Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Initial Statement 75 423K
2: EX-1 Underwriting Agreement 36 160K
4: EX-10.10 Stock Option Plan 8 30K
3: EX-10.9 Incentive Stock Option Plan 17 61K
5: EX-11.1 Pro Forma Net Income Per Share 1 7K
6: EX-11.2 Supplemental Pro Forma Net Income Per Share 1 8K
7: EX-16 Letter re: Change in Certifying Accountant 1 6K
8: EX-23.1 Consent of Independent Accountants 1 6K
9: EX-23.2 Consent of Independent Accountants 1 6K
10: EX-27 Financial Data Schedule 1 7K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1997
REGISTRATION NO. 333-_________
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOLT'S CIGAR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
[Download Table]
DELAWARE 5993 51-0350003
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE NUMBER)
REGISTRATION)
12270 TOWNSEND ROAD
PHILADELPHIA, PENNSYLVANIA 19154
(215) 676-8778
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT G. LEVIN, PRESIDENT
HOLT'S CIGAR HOLDINGS, INC.
12270 TOWNSEND ROAD
PHILADELPHIA, PA 19154
(215) 676-8778
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
MATTHEW H. LUBART, ESQ. NEIL GOLD, ESQ.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL, LLP FULBRIGHT & JAWORSKI L.L.P.
(FORMED IN THE COMMONWEALTH OF PENNSYLVANIA) 666 FIFTH AVENUE
997 LENOX DRIVE, BUILDING THREE NEW YORK, NEW YORK 10103
LAWRENCEVILLE, NEW JERSEY 08648
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. /x/
------------------------
CALCULATION OF REGISTRATION FEE
[Enlarge/Download Table]
| | PROPOSED MAXIMUM | PROPOSED MAXIMUM |
TITLE OF EACH CLASS OF | AMOUNT TO | OFFERING PRICE | AGGREGATE | AMOUNT OF
SECURITIES TO BE REGISTERED | BE REGISTERED | PER SHARE(1) | OFFERING PRICE(2)| REGISTRATION FEE
Common Stock, $.001 par value (2)................. | 2,012,500 shares | $14.00 | $28,175,000 | $8,537.88
(1) Estimated solely for the purpose of determining the registration fee.
(2) Includes 262,500 shares of Common Stock subject to sale upon the exercise of
an over-allotment option granted to the Underwriters.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SUBJECT TO COMPLETION -- DATED SEPTEMBER 24, 1997
PROSPECTUS
--------------------------------------------------------------------------------
1,750,000 Shares
[LOGO HERE] HOLT'S CIGAR HOLDINGS, INC.
Common Stock
--------------------------------------------------------------------------------
All of the 1,750,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby are being sold by Holt's Cigar Holdings, Inc.
(the "Company"). Prior to the Offering (the "Offering"), there has been no
public market for the Common Stock. It is currently anticipated that the initial
public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Application has been made to include the Common Stock in The Nasdaq Stock
Market's National Market (the "Nasdaq National Market") under the symbol "HOLT."
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
--------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
-------------------------------------------------------------------------------
Per Share..... $ $ $
-------------------------------------------------------------------------------
Total(3)...... $ $ $
===============================================================================
(1) The Company and a shareholder of the Company (the "Selling Shareholder")
have agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Principal and Selling Shareholders" and "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $550,000.
(3) The Selling Shareholder has granted the several Underwriters a 30-day
over-allotment option to purchase up to 262,500 additional shares of Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and the
total Proceeds to Selling Shareholder will be $ . See "Principal and
Selling Shareholders" and "Underwriting."
--------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about November , 1997.
PRUDENTIAL SECURITIES INCORPORATED JANNEY MONTGOMERY SCOTT INC.
November , 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[PICTURES TO COME]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and information under "Risk Factors." All
information in this Prospectus gives effect to the reorganization of the Company
(the "Reorganization"), pursuant to which the Company merged newly formed
wholly-owned subsidiaries with Ashton Distributors, Inc. and Holt's Cigar
Company, Inc. in exchange for shares of the Common Stock. See "Reorganization of
the Company" and Combined Financial Statements and notes thereto. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and all references in
this Prospectus to the "Company" mean Holt's Cigar Holdings, Inc. and its
subsidiaries. All references to a "Fiscal" year refer to the fiscal year ended
March 31 of such year.
THE COMPANY
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the three months ended June 30, 1997, the Company had net sales of $17.3
million and $6.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 92.0%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The cigar market is divided into three principal categories: premium
cigars, mass market cigars and little cigars. The Company's primary product is
premium cigars, which are generally imported, hand-made or hand-rolled cigars
made with long filler, 100% natural tobacco leaf and which generally sell at
retail prices above $1.00 per cigar. According to the Cigar Association of
America, sales of all categories of cigars totalled 4.6 billion units, or $1.6
billion, in 1996, and grew from 1993 to 1996 at a compound annual growth rate
("CAGR") of 10.3% on a unit basis and 30.2% on a dollar basis. Unit sales of
premium cigars, which had remained essentially flat between 1981 and 1993,
increased at a CAGR of 36.9%, on a unit basis, from 1993 to 1996. The Cigar
Association of America reports that premium cigar imports for the six month
period ended June 30, 1997 have increased approximately 95.0% compared to cigar
imports for the same period in 1996. The Company believes that the increase in
demand for premium cigars is a result of several factors, including: (i)
increased visibility of cigar smoking; (ii) increased interest in luxury goods;
(iii) the expansion of the cigar smoking customer base; and (iv) an increase in
the number of venues that cater to cigar smoking customers. Due to the increased
demand for premium cigars, the industry continues to experience shortages in
supply and increasing prices.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar Ltd. ("Fuente Cigar"), a Dominican Republic
based manufacturer of premium cigars. Cigars made by Fuente Cigar enjoy a
worldwide reputation for the finest tobaccos, expert blends, consistency and
quality of construction. The Company believes that its relationship with Fuente
Cigar will enable the Company to continue to grow its Ashton brand as well as to
introduce new brands to be manufactured for the Company by Fuente Cigar. Two of
the executive officers of Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., are directors of the Company and a related Fuente family
partnership will own approximately 24.4% of the shares of Common Stock
outstanding upon completion of the Offering.
3
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed by Fuente Cigar and the Company. In Fiscal 1996, Fiscal 1997 and the
three months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar.
The Company's principal objective is to enhance its position as a leading
distributor and retailer of premium cigars. The principal elements of the
Company's business strategy include: (i) strengthening the Ashton brand
primarily by increasing the volume of Ashton cigars supplied to the Company;
(ii) a continued focus on providing a broad range of premium cigar offerings
from a variety of leading manufacturers; (iii) building upon its relationship
with Fuente Cigar; (iv) using multiple distribution channels to reach a broader
customer base; and (v) a commitment to customer service and satisfaction.
The Company's growth strategy is designed to capitalize on its competitive
strengths and the significant growth trends in the premium cigar market by: (i)
introducing new premium cigar brands owned or exclusively distributed by the
Company; (ii) increasing the wholesale distribution of the Company's Ashton
brand premium cigars; (iii) expanding distribution of the Company's catalog and
the size of the Company's proprietary mailing list; and (iv) opening or
acquiring a limited number of retail stores in select markets.
The Company was incorporated on June 18, 1993 under the laws of the State
of Delaware. The Company's executive offices are located at 12270 Townsend Road,
Philadelphia, Pennsylvania 19154, and its telephone number is (215) 676-8778.
The Company's web site can be accessed at http://www.holts.com.
4
THE OFFERING
[Enlarge/Download Table]
Common Stock Offered by the Company......................... 1,750,000 shares
Common Stock to be Outstanding after the Offering(1)(2)..... 5,770,000 shares
Use of Proceeds............................................. To (i) effect the distribution of
previously taxed but
undistributed earnings from
Ashton Distributors, Inc. to its
former shareholder; (ii)
establish new retail stores;
(iii) expand inventories of
premium cigars; (iv) repay
outstanding indebtedness; (v)
expand the Company's mail order
business; (vi) introduce new
premium cigar brands; (vii)
upgrade the Company's management
information and accounting
systems; and (viii) use for
general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol...................... HOLT
------------------
(1) Excludes options to purchase an aggregate of 300,000 shares of Common Stock
authorized under the 1997 Employee Stock Option Plan (the "Employee Stock
Plan"), of which options to purchase 169,500 shares of Common Stock have
been granted at the initial public offering price per share, and an
aggregate of 180,000 shares of Common Stock authorized under the
Non-Management Directors Stock Option Plan (the "Director Stock Plan"), of
which options to purchase 60,000 shares of Common Stock have been granted at
the initial public offering price per share. See "Management -- Stock
Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Plans."
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk.
Investors should consider the material risk factors involved in connection with
an investment in the Common Stock.
------------------------
Ashton(Registered) is a registered trademark of the Company.
Holt's(Trademark), Cortesia(Trademark) and Castano(Trademark) are trademarks
with respect to which the Company has applications for registration pending.
5
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- ---------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ ------
STATEMENT OF OPERATIONS DATA:
Net sales............................... $3,042 $3,738 $5,662 $9,467 $17,278 $3,450 $6,361
Cost of goods sold...................... 2,039 2,412 3,041 5,159 9,566 1,978 3,612
------ ------ ------ ------ ------- ------ ------
Gross profit............................ 1,003 1,326 2,621 4,308 7,712 1,472 2,749
Operating expenses...................... 950 1,440 1,949 3,484 4,895 1,034 1,393
------ ------ ------ ------ ------- ------ ------
Income (loss) from operations........... 53 (114) 672 824 2,817 438 1,356
Other income............................ -- -- -- 22 32 4 14
------ ------ ------ ------ ------- ------ ------
Income (loss) before income tax
expense............................... 53 (114) 672 846 2,849 442 1,370
Income tax expense(1)................... 18 1 209 318 577 89 317
------ ------ ------ ------ ------- ------ ------
Net income (loss)....................... $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 353 $1,053
------ ------ ------ ------ ------- ------ ------
------ ------ ------ ------ ------- ------ ------
Pro forma net income(2)................. $ 1,702 $ 263 $ 820
Pro forma net income per share.......... $ .41 $ .06 $ .20
Pro forma weighted average shares
outstanding(3)........................ 4,164 4,164 4,164
Supplemental pro forma data:
Net income(4)......................... $ 1,746 $ 274 $ 825
Net income per share.................. $ .42 $ .07 $ .20
Weighted average shares
outstanding(5)...................... 4,198 4,202 4,197
SELECTED OPERATING DATA:
Percentage of net sales of premium
cigars(6)............................. 72.9% 79.0% 88.1% 84.5% 86.3% 89.4% 92.0%
Percentage of net sales of accessories
and other tobacco products............ 27.1% 21.0% 11.9% 15.5% 13.7% 10.6% 8.0%
[Enlarge/Download Table]
JUNE 30, 1997
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------ ------ -------
BALANCE SHEET DATA:
Working capital........................................... $2,793 $ 93 $20,254
Total assets.............................................. 5,887 6,132 23,593
Total debt................................................ 447 447 --
Stockholders' equity...................................... 3,651 1,195 21,803
------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization increased to
include the effects of the incremental shares required to fund distributions
in excess of earnings over the previous year to the shareholder of Ashton
Distributors, Inc.
