks, or trademarks associated with brands we exclusively distribute,
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. Robert G. Levin owns approximately 46.9%
of the outstanding shares of our Common Stock and the Fuente Investment
Partnership owns approximately 24.4% of the outstanding
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<PAGE> 14
shares of our 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 our Board of Directors. Accordingly, the
parties to such shareholder agreement will be able to control the Company,
elect all the directors and generally direct our affairs. 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 our Common Stock by either party.
- PROVISIONS WITH ANTI-TAKEOVER EFFECT. Certain provisions of our 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, even if
such events could be viewed as beneficial by our stockholders. Our Board of
Directors is empowered to issue preferred stock in one or more series
without stockholder action. Any issuance of this `blank-check' preferred
stock could materially limit the rights of holders of our Common Stock and
render more difficult or discourage an attempt to obtain control by means
of a tender offer, merger, proxy contest or otherwise. In addition, our
Certificate of Incorporation and By-Laws contain a number of provisions
which could impede a takeover or change in control, including, among other
things, staggered terms for members of our Board, the requiring of
two-thirds vote of our stockholders to amend certain provisions of our
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 we will be subject may also discourage takeover
attempts that have not been approved by our Board.
- BROAD DISCRETION IN APPLICATION OF PROCEEDS. We retain approximately $12
million, representing approximately 70% of the estimated net proceeds of
the Offering, for general corporate purposes, including working capital.
Accordingly, we have broad discretion as to the application of such
proceeds. Investors do not have the opportunity to evaluate the economic,
financial and other relevant information utilized by the Company in
determining the application of such proceeds.
- POSSIBLE VOLATILITY OF STOCK PRICE. The trading volume of our Common Stock
is low and therefore the trading price of the Common Stock may be subject
to significant fluctuations in response to the sale of a small number of
shares of our Common Stock, 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.
Additionally, 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 our Common Stock.
ITEM 2. PROPERTIES
FACILITIES
Our principal executive and administrative offices, warehouse, shipping, call
center, customer service facilities and a retail store, are located at a leased
headquarters facility in Philadelphia, Pennsylvania. We currently occupy 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. Under the lease, the rent will increase in proportion to increases in
the consumer price index. We anticipate that this facility will be sufficient to
meet our needs for the foreseeable future. We also lease our 3,000 square foot
Flagship Center City Philadelphia retail store from our Chairman of the Board,
Chief Executive Officer and President, Robert G. Levin, for an initial term
through May 31, 2009. We have the right to renew this lease for an additional
five year period. The rent is $120,000 per year, which is fixed through the end
of the renewal term.
ITEM 3. LEGAL PROCEEDINGS
The People of the State of California, the City of San Jose, and Paul Dowhall v.
Tobacco Exporters International (USA)
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Ltd., Holt's Cigar Company, Inc., Ashton Distributors, Inc., J.C. Newman Cigar
Co., Inc., Finck Cigar Co., Inc., Max Rohr Importers, Inc., Nat Sherman, Inc.,
and Thompson & Company of Tampa, Inc., and Does 1 through 100, inclusive;
Superior Court of California, County of San Francisco, Case No. 301631.
On March 1, 1999, the City of San Jose, California and an individual named Paul
Dowhall filed a lawsuit against two of our subsidiaries and several other
manufacturers, distributors, and/or retailers of cigar and pipe tobacco in the
San Francisco County Superior Court (the "San Francisco Action") alleging a
failure to issue clear and reasonable warnings to non-smokers exposed to tobacco
smoke and its constituents (often referred to as "second hand smoke") in
accordance with California Health and Safety Code section 25249.6 ("Proposition
65") and for certain claims under California Business & Professions Code section
17200 et seq. (the "Unfair Competition Act"). The complaint filed in the San
Francisco Action contains claims virtually identical to those contained in
complaints previously filed against several other manufacturers, distributors
and/or retailers of cigars and pipe tobacco products in the Los Angeles and San
Francisco Superior Courts (the "Prior Proposition 65 Cigar Actions"). We
therefore joined with other cigar and pipe tobacco defendants in a joint defense
group ("JDG") to defend these lawsuits and petitioned to coordinate the San
Francisco Action with the Prior Proposition 65 Cigar Actions and certain other
tobacco-related litigation before the Superior Court in San Diego, California.
We answered the complaint in the San Francisco Action on May 28, 1999 and denied
all material allegations and asserted numerous affirmative defenses. The San
Francisco Action was transferred to the San Diego Superior Court on May 24,
1999. On October 25, 1999, the San Diego Superior Court granted a motion for
judgment on the pleadings in favor of several other members of the JDG on
grounds that a prior judgment to which they, but not the Company were parties,
barred the plaintiffs' current claims against them. Although that ruling does
not dispose of the claims against the Company, it and another ruling that the
San Diego Superior Court issued in January 2000 which held that manufacturers,
distributors, and retailers of cigarettes do not have a duty to warn non-smokers
of exposures to tobacco smoke pursuant to Proposition 65, suggest that the
Company is in a strong position to defend this litigation if it is not resolved
by means of settlement. Settlement discussions with the plaintiffs in the San
Francisco Action are ongoing at this time.
The Company is not currently engaged in any other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted, during the fourth quarter of the fiscal year covered
by this report, to a vote of security holders, through the solicitation of
proxies or otherwise.