(Footnotes continued on next page)
6
(Footnotes continued from preceeding page)
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $11,000 and $4,400 for Fiscal 1997 and the three months ended
June 30, 1996 and 1997, respectively, which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
(6) Includes both wholesale and retail sales of premium cigars.
(7) Pro forma to give effect to an S Corporation distribution to the shareholder
of approximately $2.7 million and the related effects of the revised capital
structure and the application of purchase accounting to the acquisition of
minority interests represented by certain stock options.
(8) Pro forma as adjusted to reflect the sale by the Company of 1,750,000 shares
of Common Stock offered hereby at a price of $13.00 per share, the mid-point
of the filing range (after deducting underwriting discounts and estimated
offering expenses), and the application of the estimated net proceeds
therefrom. See "Reorganization of the Company" and "Use of Proceeds."
7
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding among
other things: (i) trends affecting the Company's financial condition or results
of operations; (ii) the Company's business and growth strategies; (iii) the
Company's relationship with Fuente Cigar and other manufacturers; (iv) the use
of the net proceeds to the Company of the Offering; (v) trends in the premium
cigar industry; (vi) government regulations; (vii) the Company's financing
plans; and (viii) the declaration and payment of dividends. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, and under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND FOR PREMIUM CIGARS. The Company
has experienced, and expects to continue to experience, a shortage in the supply
of certain premium cigars, including its proprietary Ashton brand. Although many
premium cigar manufacturers (including Fuente Cigar from whom the Company
purchased approximately 47.0% of its premium cigars on a dollar basis in Fiscal
1997) have taken measures to increase production, there can be no assurance that
the Company will have access to sufficient supplies of premium cigars. With the
exception of a supply agreement between the Company and Fuente Cigar, the
Company is not a party to long-term supply contracts with any manufacturers. The
Company relies and intends in the future to rely upon the strength of its
relationships with leading manufacturers to meet its supply requirements. There
can be no assurance that the Company will be able to continue to maintain these
relationships or that such relationships will be sufficient to enable the
Company to meet future demand for its proprietary cigars and other premium
branded cigars which the Company sells. Any material inability of the Company to
expand its current supply of premium cigars in a timely manner would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Suppliers."
Cigar manufacturers have experienced, and continue to experience, shortages
of properly aged and blended tobacco ready for manufacturing, and shortages in
skilled employees for blending and rolling premium cigars. In general, the aging
process for tobacco requires that tobacco be purchased several years in advance
of actual use in the manufacturing process. Tobacco shortages may prevent the
Company from purchasing sufficient cigars to meet demand, maintaining its growth
expectations or even maintaining its current level of sales. These factors are
all outside the control of the Company, may significantly impact the ability of
the Company to secure an adequate supply of premium cigars in a timely fashion
and could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON FUENTE CIGAR LTD. In Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar. Purchases from Fuente Cigar include all of the Company's Ashton
brand cigars, a significant percentage of the Company's proprietary Holt's brand
cigars, as well as proprietary Fuente Cigar brands. The Company has entered into
a Private Label Manufacturing Agreement with Fuente Cigar (the "PLMA") pursuant
to which Fuente Cigar has agreed to sell to the Company at least 5.0 million
premium cigars per year (the "Minimum Amount") and to use its best reasonable
efforts to sell additional cigars ordered by the Company. However, there can be
no assurance that such minimum supply of cigars or any additional cigars will be
provided to the Company. The PLMA permits noncompliance with the Minimum Amount
for various reasons
8
including, but not limited to, a shortage of labor or the inability to secure
materials or supplies at reasonable prices. Under the PLMA, Fuente Cigar selects
the brands and sizes of the various premium cigars that may be delivered to the
Company to satisfy the Minimum Amount, which brands may include Ashton, Holt's
or cigars sold under any Fuente Cigar owned brand names. There can be no
assurance that the various sizes and brands sold by Fuente Cigar to the Company
will coincide with the preferences of the Company's customers. The Company has
also entered into an exclusive distributorship agreement with Fuente Cigar
pursuant to which the Company will be the exclusive wholesale distributor of up
to three new premium cigar brands to be developed with and manufactured by
Fuente Cigar. These agreements specifically prohibit any actions for specific
performance and damages in the event of a breach of such agreements by Fuente
Cigar. It is unlikely that the Company could replace Fuente Cigar with a
substitute supplier in a timely fashion, and any failure of Fuente Cigar to
supply premium cigars to the Company in appropriate numbers and in a timely
manner or to develop new premium cigar brands to be distributed by the Company
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Suppliers."
DEPENDENCE ON ASHTON BRAND. In Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, wholesale sales of Ashton brand premium cigars and
accessories represented, on a dollar basis, approximately, 38.9%, 37.6% and
39.6%, respectively, of net sales. The Company estimates that an additional
3.5%, 7.3%, and 6.9% of net sales for Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, respectively, consisted of sales of Ashton brand
premium cigars and accessories through the Company's retail operations. The
success of the Company's business is therefore dependent, in significant part,
on the sale of Ashton brand premium cigars and accessories. A decline in the
demand for Ashton brand premium cigars and accessories for any reason would have
a material adverse effect on the Company's business, results of operations and
financial condition.
POTENTIAL CONFLICTS OF INTEREST. Fuente Cigar is controlled by Carlos A.
Fuente, Sr. and his son, Carlos P. Fuente, Jr., each of whom is a director of
the Company. The Fuente Investment Partnership, a partnership whose interests
are beneficially owned by Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. and
Cynthia Fuente Suarez, will own approximately 24.4% of the shares of Common
Stock outstanding after the Offering. These relationships may present potential
conflicts of interest to Messrs. Fuente in their capacity as members of the
Board of Directors. The Company has established a policy that it will not enter
into or amend any agreement between the Company and any entity which is related
to Fuente Cigar, Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. or Cynthia Fuente
Suarez on terms that are less favorable than those which could be otherwise
obtained from unaffiliated third parties. A majority of the disinterested
members of the Board of Directors will be required to approve any amended or new
agreements with Fuente Cigar and its related entities. Additionally, Fuente
Cigar and its affiliates are currently competitors of the Company and may
compete further with the Company in the future as Fuente Cigar: (i) makes
proprietary cigars for other distributors, including distributors in which
affiliates of Fuente Cigar own a controlling interest; and (ii) makes
proprietary cigars under its own name which compete directly with Ashton brand
premium cigars. See "Business -- Suppliers" and "Certain Transactions --
Relationship with Fuente Cigar and Related Parties."
LIMITED EXPERIENCE IN INTRODUCING NEW CIGAR BRANDS. One element of the
Company's growth strategy is to introduce and market new premium cigar brands.
To date, the Company has successfully introduced and marketed one proprietary
brand, the Ashton brand premium cigar, originally launched in 1986. The Company
expects to expand distribution in 1998 of the recently introduced Castano brand
and to exclusively distribute up to three new brands over the three year period
commencing in 1998. These brands are to be developed by Fuente Cigar and the
Company and to be manufactured by Fuente Cigar. Failure of the Company to
successfully introduce and market these new brands would have a material adverse
effect on the Company's business, results of operations and financial condition.
LIMITED EXPERIENCE IN OPENING SPECIALTY CIGAR STORES. The Company intends
to open or acquire additional retail cigar stores. To date, the Company has
opened and operated only one retail store. Although the Company's Philadelphia
store is profitable, no assurance can be given that such
9
profitability can be sustained in the future or that any additional Company
stores will achieve sales and profitability comparable to the Company's
Philadelphia store. The profitable operation of new retail stores is dependent
on a number of factors, including identifying appropriate geographic markets,
evaluating the suitability of specific locations within such markets, hiring,
training and assimilating management and store level employees, negotiating
acceptable lease terms and constructing and opening new stores in a timely and
cost effective manner. There can be no assurance that the Company will be able
to successfully identify, open and operate additional retail stores.
DECLINING MARKET FOR CIGARS THROUGH 1993. According to industry sources,
the cigar industry experienced declining unit sales between 1964 and 1993. While
the cigar industry has experienced increasing annual unit sales since 1993,
there can be no assurance that recent positive trends will continue on a
long-term basis or that new customers will remain cigar smokers in the future.
See "Business -- Market Overview." In addition, the market for premium cigars,
and consequently the Company's net sales and results of operations, will be
subject to fluctuations based upon general economic conditions in the United
States. If there were to be a general economic downturn or recession in the
United States, the Company expects that the market for luxury related items such
as premium cigars would decrease. In the event of such an economic downturn or
recession, there can be no assurance that the Company's business, results of
operations and financial condition would not be materially adversely affected.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company has
experienced rapid growth over the last several years and its future operating
results will depend, in part, upon its ability to service a larger customer base
and to manage its overall expansion effectively. The Company's growth will
increase the responsibilities for both existing and new management personnel,
and will place significant demands on the Company's management, working capital
and systems. The Company will be required to expand and improve its operational
and financial systems and to expand the number of employees at all levels,
including senior management. There can be no assurance that the Company's
management information systems, accounting systems, purchasing systems,
inventory control systems, retail sales systems and internal controls will be
adequate or that the Company will be able to upgrade its systems and controls to
respond to such growth. The inability to successfully upgrade its controls and
systems could have a material adverse effect on the successful operation of the
Company's business, implementation of its growth strategy and future operating
results. If the Company is unable to manage this growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL
TRADE. The cigars sold by the Company are manufactured outside the United
States, principally in the Dominican Republic, Honduras, Nicaragua, Jamaica and
Mexico. As a result, the Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade including changes in the law and policies that govern
foreign investment and international trade in such countries, as well as, to a
lesser extent, changes in United States laws and regulations relating to foreign
investment and trade. Any such social, political or economic changes could pose,
among other things, the risk of supply interruption or significant increases in
the prices of tobacco products. Any such changes in social, political or
economic conditions may have a material adverse effect on the Company's
business, results of operations or financial conditions.
DEPENDENCE ON SHIPPERS. The Company primarily uses United Parcel Service
to ship its products. Although the recent strike by United Parcel Service
employees did not have a material adverse effect on the Company, there can be no
assurance that any future strike or work stoppage by United Parcel Service or
other major shipping carriers then being used by the Company will not have a
material adverse effect on the Company's business, results of operations and
financial condition or that alternate shipping carriers will be immediately
available and willing to deliver the Company's shipments in a timely fashion.
RELIANCE ON KEY PERSONNEL. The Company's operations will continue to
depend upon the efforts of senior personnel of the Company, including Robert G.
Levin, the Chairman of the Board,
10
Chief Executive Officer and President of the Company and a well known figure in
the cigar industry. In significant part, the Company's relationships with its
manufacturers, suppliers and customers is based upon long-term personal
relationships with Mr. Levin. The loss of the services of Mr. Levin or other
senior personnel would have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company intends to
purchase and maintain key-man life insurance on Mr. Levin, the proceeds of such
insurance are not expected to be sufficient to compensate the Company for the
loss of his services. The Company's future performance will also depend to a
significant extent on its ability to identify, attract, train and retain highly
skilled sales, marketing and management personnel. There can be no assurance
that the Company will be successful in identifying, attracting or retaining such
personnel, and the failure to identify, attract and retain such personnel could
have a material adverse effect on the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly
operating results have fluctuated in the past and may fluctuate in the future as
a result of a variety of factors, including the timing of catalog mailings and
specialty direct mail pieces, the timing of the opening of new retail stores,
the timing of introduction of new brands and the price and availability of
premium cigars. Therefore, the results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent
quarter or any full year. Fluctuations caused by variations in quarterly
operating results may subsequently affect the market price of the Common Stock.
In addition, the Company expects its business to continue to exhibit some
seasonality, with increases in premium cigar and related accessory sales during
the holiday season, although the effect of this may be somewhat less evident due
to the growth in the Company's net sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS. The tobacco
industry is subject to regulation in the United States at the federal, state and
local levels, and the recent trend is toward increasing regulation. A variety of
bills relating to tobacco issues have been recently introduced in the United
States Congress, including bills that, if passed, would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the United States Federal Trade Commission (the "FTC") to the United States
Food and Drug Administration (the "FDA") and require the tobacco industry to
fund the FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the
access to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with tobacco
related diseases. Although hearings have been held on certain of these
proposals, to date none of such proposals have been passed by Congress. Future
enactment of such proposals or similar bills may have a material adverse effect
on the Company's business, results of operations and financial condition.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine.
Although certain legal challenges to the FDA's determination are pending, there
can be no assurance that such determination will not be upheld, nor that in the
future, the FDA will not prevail in an attempt to extend such jurisdiction to
cigars. In addition, a majority of states restrict or prohibit smoking in
certain public places and restrict sale of tobacco products (including cigars)
to minors. Local legislative and regulatory bodies have increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. Individual establishments such as bars and
restaurants have further prohibited pipe and cigar smoking even though other
tobacco products are permitted in such establishments. Further restrictions of a
11
similar nature could have a material adverse effect on the business, results of
operations and financial condition of the Company. Numerous proposals have also
been considered at the state and local level restricting smoking in certain
public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, legislation recently introduced in
Massachusetts would, if enacted, require warning labels on cigar boxes and the
states of Minnesota and Texas have enacted legislation which would require cigar
manufacturers to provide information on the levels of certain substances in
their cigars to these states on an annual basis. There can be no assurance that
such legislation introduced in other states will not be passed in the future or
that other states will not enact similar or more restrictive legislation.
Consideration at both the federal and state level also has been given to
consequences of second hand smoke. There can be no assurance that regulations
relating to second hand smoke will not be adopted or that such regulations or
related litigation would not have a material adverse effect on the Company's
business, results of operations and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. The National Cancer
Institute has announced that it will issue a report in 1997 describing research
into cigars and health. There can be no assurance as to the ultimate content,
timing or effect of this report or any additional regulation of cigars by any
federal, state, local or regulatory body, and there can be no assurance that any
such legislation or regulation would not have a material adverse effect on the
Company's business, results of operations and financial condition.
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation. Private plaintiffs in such
litigation are seeking compensatory and, in some cases, punitive damages, for
various injuries claimed to result from the use of tobacco products or exposure
to tobacco smoke, and some of these actions have named cigarette distributors as
well as manufacturers as defendants. Over 40 states have filed lawsuits against
the major United States cigarette manufacturers to recover billions of dollars
in damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorneys General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things, the
tobacco companies would pay hundreds of billions of dollars to the various
states; the FDA could regulate nicotine as a "drug" and tobacco products as
"drug delivery devices;" all outdoor advertising, sports event advertising and
advertising on non-tobacco products would be banned and certain class action
lawsuits and punitive damage claims against tobacco companies would be
prohibited. President Clinton recently announced that he would not support the
Proposed Settlement unless significant changes were incorporated. Therefore, the
potential impact of the Proposed Settlement on the cigar industry in general and
the Company in particular is uncertain. There can be no assurance that similar
litigation will not be brought against cigar manufacturers and distributors. The
potential costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business, results of operations and
financial condition. The State of Florida has entered into a separate settlement
agreement with major United States cigarette manufacturers with respect to
tobacco products, including roll-your-own and little cigars. This settlement
agreement provides, in part, for a ban on billboard and transit advertising,
significant document disclosure by the settling cigarette companies, billions of
dollars in settlement payments and certain adjustments pending the resolution of
the Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed
12
Settlement is approved the Proposed Settlement will supercede the Mississippi
settlement. The recent increase in the sales of cigars and the publicity of such
increases may increase the probability of legal claims. See "-- Extensive and
Increasing Regulation of Tobacco Products" and "Business -- The Tobacco Industry
-- Litigation."
EFFECT OF INCREASES IN EXCISE TAXES. Cigars have long been subject to
federal, state and local excise taxes and such taxes frequently have been
increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. In the past, there have been proposals by the
federal government to reform healthcare through a national program to be funded
principally through increases in federal excise taxes on tobacco products.
Enactment of new or significant increases in existing federal, state or local
excise taxes on cigars could result in decreased unit sales of premium cigars
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION. The markets for the Company's products are highly competitive
and subject to rapid consumer change and frequent new product introductions and
extensions. The Company's wholesale distribution business faces competition from
larger, well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new entrants to the marketplace. The Company's retail
operations compete with a large number of other mail order companies, some of
which are larger and better financed than the Company. The Company also faces
significant competition from a large number of existing, and an increasing
number of new, retail stores and smoking establishments selling the same branded
products as the Company. Existing or future competitors may develop or offer the
same or similar premium cigars which may result in decreases in the Company's
sales of premium cigars. Many of these competitors have longer operating
histories and significantly greater financial, managerial, creative, sales and
marketing and other resources than the Company. The Company's ability to retain
its existing customers and attract new customers depends on the quality of its
premium cigars, the availability of product, its reputation in the industry and
its ability to maintain customer satisfaction.
RISKS RELATING TO TRADEMARKS. The Company's success is dependent, in part,
on the brand name Ashton, and in the future, will be dependent on new brand name
trademarks to be developed by the Company (including the Castano brand name), or
which are used in connection with premium cigars which the Company expects to
exclusively distribute in the United States. The Company relies primarily on
trademarks to protect the Ashton, Holt's, Cortesia and Castano names. The
illegal use of the Company's trademarks, or trademarks associated with brands
the Company exclusively distributes, as well as the cost of prosecuting or
defending claims for infringement or invalidity, or claims for indemnification
resulting from infringement claims, with or without merit, could be
time-consuming, result in costly litigation and divert management's attention
and resources.
CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Offering, Robert
G. Levin will own approximately 45.3% of the outstanding shares of Common Stock
(40.7% if the Underwriters' over-allotment is exercised in full) and the Fuente
Investment Partnership will own approximately 24.4% of the outstanding shares of
the Common Stock. Mr. Levin and such partnership are parties to a shareholder
agreement pursuant to which they have agreed to vote for each other's respective
nominees to the Board of Directors. Accordingly, the parties to such shareholder
agreement will be able to control the Company, elect all the directors and
generally direct the affairs of the Company. In addition, each of the parties to
the shareholder agreement has a right of first refusal to purchase the others'
shares, and each of the parties to such shareholder agreement have granted the
other a right to participate on a proportionate basis in any sale of Common
Stock by either party. See "Management" and "Principal and Selling
Shareholders."
PROVISIONS WITH ANTI-TAKEOVER EFFECT. Certain provisions of the Company's
Certificate of Incorporation and By-Laws, as well as the Delaware General
Corporation Law could delay or frustrate the removal of incumbent directors and
could make difficult a merger, tender offer or proxy contest involving the
Company, even if such events could be viewed as beneficial by the Company's
13
shareholders. The Board of Directors of the Company is empowered to issue
preferred stock in one or more series without shareholder action. Any issuance
of this "blank-check" preferred stock could materially limit the rights of
holders of the Common Stock and render more difficult or discourage an attempt
to obtain control of the Company by means of a tender offer, merger, proxy
contest or otherwise. In addition, the Certificate of Incorporation and By-Laws
contain a number of provisions which could impede a takeover or change in
control of the Company, including, among other things, staggered terms for
members of the Board, the requiring of two-thirds vote of shareholders to amend
certain provisions of the Certificate of Incorporation or to take any action by
written consent, and a fair price requirement. Certain provisions of the
Delaware General Corporation Law to which the Company will be subject may also
discourage takeover attempts that have not been approved by the Board. See
"Description of Capital Stock -- Potential Anti-Takeover Effect of Certain
Provisions of the Certificate of Incorporation and By-Laws."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 5,770,000 shares of Common Stock outstanding, 1,750,000
(2,012,500 if the Underwriters' over-allotment option is exercised in full) of
which will be freely tradeable without restriction or requirement of future
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 4,020,000 shares of Common Stock are "restricted
securities" as that term is defined by Rule 144 promulgated under the Securities
Act. Of such shares, no shares will be eligible for sale in the public market
immediately following commencement of the Offering and 4,020,000 shares will
become eligible for sale 90 days following commencement of the Offering. The
Company, its officers and directors and all shareholders and certain option
holders, including the Selling Shareholder, owning upon completion of the
Offering, in the aggregate, 4,020,000 shares of Common Stock and options to
purchase 542,400 shares of Common Stock and the Company have executed agreements
pursuant to which they have agreed that they will not, for a period of 180 days
from the date of this Prospectus, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock of the Company or any securities
convertible into, or exercisable or exchangeable for, any Common Stock, or other
capital stock of the Company without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, except that such
agreement does not prevent the Company from granting additional options under
the Employee Stock Plan or the Director Stock Plan. Upon the expiration or
release from such lock-up agreements, 4,020,000 shares will be available for
immediate sale under Rule 144 and 542,400 additional shares subject to vested
stock options could also be sold, subject in some cases to certain volume
limitations. Prudential Securities Incorporated may, in its sole discretion, at
any time and without notice, release all or any portion of the securities
subject to such lock-up agreements. Sale of such shares in the future could
adversely affect the prevailing market price of the Common Stock. No prediction
can be made as to the effect, if any, that future sales of shares or the
availability of shares for sale will have on the market price for Common Stock
prevailing from time to time. Sale of substantial amounts of Common Stock in the
public market, or the perception of the availability of shares for sale, could
adversely affect the prevailing market price of the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. Beginning nine months after the Offering, the holders of options to
purchase an aggregate of 482,400 shares of Common Stock which are "restricted
securities" (the "Registerable Securities") will be entitled to certain rights
with respect to registration of such shares. If exercised, such registration
rights could result in the Registerable Securities being sold earlier than
otherwise allowable under Rule 144, and could adversely affect the prevailing
market price of the Common Stock. See "Description of Capital Stock --
Registration Rights" and "Shares Eligible for Future Sale."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to
utilize approximately $11.1 million, representing approximately 53.6% of the
estimated net proceeds of the Offering, for general corporate purposes,
including working capital. Accordingly, the Company will have broad discretion
as to the application of such proceeds. An investor will not have the
opportunity to evaluate
14
the economic, financial and other relevant information utilized by the Company
in determining the application of such proceeds. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in the Offering will experience an immediate and substantial dilution in the net
tangible book value of each share of Common Stock of $9.29 per share based upon
an initial public offering price of $13.00, the mid-point of the filing range.