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<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has been quoted on the NASDAQ National Market under the symbol
"HOLT". The following table shows the high and low sales price of the Common
Stock for fiscal 2000 since the initial public offering of our common stock in
November 1997.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year 2000 $4.875 $3.375 $4.375 $3.750 $ 3.875 $ 3.375 $ 4.188 $3.125
Fiscal Year 1999 $8.250 $5.750 $5.828 $3.186 $ 7.843 $ 3.431 $ 5.63 $3.750
Fiscal Year 1998 $- $- $- $- $ 11.25 $10.375 $10.125 $6.875
</TABLE>
Our policy is to retain all available earnings for the development and growth of
our business, and accordingly, has not declared or paid any cash dividends on
its Common Stock since the completion of its initial public offering in November
1999. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Reserves." We declared a two
percent (2%) stock dividend once in Fiscal 2000 and three (3) times in Fiscal
1999, on August 14, 1999, November 3, 1998 and February 2, 1999. Declaration and
payment of dividends, if any, in the future, will be at the discretion of the
Board of Directors and will depend upon our then current financial condition,
results of operations, capital requirements and other factors deemed relevant by
the Board of Directors.
The approximate number of record holders of the Common Stock as of June 15, 2000
was 775.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the accompanying financial statements and related notes thereto.
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales $ 9,467 $17,278 $29,067 $30,531 $32,922
Cost of goods sold 5,159 9,566 15,953 16,676 18,088
----- ----- ----- ----- ------
Gross profit 4,308 7,712 13,114 13,855 14,834
Operating expenses 3,484 4,895 6,919 8,917 10,282
----- ----- ----- ----- ------
Income from operations 824 2,817 6,195 4,938 4,552
Other income 22 32 341 967 651
----- ----- ----- ----- ------
Income before income tax expense 846 2,849 6,536 5,905 5,203
Income tax expense 318 577 1,498 2,267 1,967
----- ----- ----- ----- ------
Net income $ 528 $ 2,272 $ 5,038 $ 3,638 3,236
======= ======= ======= ======= =====
</TABLE>
<TABLE>
<S> <C>
Pro forma net income.................................................... $3,917
</TABLE>
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<PAGE> 17
BALANCE SHEET DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31
--------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Working capital ....... $ 1,035 $ 2,211 $11,557 $18,516 $15,528
Total assets .......... 3,686 5,406 23,741 26,620 29,322
Total debt ............ 497 312 -- -- --
Stockholders' equity .. 1,653 3,025 21,787 24,814 26,955
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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>
YEARS ENDED MARCH 31
--------------------
1998 1999 2000
---- ---- ----
<S> <C> <C> <C>
Net sales ......................... 100.0% 100.0% 100.0%
Cost of goods sold ................ 54.9% 54.6% 54.9%
Gross profit ...................... 45.1% 45.4% 45.1%
Operating expenses ................ 23.8% 29.2% 31.2%
Income from operations ............ 21.3% 16.2% 13.8%
Other income ...................... 1.2% 3.2% 2.0%
Income before income tax expense .. 22.5% 19.4% 15.8%
</TABLE>
FISCAL 2000 COMPARED TO FISCAL 1999
( $ IN THOUSANDS)
Net Sales. Net sales increased $2,391 or 7.8% to $32,922 in fiscal 2000 compared
to $30,531 in fiscal 1999. Ashton Wholesale led the way with a 24.1% increase in
sales. The retail segment sales decreased 6.1% with the retail stores sales
decreasing by 11.2% and mail order decreasing 1.5%.
Gross Profit: Gross profit increased $979 or 7.1% to $14,834 in fiscal 2000 from
$13,855 in fiscal 1999. The increase in sales contributed $1,082 to gross
profit. This was partially offset by a 0.3% decrease in gross margin percentage
decreasing the gross profit contribution by $103. The decrease is the result of
lower margin in the wholesale division resulting from the sale of the Sosa brand
of cigars.
Operating Expenses. Operating expenses increased $1,365 to $10,282 in fiscal
2000 from $8,917 in fiscal 1999. Advertising and sales promotion expenses
increased $494 primarily from increases in product promotion expenses and co-op
advertising. Labor and benefit costs also increased $414 or 9.9% primarily due
to the increase in the sales in Ashton Distributors and the corresponding
increase in the sales force compensation and increases in the in-house sales
support to accommodate the increase in the wholesale business and some general
infrastructure additions in administration to accommodate the growth in
business. Administrative expenses increased due to increases in professional
fees. Other Income decreased from lower income from investments due to
14
<PAGE> 18
rising interest rates.
FISCAL 1999 COMPARED TO FISCAL 1998
Net Sales. Net sales increased approximately $1,400 million or 4.8% from $29,066
Fiscal 1998 to $30,531 in Fiscal 1999. Net sales increased primarily as a result
of a $2,000 increase in net sales of premium cigars from $26,800 for Fiscal 1998
to $28,900 for Fiscal 1999. Of such increase, $1,000 was attributable to
increased retail sales of premium cigars and $1,000 was attributable to
increased wholesale sales of premium cigars. These increases were the result of
increased availability of premium cigars from the Company's suppliers and
continued strong demand for premium cigars.
Gross Profit. Gross profit increased approximately $741,000 or 5.7%, from
$13,114 in Fiscal 1998 to $13,855 in Fiscal 1999. Gross profit, as a percentage
of sales was 45.1% for Fiscal 1998 and 45.4% for Fiscal 1999. This increase is a
result of a favorable sales mix within the wholesale division.
Operating Expenses. Operating expenses increased approximately $2,000 or 28.9%
from $6,919 in Fiscal 1998 to $8,917 in Fiscal 1999. As a percentage of net
sales, operating expenses increased from 23.8% in Fiscal 1998 to 29.2% in Fiscal
1999. This increase primarily reflects the deployment of the Company's in-house
sales force and increased advertising expenditures.
LIQUIDITY AND CAPITAL RESERVES
The Company has historically financed its business through a combination of cash
generated from operations and bank debt. Net cash provided by operations for
Fiscal 1998, 1999 and 2000 of approximately $3,628,000, $1,797,000 and
$8,589,000, respectively, consisted primarily of net income, decreases in
trading investments and increases in accrued expenses and income taxes payable,
offset by increases in inventory and accounts receivable.
On October 24, 1997, Ashton Distributors, Inc. declared a distribution of $2.7
million to Robert G. Levin, its 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 Offering, and the taxes with respect to which have been paid
by Mr. Levin. Ashton Distributors, Inc. borrowed this amount from a bank
pursuant to a demand note, which note was guaranteed by Mr. Levin and was repaid
with the proceeds of the Offering. The Company maintains a $4,000,000 line of
credit with a bank with borrowings thereunder accruing interest at the bank's
prime rate (9% at March 31, 2000) less 0.25%. At March 31, 2000, 1999 and 1998,
the Company had no borrowings.
The Company believes its current cash resources together with cash generated
from its operating activities and available bank borrowings 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.
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. During 1999, we completed our remediation and testing of systems. As
a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. The Company is not aware of any material
problems resulting from Year 2000 issues, either with its products, its internal
systems, or the products and services of third parties.
The Company will continue to monitor mission critical computer applications and
those of its suppliers and vendors throughout the Year 2000 to ensure that any
latent Year 2000 matters that may arise are addressed promptly.
15
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See pages F-1 through F-14 annexed hereto. The schedule required under
Regulation S-X is annexed hereto as page S-1.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Reports of Independent Accountants............................... F-1
Financial Statements
Consolidated Balance Sheets.................................. F-2 to F-3
Consolidated Statements of Operations........................ F-4
Consolidated Statements of Stockholders' Equity.............. F-5
Consolidated Statements of Cash Flows........................ F-6
Notes to Consolidated Financial Statements................... F-7 to F-15
FINANCIAL STATEMENT SCHEDULE:
II Valuation and Qualifying Accounts............................ S-1
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Effective as of May 30, 1997, the Company's Board dismissed Schmeltzer Master
Group, P.C. and appointed PricewaterhouseCoopers LLP as the Company's
independent accountants. The report of Schmeltzer Master 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 Schmeltzer Master 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 Schmeltzer
Master Group, P.C. would have caused them to make reference thereto in their
report on the financial statements for such years. Prior to retaining
PricewaterhouseCoopers LLP, the Company had not consulted with
PricewaterhouseCoopers LLP regarding the application of accounting principles or
the type of audit opinion that might be rendered on the Company's financial
statements.
16
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to our Directors and Officers called for by this Item
10 is incorporated by reference to the information set forth under the heading
"Election of Directors" and "Executive Officers and Executive Compensation" in
the our Proxy Statement relating to the 2000 Annual Meeting of Stockholders
filed pursuant to Regulation 14A (the "2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation which is called for by this
Item 11 is incorporated by reference to the information set forth under the
heading "Executive Officers and Executive Compensation" in the 2000 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to the security ownership of certain beneficial owners
and our management which is called for by this Item 12 is incorporated by
reference to the information set forth under the heading "Security Ownership of
Certain Beneficial Owners and Management" in the our 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transaction which
is called for by this Item 13 is incorporated by reference to the information
set forth under the heading "Certain Relationships and Related Transactions" in
the our 2000 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS OF FORM 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements: -- See "Index to Financial Statements" -- Item 8
2. Financial Statement Schedule: -- See "Index to Financial Statements"
-- Item 8
3. Exhibits: Exhibits filed as part of this Report are listed under
subsection (c) of this Item 14.
(b) Reports on Form 8-K -- None.
(c) Exhibits:
2 Plan of Reorganization*
3.1 Restated Certificate of Incorporation*
3.2 By-Laws*
4 Specimen Common Stock Certificate*
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 September 1, 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.*
17
<PAGE> 21
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 Amended and Restated Shareholders' Agreement dated April 27,
1997, between and among Robert G. Levin, The Fuente
Investment Partnership and Ashton Holdings, Inc.*
10.12 Option Agreement between the Company and Michael Pitkow dated January
1, 1997.*
10.13 Option Agreement between the Company and Marvin B.
Sharfstein dated January 1, 1997.*
10.14 Option Agreement between the Company and Carole Cohn dated January 1,
1997.*
11.1 Amended Computation of Pro Forma Net Income Per Share*
11.2 Amended Computation of Supplemental Pro Forma Net Income Per
Share*
16 Letter re change in certifying accountant*
21 Subsidiaries of the Company*
27.1 Financial Data Schedule
* Incorporated by reference from the same Exhibit Number filed with the
Company's Registration Statement Form S-1 (Registration No. 333-36263).
18
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Holt's Cigar Holdings, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated 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 its subsidiaries (the "Company") at March 31, 2000 and March
31, 1999, and the results of their operations and their cash flows for each of
the three years in the period ended March 31, 2000 in conformity with accounting
principles generally accepted in the United States. 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 audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, 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 audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers, LLP
JUNE 2, 2000
F-1
<PAGE> 23
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
Holt's Cigar Holdings, Inc. and Subsidiaries
AS OF MARCH 31:
$ in thousands
2000 1999
------------------------------
<S> <C> <C>
Current Assets
Cash 2,882,393 5,010,009
Investments Securities 4,183,179 8,136,060
Accounts Receivable (net of allowance for doubtful 2,170,445 1,268,553
accounts of $74,511 and $75,000, respectively.)