See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or
be sustained upon completion of the Offering. The initial public offering price
will be determined by negotiations between the Company and the representatives
of the Underwriters based upon a number of factors, including market valuations
of other companies engaged in activities similar to those of the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The initial public offering price may not be indicative
of the market price of the Common Stock following completion of the Offering.
The trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or the opening or acquisition of retail stores by
the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, changes in government
legislation or litigation affecting tobacco products, general trends in the
industry, overall market conditions or other factors. In addition, the stock
markets historically have experienced extreme price and volume fluctuations
which may affect the market price of the Common Stock in a manner unrelated or
disproportionate to the operating performance of the Company. These market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."
15
REORGANIZATION OF THE COMPANY
THE REORGANIZATION
Prior to the Reorganization, the business of the Company was conducted
through separate, but related, companies: (i) Holt's Cigar Company, Inc., a
Pennsylvania corporation engaged in the operation of the mail order catalog
business and the Philadelphia retail store ("Holt's"); (ii) Ashton Distributors,
Inc., a Pennsylvania corporation engaged in the wholesale distribution of Ashton
premium cigars and Ashton cigar-related accessories ("Distributors"); and (iii)
the Company, Holt's Cigar Holdings, Inc. (formerly known as Ashton Holdings,
Inc.), a Delaware corporation which owned the Ashton trademarks and licensed
their use to Distributors. All of the issued and outstanding shares of the
common stock of Holt's and Distributors were owned by Robert G. Levin and the
issued and outstanding shares of the common stock of Holdings were owned 60.0%
by Mr. Levin and 40.0% by the Fuente Investment Partnership. In addition, there
were outstanding options (held by persons other than Mr. Levin) to purchase
shares of the Common Stock (the "Options").
The Company, Holt's and Distributors and their respective shareholders
agreed to a plan of reorganization (the "Reorganization"), whereby, in a series
of transactions prior to the closing of the Offering: (i) the Company will amend
its Certificate of Incorporation to change its authorized common stock from
15,000 shares of Class A common stock and 5,000 shares of Class B common stock
to 25,000,000 shares of Common Stock; (ii) the Company will effect a
307.74-for-one stock split; (iii) the Company will issue an aggregate of
3,517,197 shares of Common Stock in exchange for the shares of Class A and Class
B common stock then outstanding; (iv) Holt's and Distributors will become wholly
owned subsidiaries of the Company, and the Company will issue 502,803 shares of
Common Stock to Robert G. Levin in exchange for all the outstanding common stock
of Holt's and Distributors; and (v) holders of options to purchase an aggregate
of 12% of the Company will exchange such options for options to purchase 482,400
shares of Common Stock. Immediately following the Reorganization, it is the
Company's intention to form a new Delaware subsidiary and to assign and transfer
to it all of the Company's rights in and to the Ashton, Holt's, Cortesia and
Castano trademarks and other intellectual property rights currently owned by
Holt's.
As a result of the Reorganization: (i) the Company will have issued and
outstanding 4,020,000 shares of Common Stock, of which 2,613,015 shares will be
owned by Robert G. Levin and 1,406,985 shares will be owned by the Fuente
Investment Partnership; and (ii) the Company will have issued, options to
purchase an aggregate of 482,400 shares of Common Stock at a price of $.50 per
share. At the time these options were granted, Mr. Levin and the principals of
the Fuente Investment Partnership agreed that these options would not dilute the
ownership interest of the Fuente Investment Partnership. Accordingly, Mr. Levin
has agreed that upon exercise of any such options, he will contribute to the
capital of the Company one share of Common Stock for each share purchased
pursuant to these options.
TERMINATION OF S CORPORATION STATUS
Prior to the Reorganization, Distributors operated as an S Corporation for
federal income tax purposes under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and for state corporate income tax purposes under
comparable state laws. As a result of its status as an S Corporation, the
taxable income of Distributors has been taxed for federal and state income tax
purposes directly to Robert G. Levin, Distributors' sole shareholder, rather
than to Distributors. Following the Reorganization, Distributors will no longer
qualify as an S Corporation and it will be fully subject to federal and state
income taxes as a C Corporation under the Code.
Prior to the Offering, Distributors will declare a dividend to Robert G.
Levin in an amount equal to Distributors' accumulated undistributed taxable
income as of the Offering date (estimated to be $2.7 million), which amount will
be paid from the net proceeds of the Offering.
16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company hereby (after deducting underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $20.6 million, assuming an initial public offering price of $13.00
per share, the mid-point of the filing range.
The Company intends to use approximately: (i) $2.7 million to effect the
distribution of previously taxed but undistributed earnings from Ashton
Distributors, Inc. to its former shareholder (see "Reorganization -- Termination
of S Corporation Status"); (ii) $2.6 million to establish two new retail stores
in select urban centers; (iii) $2.0 million to increase inventories of premium
cigars; (iv) $650,000 to repay outstanding indebtedness of the Company; (v)
$600,000 to expand its mail order business; (vi) $500,000 for the introduction
of new premium cigar brands; and (vii) $500,000 to upgrade the Company's
management information and accounting systems. The outstanding indebtedness to
be repaid with the net proceeds of the Offering includes three different loans
with approximately $450,000, $146,000 and $54,000 outstanding, respectively,
bearing interest at 8.75%, 8.50% and 9.0%, respectively, and maturing at
December 2008, June 2020 and April 1998, respectively. The $450,000 loan,
described above, was incurred to finance the construction of tenant improvements
for the Company's new office, warehouse and distribution facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The remainder of the net proceeds of the Offering, approximately $11.1
million, will be used for general corporate purposes, including working capital
to support the growth of the Company business. In lieu of establishing new
retail stores, as described in (i) above, the Company may elect to acquire
existing retail locations and, to the extent such stores are acquired rather
than established, the Company anticipates that the cost to acquire a store will
be substantially greater than the $1.3 million allocated to establish a store.
In addition, a portion of the net proceeds may also be used for acquisition of
proprietary cigar brands and existing distributors of premium cigars. The
Company currently has no agreements with respect to the acquisition of any
retail store, cigar brand or distributor.
Pending application of the net proceeds of the Company from the Offering,
the Company intends to invest in interest-bearing bank accounts, short-term,
investment grade securities or guaranteed obligations of the United States
government.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends except for S
Corporation distributions from Ashton Distributors, Inc. to its shareholder. The
Company intends to retain future earnings for use in its business and does not
anticipate paying or declaring any dividends on shares of its Common Stock in
the foreseeable future. The Board of Directors of the Company intends to review
this policy from time to time, after taking into account various factors such as
the Company's financial condition, results of operations, current and
anticipated cash needs and plans for expansion.
17
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the capitalization of the Company at June 30, 1997 (i) on a combined basis, (ii)
on a pro forma combined basis assuming consummation of the Reorganization and
recording the anticipated S Corporation distribution of approximately $2.7
million with respect to undistributed earnings of Ashton Distributors, Inc., and
(iii) on a pro forma as adjusted basis to give effect to the sale of 1,750,000
shares of Common Stock offered hereby (at an assumed initial public offering
price of $13.00 per share, the mid-point of the filing range) and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
[Enlarge/Download Table]
JUNE 30, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
Current portion of long-term debt........................ $ 122 $ 122 $ --
====== ====== =======
Stockholder distribution payable......................... -- 2,700 --
====== ====== =======
Long-term debt........................................... 325 325 --
------ ------ -------
Stockholders' equity:
Preferred stock (pro forma), no par value; 1,000,000
shares authorized; none issued...................... -- -- --
Common stock (pro forma), $.001 par value; 25,000,000
shares authorized; 4,020,000 shares issued and
outstanding and 5,770,000 shares issued and
outstanding pro forma as adjusted(1)(2)............. 91 4 6
Additional paid-in capital............................. 304 585 21,191
Retained earnings...................................... 3,306 606 606
Treasury stock......................................... (50) -- --
------ ------ -------
Total stockholders' equity.......................... 3,651 1,195 21,803
------ ------ -------
Total capitalization.......................... $3,976 $1,520 $21,803
====== ====== =======
------------------
(1) Excludes: (i) 169,500 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Employee Stock Plan; and (ii) 60,000 shares
of Common Stock issuable upon the exercise of options granted under the
Director Stock Plan. See "Management -- Stock Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Options."
18
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma book value of the Common Stock from
the initial public offering price. At June 30, 1997, the pro forma net tangible
book value of the Company was $822,000, or $0.20 per share of outstanding Common
Stock after giving effect to the Reorganization, including S Corporation
distributions of approximately $2.7 million. After giving effect to the Offering
(at an assumed initial public offering price of $13.00 per share, the mid-point
of the filing range), the pro forma net tangible book value of the Common Stock
would be $21.4 million, or $3.71 per share. This represents an immediate
increase in pro forma net tangible book value of $3.51 per share of Common Stock
to existing shareholders and an immediate and substantial dilution of $9.29 per
share of Common Stock to new investors purchasing shares of Common Stock in the
Offering. The following table illustrates the dilution per share:
[Download Table]
Assumed initial public offering price...................... $13.00
Pro forma net tangible book value before the Offering.... $0.20
Increase attributable to new investors................... 3.51
-----
Pro forma net tangible book value after the Offering....... 3.71
------
Dilution to new investors.................................. $ 9.29
======
The following table summarizes the number of shares of Common Stock sold by
the Company, the total consideration paid to the Company and the average price
per share paid by the existing shareholders and by the new investors purchasing
shares of Common Stock in the Offering:
[Download Table]
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
Existing shareholders..... 4,020,000 69.7% $ 589,061 2.5% $ 0.15
New investors............. 1,750,000 30.3 22,750,000 97.5 13.00
--------- ------ ----------- ------
Total................... 5,770,000 100.0% $23,339,061 100.0%
========= ====== =========== ======
The computations in the table set forth above exclude shares issuable
pursuant to the outstanding options granted January 1, 1996, the shares issuable
pursuant to the Employee Stock Plan and the Director Stock Plan.