Inventory 7,559,416 4,924,864
Deferred Income Taxes 106,885 141,500
Prepaid Expenses and Other current assets 992,736 840,324
----------- -----------
Total Current Assets 17,895,054 20,321,310
=========== ===========
Investments Securities 7,897,483 4,042,520
Net Property and Equipment, net 2,048,521 1,481,536
Loan to shareholder 700,000 --
Deferred Income Taxes 26,930 17,600
Other Assets, Net 753,929 756,736
----------- -----------
- -
Total Assets 29,321,917 26,619,702
=========== ===========
Current Liabilities
Accounts Payable 617,735 720,149
Due to Related Party 1,348,266 860,360
Accrued Expenses and other current liabilities 401,180 125,699
Income Taxes Payable - 99,247
----------- -----------
- -
Total Current Liabilities 2,367,181 1,805,455
Commitments
Stockholders' Equity
Preferred Stock, $0.001 par value, 1,000,000 shares
Authorized, non-issued - -
Common Stock, $0.01 par value, 25,000,000 shares 6,246 6,123
Authorized, 6,245,593 shares issued and 5,847,728
shares outstanding at March 31, 2000 and
$6,123,145 shares issued and 5,996,178 shares outstanding
at March 31, 1999.
</TABLE>
F-2
<PAGE> 24
<TABLE>
<S> <C> <C>
Additional Paid-in-capital 20,054,541 19,562,067
Retained Earnings 8,685,334 5,941,989
----------- -----------
Subtotal 28,746,121 25,510,179
Treasury Stock, 397,865 and 126,967 shares at
cost, respectively (1,716,141) (620,688)
Stock Purchase Loans (75,244) (75,244)
----------- -----------
Total Stockholders' Equity 26,954,736 24,814,247
----------- -----------
Total Liabilities and Stockholders' Equity 29,321,917 26,619,702
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 25
CONSOLIDATED STATEMENT OF OPERATIONS
Holt's Cigar Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the years ended March 31: 2000 1999 1998
<S> <C> <C> <C>
NET SALES $32,922,139 $30,530,850 $29,066,895
COST OF GOODS SOLD 18,088,428 16,676,031 15,952,995
----------- ----------- -----------
GROSS PROFIT 14,833,711 13,854,819 13,113,900
OPERATING EXPENSES 10,282,172 8,917,414 6,918,591
----------- ----------- -----------
INCOME FROM OPERATIONS 4,551,539 4,937,405 6,195,309
OTHER INCOME (EXPENSE) 651,808 967,213 340,798
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 5,203,347 5,904,618 6,536,107
INCOME TAXES 1,967,404 2,266,582 1,498,473
----------- ----------- -----------
NET INCOME (LOSS) $ 3,235,943 $ 3,638,036 $ 5,037,634
=========== =========== ===========
EARNINGS PER SHARE - BASIC AND DILUTED(1) $ 0.54 $ 0.59 $ 0.99
Weighted Average Shares - Basic 5,999,420 6,189,565 5,091,966
Weighted Average Shares - Diluted 6,001,240 6,194,176
Pro forma income data: (2)
Income before income taxes as reported 6,536,107
Pro forma amortization of goodwill 8,125
Pro forma income before income taxes 6,527,982
Pro forma provision for income taxes 2,611,000
Pro forma net income 3,916,982
Pro forma net income per share
(basic and diluted) $ 0.77
Pro forma weighted average number of 5,091,966
shares
(basic and diluted)
</TABLE>
(1) Fiscal 2000, 1999 and 1998 weighted average number of shares restated for
the stock dividends effected in fiscal 2000 and 1999.
(2) Pro forma amounts are not presented for the years ended March 31, 2000 and
1999 as the Company's reorganization occurred in November 1997.
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE> 26
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Holt's Cigar Holdings, Inc, and Subsidiaries
<TABLE>
<CAPTION>
ADDITIONAL STOCK
COMMON PAID IN RETAINED TREASURY PURCHASE
STOCK CAPITAL EARNINGS STOCK LOANS TOTAL
----- ------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 $ 91,114 $ 303,607 $ 2,679,887 $ (50,000) $ -- $ 3,024,608
Net Income -- -- 5,037,634 -- -- 5,037,634
Stockholders' Distributions -- -- (3,492,000) -- -- (3,492,000)
Issuance of Common Stock 1,750 17,093,502 -- -- -- 17,095,252
Effects of Corporate Reorganization (37,094) 243,742 -- -- -- 206,648
(Note 1)
Retirement of Treasury Stock (50,000) -- -- 50,000 -- --
Stock Purchase Loans -- -- -- -- (84,892) (84,892)
----------- ----------- ----------- ----------- ---------- -----------
Balance at March 31, 1998 5,770 17,640,851 4,225,521 -- (84,892) 21,787,250
Net Income -- 3,638,036 -- -- 3,638,036
Stock Dividends 353 1,921,216 (1,921,569) -- -- --
Return - Stock purchase Loan -- -- -- (9,648) 9,648 --
Treasury Stock Purchases -- -- -- (611,040) -- (611,040)
----------- ----------- ----------- ----------- ---------- -----------
Balance at March 31, 1999 6,123 19,562,067 5,941,989 (620,688) (75,244) 24,814,247
Net Income -- -- 3,235,943 -- -- 3,235,943
Stock Dividends 123 492,474 (492,597) -- -- --
Treasury Stock Purchases -- -- -- (1,095,453) -- (1,095,453)
----------- ----------- ----------- ----------- ---------- -----------
Balance at March 31, 2000 $ 6,246 $20,054,541 $ 8,685,334 $(1,716,141) $ (75,244) $26,954,736
=== ==== =========== =========== =========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Holt's Cigar Holdings, Inc. and Subsidiaries
<TABLE>
<CAPTION>
For the Years Ended March 31: 2000 1999 1998
---------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 3,235,943 $ 3,638,036 $ 5,037,634
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATIONS:
Increase (Decrease) in Allowance for Doubtful Accounts -- (45,000) 85,500
Depreciation and Amortization 318,207 284,395 183,811
(INCREASE) DECREASE IN:
Investments - Trading 8,240,327 (133,459) --
Accounts Receivable (901,893) 95,588 (168,972)
Inventory (2,634,552) (1,468,267) (872,720)
Deferred Income Taxes 16,785 11,000 (170,100)
Prepaid Expenses and Other Assets 347,080 (437,461) (351,136)
INCREASE (DECREASE) IN:
Accounts Payable and Due to Related Parties 385,491 388,928 (415,218)
Accrued Expenses and Other Current Liabilities 275,481 (114,871) 74,700
Income Tax Payable (693,450) (421,853) 224,749
----------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,589,419 1,797,036 3,628,248
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase on investment securities (8,142,409) (12,039,996)
Purchase of Equipment (779,173) (240,615) (1,219,864)
Stock Purchase Loans -- -- (84,892)
Loan to Shareholder (700,000) -- --
----------- --------- ------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (9,621,582) (240,615) (13,344,752)
----------- --------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long term debt -- -- (3,461,881)
Proceeds from long term debt -- -- 3,150,000
Proceeds from issuance of common stock -- -- 17,079,141
Stockholder distribution -- -- (3,492,000)
Purchase of Company Stock (1,095,453) (620,688) --
----------- ---------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,095,453) (620,688) 13,275,260
----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH (2,127,616) 935,733 3,558,756
=========== ========== ===========
Cash - beginning of period 5,010,009 4,074,276 515,520
Cash - end of period 2,882,393 5,010,009 4,074,276
Interest paid $ -- $ -- $ 49,148
Income taxes paid $ 2,515,338 $ 2,650,806 $ 1,491,047
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 Basis of Presentation and Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The accompanying consolidated financial statements include Holt's Cigar
Holdings, Inc. and its wholly-owned subsidiaries (together the "Company"). These
statements reflect the consolidated financial position, results of operations
and cash flows after elimination of intercompany accounts and transactions. The
Company's business comprises the retail, catalog mail-order and wholesale
distribution of cigars and related products.
The consolidated financial statements have been presented as if the Company had
operated as a single combined entity for all periods presented.
CORPORATE REORGANIZATION
In November 1997, the companies were 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.
Ashton Distributors, Inc. and 60% of the outstanding common stock of Ashton
Holdings, Inc. Ashton Holdings, Inc., acquired all the outstanding common stock
of Holt's Cigar Company, Inc. and Ashton Distributors, Inc. The assets acquired
and liabilities assumed are reflected in the consolidated 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 interest 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 consolidated financial statements and
accompanying disclosures. Although these estimates are base on management's best
knowledge of current events and actions the Company may undertake in the future,
actual results ultimately may differ from the estimates.
INVENTORY
Inventory is stated at the lower of cost or market. Cost is determined by the
first-in first-out method. Inventory is composed primarily of finished goods
held for resale.
CONCENTRATION OF CREDIT RISK
Certain financial instruments are potentially subject 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.
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, and 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. The fair value of investments is determined using
quoted market values.
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 assets are capitalized. Depreciation is computed using
straight-line basis over the estimated useful lives of the related assets.
Useful lives range from three to thirty-nine years. The recoverability of
long-lived assets is periodically reviewed based principally on an analysis of
cash flow.
REVENUE RECOGNITION
Sales are recognized upon shipment of products.
COST OF GOODS SOLD
Cost of goods sold include the purchases of finished goods inventory for
resale.
F-7
<PAGE> 29
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
Beginning inventory $ 4,924,864 $ 3,456,597 $ 2,583,877
Purchases from:
Related party supplier 11,996,181 11,026,228 9,310,924
(Note 9 and 11)
Other suppliers 8,726,799 7,118,070 7,514,791
Less Ending inventory (7,559,416) (4,924,864) (3,456,597)
Cost of good sold $18,088,428 $16,676,031 $15,952,995
</TABLE>
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.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Purchase Compensation" ("SFSA 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
consolidated financial condition, results of operations, or cash flows. See Note
12.
NET INCOME PER SHARE
Earnings per share are presented on a historical basis in accordance with SFAS
No. 128, "Earnings Per Share".
INCOME TAXES
The Company accounts for income taxes under statement of Financial Accounting
Standards No. 109 (SFAS 109) which utilizes an asset and 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 basis of assets and
liabilities.
Prior to November 1997, Ashton Distributors, Inc. (Ashton) had elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code and
Pennsylvania Tax Reform Code. Under these provisions, Ashton did not pay federal
or state income taxes on its taxable income. Instead, Ashton's income, losses
and credits were included in the individual tax return of Ashton's stockholder.
ADVERTISING
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotions cost amounted to $2,194,818, $1,700,591 and $438,510
for the years ended March 31, 2000, 1999 and 1998, respectively.
2. INVESTMENT SECURITIES
Investment securities consist of debt securities issued by the U. S. Treasury,
which are classified as trading and available for sale. Trading securities are
valued at fair market value. Unrealized gains (losses) relating to securities
classified as trading were recorded in the Statements of Operations. These
amounts were ($83,799), $133,459 and $5,125 for the years ended March 31, 2000,
1999 and 1998, respectively. Unrealized gains (losses) related to securities
classified as available for sale are recorded as other comprehensive income. For
the year ended March 31, 2000 the fair market value of available for sale
securities approximates amortized cost. Maturities of the securities range from
six months to four years.