19
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods and at the dates indicated,
summary combined financial data for the Company. The information presented below
under the captions "Statement of Operations Data" for Fiscal 1995, 1996 and 1997
and "Balance Sheet Data" as of March 31, 1996 and 1997 is derived from the
Company's audited financial statements. The Company's audited financial
statements as of March 31, 1996 and 1997 and for the three years ended March 31,
1997 are included elsewhere in this Prospectus. The selected financial data for
the Company presented below under the captions "Statement of Operations Data"
for Fiscal 1993 and 1994 and for the three months ended June 30, 1996 and 1997
and the "Balance Sheet Data" as of March 31, 1993, 1994 and 1995 and June 30,
1997 are derived from the Company's unaudited financial statements. In the
opinion of management, such unaudited financial information contains all
adjustments (which consist only of normal recurring adjustments) necessary to
present fairly the financial position and results of operations of the Company
as of such dates and for such periods. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Combined Financial Statements and
notes thereto included elsewhere in this Prospectus.
[Enlarge/Download Table]
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ --------
STATEMENT OF OPERATIONS DATA:
Net sales................................ $3,042 $3,738 $5,662 $9,467 $17,278 $3,450 $6,361
Cost of goods sold....................... 2,039 2,412 3,041 5,159 9,566 1,978 3,612
------ ------ ------ ------ ------- ------ ------
Gross profit............................. 1,003 1,326 2,621 4,308 7,712 1,472 2,749
Operating expenses....................... 950 1,440 1,949 3,484 4,895 1,034 1,393
------ ------ ------ ------ ------- ------ ------
Income (loss) from operations............ 53 (114) 672 824 2,817 438 1,356
Other income............................. -- -- -- 22 32 4 14
------ ------ ------ ------ ------- ------ ------
Income (loss) before income tax
expense................................ 53 (114) 672 846 2,849 442 1,370
Income tax expense(1).................... 18 1 209 318 577 89 317
------ ------ ------ ------ ------- ------ ------
Net income (loss)........................ $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 353 $1,053
====== ====== ====== ====== ======= ====== ======
PRO FORMA AND SUPPLEMENTAL PRO FORMA INCOME DATA:
Income before income tax expense......... $ 2,849 $ 442 $1,370
Pro forma income tax provision(2)...... 1,135 176 547
Pro forma amortization of
goodwill(2).......................... 12 3 3
------- ------ ------
Pro forma net income(2).................. $ 1,702 $ 263 $ 820
======= ====== ======
Pro forma net income per share........... $ .41 $ .06 $ .20
======= ====== ======
Pro forma weighted average shares
outstanding(3)......................... 4,164 4,164 4,164
Supplemental pro forma net income(4)..... $ 1,746 $ 274 $ 825
======= ====== ======
Supplemental pro forma net income per
share.................................. $ .42 $ .07 $ .20
======= ====== ======
Supplemental pro forma weighted
average shares outstanding(5).......... 4,198 4,202 4,197
MARCH 31,
------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------- --------
BALANCE SHEET DATA:
Working capital.......................... $ 431 $ 346 $ 721 $1,035 $ 2,211 $2,793
Total assets............................. 938 1,425 2,260 3,686 5,406 5,887
Total debt............................... 31 88 72 497 312 447
Stockholders' equity..................... 453 643 1,162 1,653 3,025 3,651
(footnotes on following page)
20
------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception, and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization increased to
include the effects of the incremental shares required to fund distributions
in excess of earnings over the previous year to the shareholder of Ashton
Distributors, Inc.
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $11,000 and $4,400 for Fiscal 1997 and the three months ended
June 30, 1996 and 1997, respectively, which would have resulted assuming the
application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to a "Fiscal" year refer to the fiscal year ended March 31 of
such year.
OVERVIEW
The Company is a leading distributor and retailer of brand name premium
cigars, cigar-related accessories and other tobacco products. The Company's
primary focus is the premium cigar market. The following table sets forth the
net sales of the Company's products, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
[Enlarge/Download Table]
YEAR ENDED MARCH 31,
---------------------------------------------------------------
1995 1996 1997
------------------- ------------------- -------------------
Premium Cigars.............. $4,988 88.1% $7,996 84.5% $14,915 86.3%
Accessories and Other....... 674 11.9 1,471 15.5 2,363 13.7
------ ----- ------ ----- ------- -----
Total....................... $5,662 100.0% $9,467 100.0% $17,278 100.0%
====== ===== ====== ===== ======= =====
THREE MONTHS ENDED JUNE 30,
-----------------------------------------
1996 1997
------------------- -------------------
Premium Cigars.............. $3,084 89.4% $5,850 92.0%
Accessories and Other....... 366 10.6 511 8.0
------ ----- ------ -----
Total....................... $3,450 100.0% $6,361 100.0%
====== ===== ====== =====
The Company's results of operations have been significantly affected by
current industry trends in the premium cigar market. Since 1993, the cigar
industry has experienced increasing consumption and retail sales across all
major categories, especially in the premium cigar segment. On a unit basis,
premium cigar sales grew at a CAGR of approximately 36.9% from 1993 to 1996,
while retail dollar sales have increased more rapidly due to price increases.
From Fiscal 1994 to Fiscal 1997, the Company's net sales increased at a CAGR of
66.6% and its sales of premium cigars increased at a CAGR of 71.6% over the same
period.
The Company's products are marketed on a wholesale basis to premium cigar
retailers nationwide, and on a retail basis through the Company's mail order
catalog and Philadelphia retail store. The following table sets forth the
Company's wholesale and retail sales, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
[Enlarge/Download Table]
YEAR ENDED MARCH 31, THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------- -----------------------------------------
1995 1996 1997 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
Wholesale............ $2,296 40.6% $3,687 38.9% $ 6,502 37.6% $1,174 34.0% $2,521 39.6%
Retail-Mail Order.... 1,674 29.5 3,178 33.6 6,633 38.4 1,301 37.7 2,510 39.5
Retail-Store......... 1,692 29.9 2,602 27.5 4,143 24.0 975 28.3 1,330 20.9
------ ----- ------ ----- ------- ----- ------ ----- ------ -----
Total................ $5,662 100.0% $9,467 100.0% $17,278 100.0% $3,450 100.0% $6,361 100.0%
====== ===== ====== ===== ======= ===== ====== ===== ====== =====
The Company was incorporated in 1983, and its predecessors have been in
continuous operation since 1898. Immediately prior to the Offering, the Company
will undergo a Reorganization whereby, among other things, the Company will
acquire all of the issued and outstanding stock of Ashton Distributors, Inc. and
Holt's Cigar Company, Inc. from their sole shareholder, Robert G. Levin, in
exchange for shares of Common Stock and Ashton Distributors, Inc. will thereupon
be subject to taxation as a C Corporation. The Reorganization is intended to
qualify as a tax-free exchange under the Code. See "Reorganization of the
Company."
22
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:
[Enlarge/Download Table]
THREE MONTHS
YEAR ENDED MARCH 31, ENDED JUNE 30,
---------------------------- ----------------------
1995 1996 1997 1996 1997
----- ----- ------ -------- --------
(UNAUDITED)
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of goods sold....................... 53.7 54.5 55.4 57.3 56.8
----- ----- ------ ----- -----
Gross profit.............................. 46.3 45.5 44.6 42.7 43.2
Operating expenses........................ 34.4 36.8 28.3 30.0 21.9
----- ----- ------ ----- -----
Income from operations.................... 11.9 8.7 16.3 12.7 21.3
Other income.............................. 0.0 0.2 0.2 0.1 0.2
----- ----- ------ ----- -----
Income before income tax
expense................................. 11.9% 8.9% 16.5% 12.8% 21.5%
===== ===== ====== ===== =====
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales increased approximately $2.9 million, or 84.4%, from
$3.5 million in the three months ended June 30, 1996 to $6.4 million in the
three months ended June 30, 1997. Net sales increased primarily as a result of
the increase in net sales of premium cigars from $3.1 million for the three
months ended June 30, 1996 to $5.9 million for the comparable period in 1997. Of
such increase, $1.5 million was attributable to increased retail sales of
premium cigars and $1.3 million was attributable to increased wholesale sales of
premium cigars. These increases were the result of (i) increased availability of
premium cigars from the Company's suppliers, (ii) strong demand for premium
cigars, and (iii) increases in the average selling price per cigar of premium
cigars.
Gross Profit. Gross profit increased approximately $1.2 million, or 86.8%,
from $1.5 million in the three months ended June 30, 1996 to $2.7 million in the
three months ended June 30, 1997. Gross profit as a percent of net sales
increased from 42.7% in the three months ended June 30, 1996 to 43.2% in the
three months ended June 30, 1997. The increase in gross profit as a percent of
net sales was primarily due to the increase in the proportion of net sales
represented by premium cigars which generally carry a higher gross margin.
Operating Expenses. Operating expenses increased approximately $359,000,
or 34.7%, from $1.0 million in the three months ended June 30, 1996 to $1.4
million in the three months ended June 30, 1997. As a percentage of net sales,
operating expenses decreased from 30.0% in the three months ended June 30, 1996
to 21.9% in the three months ended June 30, 1997. This decrease was primarily
due to net sales increasing at a higher rate than the increase in operating
expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased approximately $7.8 million, or 82.5%, from
$9.5 million in Fiscal 1996 to $17.3 million in Fiscal 1997. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $8.0
million in Fiscal 1996 to $14.9 million in Fiscal 1997. Of such increase, $4.6
million was attributable to increased retail sales of premium cigars and $2.3
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of (i) increased availability of premium cigars from
the Company's suppliers, (ii) strong demand for premium cigars, and (iii)
increases in the average selling price per cigar of premium cigars. The
remaining increase in net sales of approximately $900,000 was attributable to
increased sales of accessories and other products.
Gross Profit. Gross profit increased approximately $3.4 million, or 79.0%,
from $4.3 million in Fiscal 1996 to $7.7 million in Fiscal 1997. Gross profit as
a percent of net sales decreased from 45.5% in Fiscal 1996 to 44.6% in Fiscal
1997. The decrease in gross profit as a percent of net sales was
23
primarily due to cigars on a retail basis being sold at a lower margin as a
result of costs from manufacturers increasing faster than market retail prices.
Operating Expenses. Operating expenses increased approximately $1.4
million, or 40.5%, from $3.5 million in Fiscal 1996 to $4.9 million in Fiscal
1997. This increase was primarily due to an increased number of employees which
increased payroll and related employee expenses, and an increase in professional
fees and sales commissions. As a percentage of net sales, operating expenses
decreased from 36.8% in Fiscal 1996 to 28.3% in Fiscal 1997. This decrease was
primarily due to net sales increasing at a higher rate than the increase in
expenses.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased approximately $3.8 million, or 67.2%, from
$5.7 million in Fiscal 1995 to $9.5 million in Fiscal 1996. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $5.0
million in Fiscal 1995 to $8.0 million in Fiscal 1996. Of such increase, $1.6
million was attributable to increased retail sales of premium cigars and $1.4
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of increased supply of premium cigars from the
Company's suppliers and strong demand for premium cigars. The remaining increase
in net sales of approximately $800,000 was attributable to increased sales of
accessories and other products.