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 rate in 1998
differs from the statutory rate primarily due to the Company's historical
corporate structure. The income recorded in Ashton Distributors, Inc. prior to
the Company's restructuring in November 1997 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
expenses detailed as follows on a consolidated basis, after the effects of
eliminations:
F-8
<PAGE> 30
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
2000 1999 1998
<S> <C> <C> <C>
Income taxes at U.S. federal income tax rate $ 1,707,765 $ 1,910,291 $ 2,222,276
State taxes, net of federal benefit 259,639 356,291 392,166
S Corporation income tax attributable directly to stockholder -- -- (1,119,720)
Other 3,751
Income Tax Expense $ 1,967,404 $ 2,266,582 $ 1,498,473
Income tax expense (benefit) consists of the following:
Current tax expense
Federal $ 1,694,665 $ 1,893,891 $ 1,418,287
State 255,954 353,191 250,286
$ 1,950,619 2,247,082 1,668,573
Deferred tax expense (benefit)
Federal 13,100 16,400 (144,600)
State 3,685 3,100 (25,500)
16,785 19,500 (170,100)
$ 1,967,404 $ 2,266,582 $ 1,498,473
The components of deferred tax assets are as follows:
Deferred tax asset - current:
Bad debt allowance $ 21,076 $ 16,200 $ 34,200
Inventories 85,809 116,800 126,800
Deferred tax asset - noncurrent
Depreciation 26,930 17,600 9,100
Total deferred tax assets $ 133,815 $ 150,600 $ 170,100
</TABLE>
The Company assessed the need for a valuation allowance and the
realizability of the related deferred tax asset. Based on this assessment no
valuation allowance is necessary at March 31, 2000.
F-9
<PAGE> 31
4. PROPERTY AND EQUIPMENT, NET
Property and equipment is detailed as follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Equipment $ 1,233,212 $ 496,548
Furniture and fixtures 310,387 302,593
Leasehold improvements 1,253,972 1,219,258
2,797,571 2,018,399
Accumulated depreciation (749,050) (536,863)
Property and equipment, net $ 2,048,521 1,481,536
</TABLE>
Depreciation expense amounted to $ 212,187, $176,577 and $142,111 for the years
ended March 31, 2000, 1999 and 1998, respectively.
5. OTHER ASSETS, NET
Other assets consist of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Contract Rights $ 450,000 $ 450,000
Goodwill 243,742 243,742
Trademarks 260,535 167,323
Other 41,890 31,890
996,167 892,955
(242,238) (136,219)
$ 753,929 $ 756,736
</TABLE>
The assets are being amortized on a straight line basis over periods
ranging from five to twenty years.
6. BORROWINGS
Lines of Credit
The Company maintains a line of credit with a bank, payable on demand of which
no amounts were outstanding at March 31, 2000, 1999 and 1998. Interest is
payable at the bank's prime (9% at March 31, 2000) less .25%. The amount
available under this line is $4,000,000.
For fiscal 2000 and 1999 there was no interest expense. Total interest expense
amounted to $49,148 for the fiscal year ended March 31, 1998.
7. LEASE COMMITMENTS
The Company leases office and warehouse space in Philadelphia under a
noncancelable operating lease expiring in August, 2002 with one five year
renewal option. The Company also leases retail space from a stockholder under an
operating lease expiring in May 2009. (See note 11)
The Company leases various office and warehouse equipment and an automobile
under operating leases expiring through June, 2005. The following is a schedule
of future minimum rental payments required under the above operating leases as
of March 31, 2000:
<TABLE>
<CAPTION>
<S> <C>
2001 $215,773
2002 $214,830
</TABLE>
F-10
<PAGE> 32
<TABLE>
<S> <C>
2003 $162,623
2004 $124,388
2005 $121,018
Thereafter $500,000
</TABLE>
Rental expense amounted to $208,964, $208,519 and $175,384 for the years ended
March 31, 2000, 1999 and 1998, respectively.
8. 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 compensation. The Company's contributions for fiscal
2000, 1999, and 1998 amounted to $48,752, $37,071, and $25,525, respectively.
9. MAJOR SUPPLIERS
During fiscal year 2000 and 1999, the Company purchased approximately 58% and
61%, respectively, of its cigars from one supplier. At March 31, 2000 and 1999,
amounts due to the supplier were approximately $1,348,300 and $860,400,
respectively, and are included in due to related party. The supplier is a
company controlled by an affiliates of stockholders and directors of the
Company. During fiscal 2000 and 1999, approximately 7% and 14%, respectively, of
the Company's cigar purchases were from another third party supplier. At March
31, 2000 and 1999, approximately $98,000 and $110,500, respectively, was due to
the other supplier and is included in accounts payable.
10. COMMITMENTS
The Company has been required to pay royalties to an 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 in
the years ended March 31, 2000. 1999 and 1998 were $65,017, $58,040, and
$71,701, respectively.
11. RELATED PARTY TRANSACTIONS
The Company has a loan receivable due from several employees including a
stockholder (see note 14).
In May, 1999, the Company loaned Mr. Robert Levin the sum of $700,000 secured by
a pledge of the Company's Common Stock owned by Mr. Levin and equal in current
market value to 150% of the outstanding principal balance of the loan from time
to time. This loan is for a term of five years, and is payable, interest only,
at an annual rate of 6.00% in semi-annual installments.
The Company paid rent of approximately $112,500, $75,000, and $75,000 to a
stockholder in the years ended March 31, 2000, 1999, and 1998, respectively (see
Note 7).
The major supplier mentioned in Note 9 is a company owned by stockholders and
directors of the Company. Amounts due to the related party are separately shown
on the face of the balance sheet.
12. STOCK OPTIONS
Effective January 1, 1996, three individuals were granted stock options to
purchase common stock of each of the three companies, which now comprise Holt's
Cigar Holdings, Inc., at estimated fair market value. The individuals were an
employee, an outside director, and a member of the controlling stockholder's
immediate family, respectively. An aggregate of 511,924 shares were issued at an
exercise price of $.50 per share. The options expire on December 21, 2005. The
employee options vest ratably over five years, the family member and director's
options vested immediately. 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.
In September 1997, the Board of Directors approved an Employee Stock Option
Plan. The plan allows for options to purchase up to 400,000 shares of common
stock to be granted, at their fair market value on the date of grant. The
Company granted options to purchase an aggregate of 178,813 shares at $11.00 per
share on November 24, 1997. The options have a contractual life of five years
from grant date and vest ratably over three years.
F-11
<PAGE> 33
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 granted outside directors options to purchase an aggregate of 64,944
shares at $11.00 per share on November 24, 1997. The options have a contractual
life of five years from grant date and vested immediately.
The following table summarizes the stock options for each of the three years
ended March 31, 2000:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
Weighted Weighted Weighted
Average Average Average
Fair Market Fair Market Fair Market
Weighted Value Weighted Value Weighted Value
Average Granted Average Granted Average Granted
Exercise During Exercise During Exercise During
Shares Price The Year Shares Price The Year Shares Price The Year
------ -------- -------- ------ -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
Beginning of year 899,794 $2.94 $ -- 756,532 $ 3.83 $ -- 511,924 $ 0.50 $ --
Granted 244,300 4.11 3.16 169,792 6.90 1.50 248,851 11.00 3.05
Exercised [40,000] 0.50 -- -- -- -- -- -- --
Cancelled [51,049] 7.65 -- (26,530) 11.00 -- (4,243) 11.00 --
Outstanding at
End of year 1,053,045 4.11 -- 899,794 4.22 756,532 3.83
Options exercisable
At end of year 746,752 3.62 -- 613,058 2.94 446,768 1.99
</TABLE>
F-12
<PAGE> 34
<TABLE>
<CAPTION>
Outstanding and Exercisable by Price Range Options Exercisable
----------------------------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
----- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$0.50 479,563 5.75 0.50 436,266 0.50
$3.83 25,000 4.48 3.83
$4.06 61,200 4.38 4.06 61,200 4.06
$4.45 71,400 4.23 4.45
$4.79 64,944 3.37 4.79 64,944 4.79
$4.90 66,300 4.23 4.90
$6.81 27,060 3.12 6.81 9,020 6.81
$7.49 54,121 3.12 7.49 18,040 7.49
$11.00 203,457 2.50 11.00 157,282 11.00
------- ---- ----- ------- -----
$.50-11.00 1,053,045 4.57 4.09 746,752 3.62
========= =======
</TABLE>
The weighted average fair value was estimated on the date of grant using the
Black-Scholes option pricing model assuming no dividends, a volatility based on
the Company's daily historical stock prices, the average expected life and a
risk free interest rate of 6.5%.
The Company accounts for options in accordance with APB No. 25 and accordingly,
no compensation cost has been recognized. If the Company had elected to
recognize compensation cost consistent with the method prescribed by SFAS 123,
net income would have been reduced by approximately $260,000, $265,000 and
$249,000 (a decrease of $0.04, $0.05 and $0.05 on earnings per share) in fiscal
2000, 1999 and 1998, respectively.
13. NET INCOME PER SHARE:
The Company adopted the provisions of SFAS 128 "earnings per Share" in fiscal
1998. SFAS 128 requires the presentation of both basic EPS and EPS assuming
dilution. Basic EPS is calculated using the weighted average shares outstanding
during the applicable period. Diluted EPS reflects the potential dilution that
would occur if securities or other contracts to issue common stock were
exercised or converted, except when such effect would be antidilutive.
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
Income Available to Average Common
Common Shareholders Shares Outstanding
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Basic $3,235,943 $3,638,036 5,999,420 6,189,565
Dilutive effect of Stock Options - - 1,820 4,611
Diluted $3,235,943 $3,638,036 6,001,240 6,194,176
</TABLE>
F-13
<PAGE> 35
14. CAPITAL STRUCTURE
As discussed in Note 1, the company reorganized in November 1997. After the
reorganization, Holt's Cigar Holdings, Inc. has one class of common stock with a
par value of $.001. 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. On November 24, 1997, the Company effected its initial
public offering by selling 1,750,000 shares at $11 per share. As discussed in
Note 12, the Company has options outstanding for the purchase of 1,053,045
shares of common stock.
In February 1998, the Company loaned certain employees a total of $84,892 to
purchase shares of the company stock. In September 1998 1,250 share were
returned to the Company in lieu of payment. The balance of the loans outstanding
has been reflected as a reduction of stockholders' equity.
15. SEGMENT INFORMATION
The Company has two reportable segments, Wholesale and Retail. Management
evaluates the segments based on net sales and gross profit.