Gross Profit. Gross profit increased approximately $1.7 million, or 64.4%,
from $2.6 million in Fiscal 1995 to $4.3 million in Fiscal 1996. Gross profit as
a percent of net sales decreased from 46.3% in Fiscal 1995 to 45.5% in Fiscal
1996. The decrease in gross profit as a percent of net sales was primarily due
to cigars on a retail basis being sold at a lower margin as a result of
increased costs from the manufacturers, partially offset by an increase in the
Company's wholesale prices.
Operating Expenses. Operating expenses increased approximately $1.6
million, or 78.8%, from $1.9 million in Fiscal 1995 to $3.5 million in Fiscal
1996. This increase was due to an increased number of employees which increased
payroll and related employee expenses, increased advertising expenditures and
other increased costs incurred as a result of the Company's growth. As a
percentage of net sales, operating expenses increased from 34.4% in Fiscal 1995
to 36.8% in Fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited operations data for each of
the Company's preceding nine quarters:
[Enlarge/Download Table]
QUARTER ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
Net sales................ $1,809 $2,450 $2,518 $2,689 $3,450 $4,160 $4,957 $4,710 $6,361
Gross profit............. 826 1,086 1,157 1,239 1,472 1,993 2,227 2,020 2,749
Income from operations... 79 297 275 174 438 786 1,043 551 1,356
The following table sets forth certain unaudited operations data as a
percentage of net sales for each of the Company's preceding nine quarters:
[Enlarge/Download Table]
QUARTER ENDED
--------------------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- --------- -------- -------- -------- --------- -------- -------- --------
Net sales................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............. 45.7 44.3 46.0 46.1 42.7 47.9 44.9 42.9 43.2
Income from operations... 4.4 12.1 10.9 6.5 12.7 18.9 21.0 11.7 21.3
24
The Company's quarterly operating results have fluctuated due to several
factors, including the timing of catalog mailings and specialty direct mail
pieces, the opening of the Company's retail store and the price and availability
of premium cigars. In addition, the Company expects its business to continue to
exhibit some seasonality, with increases in premium cigar and cigar-related
accessory sales during the holiday season, although the effect of this may be
somewhat less evident due to the growth in the Company's net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash generated from operations and bank debt. Net cash provided by operations
for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three months ended June 30,
1997 of $539,000, $669,000, $1,130,000 and $835,000, respectively, consisted
primarily of net income and depreciation and amortization offset by increases in
accounts receivable and inventory.
On January 29, 1997, the Company entered into a $400,000 line of credit
with Jefferson Bank with borrowings thereunder accruing interest at the bank's
prime rate. At June 30, 1997, the Company had no borrowings under the line of
credit. On May 5, 1995, the Company entered into a long-term note payable with
Jefferson Bank due in monthly payments including interest at 9.0%. At June 30,
1997, the outstanding balance on this note was $90,268. The note matures in
April 1998. On October 14, 1994, the Company entered into a long-term note
payable to Jefferson Bank due in monthly payments including interest at 8.5%. At
June 30, 1997, the outstanding balance on this note was $146,613. This note
matures in June 2020. On June 17, 1997, the Company entered into a construction
loan agreement with Jefferson Bank to construct tenant improvements for the
Company's new office, warehouse and distribution facility. The maximum available
under this agreement is $450,000. Interest on the loan is charged at 8.75% and
matures December 2008. At June 30, 1997, the outstanding balance on this note
was $170,000. The credit line and the notes payable are secured by accounts
receivable, inventory, a second mortgage on the retail store realty owned by a
shareholder and the personal guaranty of a shareholder. The long-term notes
payable and the construction loan will be repaid with the net proceeds of the
Offering.
The Company believes that the net proceeds of the Offering, together with
cash generated from its operating activities and available bank borrowings, will
be sufficient to fund its operations and expansion programs at least through the
end of Fiscal 1999.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
net sales or results of operations.
25
BUSINESS
GENERAL
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the three months ended June 30, 1997, the Company had net sales of $17.3
million and $6.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 92.0%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar, a Dominican Republic based manufacturer of
premium cigars. Cigars made by Fuente Cigar enjoy a worldwide reputation for the
finest tobaccos, expert blends, consistency and quality of construction. The
Company believes that its relationship with Fuente Cigar will enable the Company
to continue to grow its Ashton brand as well as to introduce new brands to be
manufactured for the Company by Fuente Cigar. Two of the executive officers of
Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr., are directors of
the Company and a related Fuente family partnership will own approximately 24.4%
of the shares of Common Stock outstanding upon completion of the Offering.
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed with and manufactured by Fuente Cigar. In Fiscal 1996, Fiscal 1997 and
the three months ended June 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 45.4%, respectively, of its premium cigars from
Fuente Cigar.
MARKET OVERVIEW
The cigar market is divided into three principal categories: premium
cigars, mass market cigars (large and small) and little cigars. Premium cigars
are generally imported, hand-made or hand-rolled cigars made with long filler,
100% natural tobacco leaf and which generally sell at retail prices above $1.00
per cigar. In order to make hand-made cigars, tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch" which is placed in a
mold. Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a
premium cigar.
After declining for almost thirty years from a peak in 1964, the cigar
market entered a significant growth period in 1993. According to the Cigar
Association of America, sales of all categories of cigars totaled 4.6 billion
units, or $1.6 billion, in 1996, and grew from 1993 to 1996 at a CAGR of 10.3%
on a unit basis and 30.2% on a dollar basis. Unit sales of premium cigars, which
had remained essentially flat between 1981 and 1993, increased at a CAGR of
36.9%, on a unit basis, from 1993 to 1996. The Cigar Association of America
reports that premium cigar imports for the six month period ended June 30, 1997
have increased approximately 95.0% compared to cigar imports for the same period
in 1996.
The Company believes that the increase in demand for premium cigars is the
result of several factors, including: (i) the improved image of cigar smoking
resulting from increased publicity, including the success of Cigar Aficionado
magazine and the increased visibility of cigar smoking by celebrities; (ii) the
emergence of an expanded base of younger, highly educated, affluent adults aged
25 to 35 and the growing interest of this group in luxury goods, including
premium cigars; (iii) the
26
increase in the number of adults over age 40 (a demographic group believed to
smoke more cigars than any other demographic group); and (iv) the proliferation
of establishments where cigar smoking is encouraged, as well as "cigar smoker"
dinners and other special events for cigar smokers.
Cigar manufacturers have experienced a shortage of raw materials
(principally properly aged tobacco) due to increased demand for premium cigars
and the length of time necessary to cultivate, grow, harvest, age and process
the tobacco used in the manufacture of premium cigars. In addition,
manufacturers of premium cigars have reported shortages of skilled labor
necessary for processing, blending and manufacturing premium cigars, although
these manufacturers currently report that labor shortages have been easing. As a
result, wholesalers and retailers of premium cigars have experienced and
continue to experience shortages in supply and increasing prices with respect to
premium cigars.
BUSINESS STRATEGY
The Company's principal business objective is to enhance its position as a
leading distributor and retailer of a broad range of premium cigars and
cigar-related accessories. The principal elements of this business strategy
include:
Strengthening the Ashton Brand. The Company believes its proprietary
Ashton brand premium cigars are nationally recognized among the top brands due
to their flavor, consistency and quality of construction. Cigar Aficionado
magazine has consistently rated Ashton cigars as "very good to excellent" in
each category evaluated by the publication. To continue to build the Ashton
brand, the Company plans to: (i) secure an increasing volume of Ashton cigars
supplied by Fuente Cigar; (ii) expand the Ashton product line to include
additional sizes and shapes; (iii) broaden awareness of the Ashton brand name
through targeted advertising in select national and regional publications; and
(iv) increase the sales of cigar-related accessories featuring the Ashton brand
name.
Concentration on Premium Cigars. The Company is focused on the premium,
hand-made cigar market. Within this segment, the Company offers a diverse range
of sizes, shapes, tastes, blends and prices designed to appeal to the
preferences of premium cigar consumers. Products sold by the Company include
over 170 brands manufactured by companies such as Fuente Cigar, General Cigar
Company, Consolidated Cigar Holdings Corporation, Lane Limited and Villazon &
Co., Inc. (acquired by General Cigar Company in January 1997). The Company
believes that its broad offering of premium cigars is essential to maintain the
appeal of its catalog and retail store as single sources for a broad range of
premium cigar products. This concentration on premium cigars has positioned the
Company to benefit from the highest growth segment of the cigar industry.
Building on Relationship with Fuente Cigar. To secure a source of
high-quality premium cigars at a time when demand exceeds supply, the Company
entered into an amended agreement with Fuente Cigar pursuant to which Fuente
Cigar agreed to sell at least 5.0 million premium cigars per year to the Company
and to use its best reasonable efforts to sell to the Company premium cigars in
excess of the 5.0 million annual minimum. Fuente Cigar is a leading manufacturer
of premium cigars made in the Dominican Republic, and cigars made by Fuente
Cigar enjoy a worldwide reputation for use of the finest tobaccos, expert
blends, consistency and quality of construction. Fuente Cigar has manufactured
the Company's Ashton brand since 1988 and has agreed that the Company will be
the exclusive distributor of up to three new brands to be introduced over the
three year period commencing in 1998, which brands will be developed with and
manufactured exclusively by Fuente Cigar. Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., two of the principal executive officers of Fuente Cigar, serve on
the Company's Board of Directors and their affiliated family partnership will
own approximately 24.4% of the shares of Common Stock outstanding after the
Offering. The Company believes that its relationship with Fuente Cigar is an
important element of its overall strategy of increasing sales of branded premium
cigars.
Use of Multiple Distribution Channels. The Company believes that
distribution of its products through its wholesale, catalog and retail store
channels enables it to: (i) reach a geographically broad group of customers;
(ii) maintain a strong retail presence enabling it to react quickly to changes
in customer preferences; and (iii) benefit from significant growth opportunities
available through national distribution of its branded products.
27
Commitment to Customer Service. The Company believes its emphasis on
customer service and satisfaction is an integral part of its success. Catalog
and store sales personnel are trained to educate customers on the relative
merits of premium cigar products and to assist customers in making informed
purchasing decisions. In addition, the Company offers a 100% Guarantee of
Satisfaction to its customers which provides for a refund, credit or replacement
for any full or partially smoked box of cigars. The Company received the Best of
Philly award from Philadelphia magazine in 1997 as the best retail cigar store
in the Philadelphia area.
GROWTH STRATEGY
The principal elements of the Company's growth strategy are:
Introduction of New Proprietary Brands. The Company believes that the
increased popularity of premium cigars has resulted in cigar smokers who are
more informed, selective and brand conscious. At the same time, several new
brands of premium cigars have been introduced by manufacturers and distributors
seeking to capitalize on the increasing popularity of cigars. The Company
believes that many of these brands have not utilized the tobacco grades and
production methods normally associated with quality premium cigars. As a result,
the Company believes that premium cigar smokers prefer cigars with a highly
regarded brand name that are produced by respected cigar manufacturers. Under a
distributorship agreement with Fuente Cigar, the Company will be the exclusive,
worldwide distributor for up to three new premium brands to be developed by
Fuente Cigar and the Company. The Company and Fuente Cigar anticipate that these
brands will be introduced over a three year period beginning in 1998. The
Company intends to support these new brands through advertising in trade and
consumer publications and at cigar-related events. Based on its success with the
Ashton brand and its wholesale customer base of over 1,000 specialty
tobacconists, the Company believes that it is well positioned to support the
introduction of new brands.
Increase Wholesale Distribution of Proprietary Premium Cigars. The Company
expects to be able to distribute an increased number of premium cigars under the
Ashton brand, other proprietary brands and brands for which it will act as the
exclusive distributor. In anticipation of an increased supply of premium cigars,
the Company intends to expand its wholesale operations by: (i) increasing the
number of its direct sales force personnel covering wholesale acccounts; (ii)
penetrating existing accounts with a greater amount and variety of premium
cigars; and (iii) adding new accounts domestically and internationally.
Expand Catalog Distribution and Sales. The Company believes that its
catalog operations enable it to market and sell premium cigars to a large and
diverse group of customers. During Fiscal 1998, the Company distributed its
Spring/Summer catalog to a proprietary list of over 80,000 cigar smokers, cigar
purchasers and others evidencing interest in premium cigar products, compared to
35,000 and 45,000 in Fiscal 1995 and Fiscal 1996, respectively. The Company
anticipates that it will distribute its Fall/Winter catalog to over 100,000
individuals by the end of Fiscal 1998. The Company plans to increase its catalog
revenues by: (i) increasing the size of the Company's proprietary mailing list;
(ii) increasing the frequency of catalog mailings; and (iii) increasing the size
and capability of the Company's mail order operations. The Company completed a
move to a larger distribution facility in September 1997, and believes that the
larger facility will enable it to process a greater number of incoming telephone
orders and a greater volume of deliveries to its catalog customers.
Open or Acquire Selected Retail Locations. The Company intends to open or
acquire cigar stores in selected, densely populated and highly trafficked areas
where demand for premium cigars is high. New store openings or acquired stores
will enable the Company to increase its total market presence and develop a
broader base of customers for its catalog division. The Company is also
considering opening retail locations in special venues such as sports arenas and
casino/hotels.
28
PRODUCTS
The Company markets a broad selection of premium cigars and related
accessories. A small percentage of the Company's sales are derived from the sale
of mass market cigars. Premium cigars accounted for approximately 88.1%, 84.5%,
86.3% and 92.0% of the Company's net sales in Fiscal 1995, Fiscal 1996, Fiscal
1997 and the three months ended June 30, 1997, respectively.
Premium Cigars. Premium cigars are generally imported, hand-made or
hand-rolled cigars made with long filler, 100% natural tobacco leaf which sell
at retail prices above $1.00 per cigar. The Company uses tobaccos of the finest
grades for its Ashton brand cigars. Such tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch," which is placed in a
mold. Then, specially selected "wrapper" tobacco is hand-wrapped around the
bunch. After the manufacturing process is complete, an Ashton cigar will
normally be aged from three months to one year in specially constructed and
climate controlled aging rooms. The premium cigars manufactured by Fuente Cigar
for the Company undergo numerous quality control procedures at each stage of the
manufacturing, aging and packaging process.
The Company markets over 170 brands of premium cigars, ranging in price
from $1.00 to $28.00 per cigar. Of these brands, Ashton, Holt's, Cortesia and
Castano are proprietary brands owned by the Company. Net sales of the Company's
proprietary cigars represented approximately 44.1%, 41.6% and 39.6% of the
Company's net sales for Fiscal 1996, Fiscal 1997 and the three months ended June
30, 1997, respectively.
The significant growth in the Company's proprietary cigar sales has been
primarily due to an increase in the popularity of the Ashton brand. The Ashton
brand, which was introduced in 1986, is comprised of 22 different sizes and
shapes with retail prices generally between $4.50 and $17.00 per cigar. The
Company believes that the proprietary Ashton brand premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Ashton brand cigars are targeted at the upper end of the
premium cigar market. Holt's and Cortesia brand premium cigars are sold by the
Company exclusively through its catalog and Philadelphia retail store. The
Holt's brand is comprised of 18 different sizes and shapes with retail prices
generally between $2.30 and $4.80 per cigar. The Holt's brand premium cigars are
targeted at the middle of the premium cigar market. The Cortesia brand is
comprised of six different sizes and shapes with retail prices generally between
$1.30 and $3.10 per cigar. The Company also distributes cigars under its
proprietary Castano brand name. The Castano brand of premium cigars was
introduced in July 1997 and has been in limited production since that time. The
Company intends to increase distribution of this brand in 1998. The Castano
brand currently has five different sizes and shapes with retail prices generally
between $4.50 and $6.75 per cigar.
The Company intends to introduce up to three more brands to be developed
with and manufactured by Fuente Cigar over the next three years under an
exclusive distributorship agreement. Management will work closely with Fuente
Cigar to develop the specific blends, wrapper and sizes for these new brands, to
be sold under trademarks owned by Fuente Cigar. See "-- Suppliers."
Accessories. The increased demand for premium cigars has led to an
increase in the market for cigar accessories such as humidors, cigar cutters,
cigar cases, lighters and ashtrays. The Company offers accessories by brand name
manufacturers, as well as accessories incorporating the Ashton trademark. Net
sales of accessories represented approximately 7.1%, 10.8%, 12.4% and 7.3% of
the Company's net sales for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three
months ended June 30, 1997, respectively.
Other Tobacco Products. The Company offers a limited selection of other
tobacco products, including mass market cigars, smokeless tobacco and pipe
tobacco for sale through its mail order catalog and retail store, as well as a
limited number of imported cigarettes which are sold only through the Company's
retail store. Net sales of other tobacco products represented approximately
4.8%, 4.7%, 1.3%, 0.7% of the Company's net sales for Fiscal 1995, Fiscal 1996,
Fiscal 1997 and the three months ended June 30, 1997, respectively.
29
MARKETING AND DISTRIBUTION
The Company distributes its Ashton brand premium cigars and cigar-related
accessories on a wholesale basis to specialty tobacconists nationwide, and also
sells premium cigars on a retail basis through its mail order catalog and its
retail store.
Wholesale Operations. The Company distributes premium cigars, cigar cases,
travel humidors and ashtrays which are marketed under the Ashton brand name and
feature the Ashton logo. Net sales from wholesale operations were $2.3 million,
$3.7 million, $6.5 million and $2.5 million for Fiscal 1995, Fiscal 1996, Fiscal
1997 and the three month period ended June 30, 1997, respectively.
The Company believes that its ability to secure an increasing supply of
premium cigars under the PLMA with Fuente Cigar will allow it to better satisfy
the current demand for Ashton cigars and to increase the number of its wholesale
customers. See "-- Suppliers." At present, the Company has limited the
acceptance of new wholesale accounts in order to attempt to satisfy the demand
of its existing account base. As of June 30, 1997, the Company's wholesale
account base totaled approximately 1,000 customers.
The Company's wholesale activities are serviced by a direct sales force of
five employees who represent only the Company's brands and four independent
sales representatives who represent Company brands as well as competing brands.
The Company intends to increase the size of its direct sales force in order to:
(i) better penetrate its existing wholesale accounts; (ii) increase its
wholesale account base through the opening of new accounts; and (iii) manage the
distribution of its products to protect the overall integrity and image of the
Company's brands. Additionally, the Company has agreed to serve as the exclusive
distributor for up to three new Fuente Cigar manufactured brands to be
introduced over a three year period beginning in 1998. To support the Company's
proprietary brands and brands which the Company will distribute exclusively, the
Company intends to invest in further brand and product promotion in national
publications, trade magazines and other publications. The Company utilizes two
distributors for the distribution of its Ashton brand cigars on a limited basis
in Europe.
Retail Operations. The Company sells a broad selection of premium cigar
and related accessories through its mail order operation and its Philadelphia
retail store. The Company is committed to providing high quality customer
service and provides a 100% Guarantee of Satisfaction for every product sold.
For premium cigar purchases, the Company's 100% Guarantee of Satisfaction
provides a refund, credit or replacement for any full box of cigars provided
that less than four cigars have been smoked, and a proportionate credit if four
or more have been smoked. Any other merchandise may be returned by the customer
for a full refund, credit or replacement within ten days of receipt of the
merchandise.
Mail Order Catalog
The Company's mail order catalog markets a large selection of premium
cigars and accessories. In the current fiscal year, the Company distributed
approximately 80,000 copies of its Spring/Summer catalog and anticipates
distributing over 100,000 copies of its Fall/Winter catalog. Each of the
Company's four-color glossy catalogs contains photographs of the Company's
products and features premium cigars and other special offerings. The Company
mails its catalogs to its proprietary list of cigar smokers, cigar purchasers
and others evidencing interest in cigar products, and the Company deletes a name
from its proprietary list if there has been no sales activity for two years. In
addition, the Company produces four to eight page mailings that it distributes
four times per year. Sales associates are able to provide information on
products offered in the Company's catalogs and other mailings. The Company's
call center operates from 8:00 a.m. to 6:00 p.m. Monday to Friday, Eastern Time,
and from 9:00 a.m. to 3:00 p.m., Eastern Time, on Saturdays. Net sales from the
Company's mail order catalog were $1.7 million, $3.2 million, $6.6 million and
$2.5 million in Fiscal 1995, Fiscal 1996, Fiscal 1997 and the three months ended
June 30, 1997, respectively.
30
Retail Store
The Company currently operates a 3,000 square foot retail store located in
Philadelphia, Pennsylvania. The Company's retail store contains a large,
walk-in, open-display humidor, smoking lounge, cigar lockers and accessory
retail space. The Company intends to incorporate many of these features in new
retail locations in order to establish them as "destination" stores which draw
customers from a large geographic area. The Company's store received the Best of
Philly award from Philadelphia magazine as the best retail cigar store in the
Philadelphia area in 1997. The Company intends to acquire or develop two
additional cigar stores in selected, densely populated, highly trafficked areas
where demand for premium cigars is high. The cost to develop a new retail
location is estimated to be approximately $600,000 for fit-out, furnishings and
equipment, and approximately $700,000 for the cost of inventory and initial
operating capital. With respect to any retail store acquisitions, the costs will
be dependent upon the location, size and operating performance of the store. The
Company is also considering opening retail facilities in special venues such as
sports arenas and casino/hotels. Net sales from the Company's retail store were
$1.7 million, $2.6 million, $4.1 million and $1.3 million in Fiscal 1995, Fiscal
1996, Fiscal 1997 and the three months ended June 30, 1997, respectively.