<TABLE>
<CAPTION>
FISCAL 2000 FISCAL 1999 FISCAL 1998
WHOLESALE RETAIL TOTAL WHOLESALE RETAIL TOTAL WHOLESALE RETAIL TOTAL
--------- ------ ----- --------- ------ ----- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $17,493,729 $15,428,410 $32,922,139 $14,092,257 $16,438,593 $30,530,850 $13,288,115 $15,778,780 $29,066,895
Cost of Sales 8,516,310 9,572,118 18,088,428 6,613,307 10,062,724 16,676,031 5,889,531 10,063,464 15,952,995
Gross Profit 8,977,419 5,856,292 14,833,711 7,478,950 6,375,869 13,854,819 $7,398,584 $5,715,316 $13,113,900
</TABLE>
The Company is currently in the process of splitting the retail segment into two
segments, the traditional retail store business and the catalog business.
Management currently analyzes these segments only at the sales level. Prior to
fiscal 2000 the Company' s reporting systems were not designed to separately
report these two segments and management analyzed them as one. Sales in fiscal
2000 for the retail store and catalog segments were $4,844,000 and $10,584,000,
respectively. Sales in fiscal 1999 for the retail store and catalog segments
were $5,688,000 and $10,750,000, respectively.
16. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED)
PRO FORMA NET INCOME PER SHARE
The computations of basic earnings per share is based on the weighted average
numbed of outstanding common shares during the period plus common stock
equivalents, if dilutive, consisting of shares subject to stock options.
Pro forma net income per shares is based on net income per share decreased to
give effect to the increased amortization costs of $8,125 for the year ended
March 31, 1998 which would have resulted if the goodwill created at the
reorganization had existed at March 31, 1997.
In addition, pro forma income taxes represent the income tax expense that would
have been recorded had the Company been a C Corporation for the year ended March
31, 1998.
SUPPLEMENTAL PRO FORMA NET INCOME PER SHARE
Pursuant to the requirements of the Securities and Exchange Commission, the
weighted average number of outstanding common shares
F-14
<PAGE> 36
for supplemental earnings per share 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. The
inclusion of such additional shares would not materially impact pro forma
earnings per share as reported.
QUARTERLY DATA (UNAUDITED)
FINANCIAL DATA
The following table presents the unaudited quarterly financial data for the
Company's last two completed fiscal years:
<TABLE>
<CAPTION>
Quarterly Financial Data (unaudited)
(in thousands except for earnings per share)
First Quarter Second Quarter Third Quarter Fourth Quarter
<S> <C> <C> <C> <C>
Year Ended March 31, 2000
Net Sales $8,301 $8,950 $9,056 $6,615
Gross Profit 3,849 3,824 4,028 3,133
Income From Operations 1,580 1,403 1,189 380
Net Income 1,043 1,000 881 312
Earnings per share $0.17 $0.17 $0.15 $0.05
Year Ended March 31, 1999
Net Sales $7,300 $8,260 $9,315 $5,656
Gross Profit 3,281 3,662 4,362 2,550
Income From Operations 1,409 1,553 1,788 187
Net Income 966 1,126 1,272 275
Earnings per share $0.16 0.18 $0.21 $0.04
</TABLE>
COMMON SHARES
The following are the high and low closing prices of the common shares of the
Company for fiscal years ended March 31, 2000, 1999 and 1998 as traded on the
NASDAQ stock exchange. The commencement of public trading (NASDQ:
HOLT) was November 27, 1997.
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
High Low High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fiscal Year 2000 $4.875 $3.375 $4.375 $3.750 $3.875 $3.375 $4.188 $3.125
Fiscal Year 1999 $8.250 $5.750 $5.828 $3.186 $7.843 $3.431 $5.63 $3.750
Fiscal Year 1998 $- $- $- $- $11.25 $10.375 $10.125 $6.875
</TABLE>
No cash dividends have been declared.
F-15
<PAGE> 37
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED MARCH 31, 1998, 1999 and 2000
<TABLE>
<CAPTION>
Charged Charged to
Balance at to costs other Balance at
Beginning And accounts Deductions end of
Description of period Expenses described describe period
----------- ---------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1998
Allowance for doubtful accounts $34,500 $85,500 $120,000
Inventory reserve $ -- $317,045 $317,045
Year ended March 31, 1999
Allowance for doubtful accounts $120,000 $45,000 $75,000
Inventory reserve $317,045 $25,045 $292,000
Year ended March 31, 2000
Allowance for doubtful accounts $75,000 $1,000 $74,000
Inventory reserve $292,000 $90,000 $202,000
</TABLE>
Allowance for doubtful accounts was decreased as a result of management's
analysis of historical write-offs and the current customer aging and base.
Inventory reserve analysis at year end and historical analysis reflected a
requirement of $202,000
S-1
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HOLT'S CIGAR HOLDINGS, INC.
By: /s/ MICHAEL PITKOW
----------------------
Michael Pitkow, Executive Vice President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual
report has been signed by the following persons on behalf of the Company and in
the capacities indicated as of June 28, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- -------------
<S> <C> <C>
/s/ ROBERT G. LEVIN Chairman, Chief Executive Officer June 28, 2000
------------------------------
Robert G. Levin President and Director
/s/ MICHAEL PITKOW Chief Operating Officer, Executive June 28, 2000
------------------------------
Michael Pitkow Vice President and Director
/s/ KEITH GOORSKY Chief Financial Officer June 28, 2000
------------------------------
Keith Goorsky
/s/ HARVEY W. GROSSMAN Director June 28, 2000
------------------------------
Harvey W. Grossman
/s/ MARVIN B. SHARFSTEIN Director June 28, 2000
------------------------------
Marvin B. Sharfstein
/s/ CARLOS A. FUENTE, SR. Director June 28, 2000
------------------------------
Carlos A. Fuente, Sr.
/s/ CARLOS P. FUENTE, JR. Director June 28, 2000
------------------------------
Carlos P. Fuente, Jr.
</TABLE>