Distribution. In September 1997, the Company relocated its distribution
center to a 21,360 square foot facility located in Philadelphia, Pennsylvania.
The facility also houses the Company's corporate offices, wholesale and mail
order operations. The humidified and climate controlled cigar storage warehouse
located within this facility is approximately 5,000 square feet, a substantial
increase over the 2,200 square feet of humidified storage space at the Company's
prior facility. The specific products in stock vary from time to time depending
upon the ability of the Company to secure supplies of premium cigars, and if in
stock, such products are available for shipment to wholesale and retail
customers within one day of receipt of an order.
SUPPLIERS
The Company has long-term relationships with over 50 suppliers including
major manufacturers such as Fuente Cigar, General Cigar Company, Consolidated
Cigar Holdings Corporation, Lane Limited and Villazon & Co., Inc. Fuente Cigar
supplied approximately 39.2%, 47.0% and 45.4% of all premium cigars purchased,
on a dollar basis, by the Company during Fiscal 1996, Fiscal 1997 and the three
month period ended June 30, 1997, respectively. General Cigar Company acquired
Villazon & Co., Inc. in January 1997, and, on a combined basis, they supplied
approximately 13.4%, 18.4% and 11.6% of all premium cigars purchased, on a
dollar basis, by the Company in Fiscal 1996, Fiscal 1997 and the three months
ended June 30, 1997, respectively. No other supplier accounted for more than 10%
of the Company's premium cigar purchases during these periods. The Company
believes that maintaining and strengthening its long-term relationships with its
suppliers is essential to securing an allocation of the limited worldwide
premium cigar supply. Other than its agreements with Fuente Cigar, the Company
has no agreements relating to the supply of premium cigars.
Private Label Manufacturing Agreement with Fuente Cigar ("PLMA"). The
Company entered into the PLMA with Fuente Cigar in April 1997 whereby Fuente
Cigar agreed to sell the Company a minimum of 5.0 million premium cigars per
year for an initial term of ten years and the Company has agreed to use its best
reasonable efforts to purchase at least 5.0 million cigars during each year of
the term of the PLMA. In addition, Fuente Cigar agreed to use its best
reasonable efforts to sell to the Company premium cigars in excess of the 5.0
million per year. The premium cigars supplied by Fuente Cigar pursuant to the
PLMA include the Company's proprietary Ashton and Holt's brand premium cigars,
as well as any other premium cigars manufactured by Fuente Cigar under its
trademarks, and will be comprised of those brands in such amounts, sizes and
shapes as determined by Fuente Cigar. The PLMA represents a commitment by Fuente
Cigar to increase its supply of premium cigars to the Company. Fuente Cigar
supplied the Company with 2.1 million premium cigars in Fiscal 1996 and 3.3
million premium cigars in Fiscal 1997. The purchase price for premium cigars
delivered under the PLMA is set by Fuente Cigar at the market price in effect
from time to time. The PLMA specifies that while the Company owns the trademark
to the name Ashton, Fuente Cigar owns the formula used to blend the tobacco used
in the production of Ashton cigars. The PLMA permits noncompliance with the
obligations of Fuente Cigar to sell 5.0 million premium cigars per year for
various reasons, including
31
but not limited to, a shortage of labor or the inability to secure materials and
supplies at reasonable prices. The PLMA provides that it is to be interpreted
and enforced under Florida law. However, the agreement specifically prohibits
any actions for specific performance and damages in the event of a breach of the
PLMA by Fuente Cigar. In the event that a competitor of Fuente Cigar were to
acquire control of the Company, Fuente Cigar may, after the expiration of an
eight month period commencing on the date of such change in control, give notice
of the termination of the PLMA effective one year from the date of such notice.
If Fuente Cigar does not give such notice, the PLMA will be automatically
renewed for successive one year terms if neither party gives notice of
termination.
Exclusive Distributorship Agreement. In September 1997, the Company and
Fuente Cigar entered into an exclusive distributorship agreement whereby Fuente
Cigar agreed to develop with the Company up to three new premium cigar brands to
be manufactured by Fuente Cigar, and to be exclusively distributed by the
Company on a worldwide basis. Cigars manufactured for the Company under this
agreement will be applied to the annual minimum requirement under the PLMA. The
initial term of this agreement expires on April 30, 2007. The Company is
obligated to use its best reasonable efforts to promote these new brands.
SALES AND ADVERTISING
At June 30, 1997, the Company employed five direct sales personnel in
connection with its wholesale operations, 10 telephone sales associates in the
Company's mail order catalog call center and 12 sales people in the Company's
Philadelphia retail store. In addition, the Company utilized four independent
sales agents in connection with its wholesale operations.
The Company's catalogs are its primary means of marketing to retail
customers. The Company targets its potential customers by originating its own
mailing list and keeping the mailing list exclusive to interested customers by
removing names from the mailing list if there has not been a purchase made
within two years. To support its retail sales, the Company utilizes local print
advertising, radio advertising during local sporting events and attends or
sponsors numerous cigar related events. The Company advertises through full page
advertisements in each issue of Cigar Aficionado magazine and through its
presence at or sponsorship of cigar related marketing events such as the "Big
Smokes" sponsored by Cigar Aficionado. Additionally, the Company relies to a
certain extent upon the reputation of the Ashton brand, Robert G. Levin, the
Company's Chairman of the Board, Chief Executive Officer and President, and
Fuente Cigar.
INFORMATION SYSTEMS
The Company has upgraded its information systems over the past year and
intends to make additional capital expenditures of approximately $500,000 from
the net proceeds of the Offering to further upgrade the capabilities of its
systems in support of anticipated growth. The Company has engaged an outside
consultant to further enhance the productivity and regularly review the
suitability of its management information systems. Additional investments are
also anticipated to enhance the Company's web site.
INTELLECTUAL PROPERTY
Ashton is a registered trademark of the Company. Holt's, Cortesia and
Castano are trademarks with respect to which the Company has applications for
registration pending. As the Company believes that its existing trademarks,
particularly the Ashton trademark, are critical to the Company's continued
success, the Company intends to vigorously defend its trademarks against any
potential infringement.
COMPETITION
The markets for the Company's products are highly competitive and subject
to rapid consumer change and frequent new product introductions and extensions.
The Company's wholesale distribution business faces competition from larger,
well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new entrants to the marketplace. The Company's retail sales
compete with a large number of other mail
32
order companies, some of which are larger and better financed than the Company.
The Company also faces significant competition from a large number of existing,
and an increasing number of new, retail stores and smoking establishments
selling the same branded products as the Company. Existing or future competitors
may develop or offer the same or similar premium cigars which may result in
decreases in the Company's sales of premium cigars. Many of these competitors
have longer operating histories and significantly greater financial, managerial,
creative, sales and marketing and other resources than the Company. The
Company's ability to retain its existing customers and attract new customers
depends on the quality of its premium cigars, the availability of product, its
reputation in the industry, and its ability to maintain customer satisfaction.
The Company's Ashton brand competes on the basis of quality and consistency of
its premium cigars and service to its wholesale customers. The Company's retail
operations compete on the basis of breadth of product, customer service and
price.
THE TOBACCO INDUSTRY
Regulation. Cigar manufacturers, like other producers of tobacco products,
are subject to regulation at the federal, state and local levels. Federal law
has recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
purchase of tobacco products, together with an appropriate enforcement program.
The recent trend is toward increasing regulation of the tobacco industry, and
the recent increase in popularity of cigars could lead to an increase in
regulation of cigars. A variety of bills relating to tobacco issues have been
introduced in the U.S. Congress, including bills that would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the FTC to the FDA and require the tobacco industry to fund the FDA's
oversight; (v) increase tobacco excise taxes; (vi) restrict the access to
tobacco products by, among other things, banning the distribution of tobacco
products through the mail, except for sales subject to proof of age; (vii)
require licensing of retail tobacco product sellers; (viii) regulate tobacco
product development; and (ix) require tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Although hearings have been held on certain of these proposals, to
date none of such proposals have been passed by Congress.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine. In
addition, a majority of states restrict or prohibit smoking in certain public
places and restrict sale of tobacco products (including cigars) to minors. Local
legislative and regulatory bodies have increasingly moved to curtail smoking by
prohibiting smoking in certain buildings or areas or by requiring designated
"smoking" areas. Individual establishments, such as bars and restaurants, have
further prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Numerous proposals also have been considered
at the state and local level restricting smoking in certain public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, legislation recently introduced in
Massachusetts would, if enacted, require warning labels on cigar boxes, and the
states of Minnesota and Texas have recently enacted legislation which would
require cigar manufacturers to report the levels of various substances in their
cigars on an annual basis. Consideration at both the federal and state level
also has been given to consequences of second-hand smoke.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of second-hand
smoke, which concluded that widespread
33
exposure to environmental tobacco smoke presents a serious and substantial
public health concern. Issuance of the report, which is based primarily on
studies of passive cigarette smokers, may lead to further legislation designed
to protect non-smokers. Also, a study recently published in the journal Science
reported that a chemical found in cigarette smoke has been found to cause
genetic damage in lung cells that is identical to damage observed in many
malignant tumors of the lung and, thereby, directly links lung cancer to
smoking. The National Cancer Institute also has announced that it will issue a
report in 1997 describing research into cigars and health. The study and these
reports could affect pending and future tobacco regulation and litigation.
Litigation
Litigation against the cigarette industry historically has been brought by
individual cigarette smokers. In 1992, the United States Supreme Court
in Cipollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts state law claims based on failure to
warn consumers about the health hazards of cigarette smoking, but does not
preempt claims based on express warranty, misrepresentation, fraud or
conspiracy. To date, individual cigarette smokers' claims against the cigarette
industry generally have been unsuccessful. A jury in Florida, however, recently
determined that a cigarette manufacturer was negligent in the production and
sale of its cigarettes and sold a product that was unreasonably dangerous and
defective, awarding the plaintiffs a total of $750,000 in damages.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions or actions brought by individual states
generally to recover Medicaid costs allegedly attributable to tobacco-related
illnesses. The pending actions allege a broad range of injuries resulting from
the use of tobacco products or exposure to tobacco smoke and seek various
remedies, including compensatory and, in some cases, punitive damages together
with certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions.
Over 40 states have filed lawsuits against the major United States
cigarette manufacturers to recover billions of dollars in damages, primarily
costs of medical treatment of smokers. On June 20, 1997, the Attorneys General
of 40 states and several major cigarette manufacturers announced a proposed
settlement of the lawsuits filed by these states (the "Proposed Settlement").
The Proposed Settlement, which will require Federal legislation to implement, is
complex and may change significantly or be rejected. The Proposed Settlement
would significantly change the way in which cigarette companies and tobacco
companies do business. Among other things, the tobacco companies would pay
hundreds of billions of dollars to the various states; the FDA could regulate
nicotine as a "drug" and tobacco products as "drug delivery devices;" all
outdoor advertising, sports event advertising and advertising on non-tobacco
products would be banned and certain class action lawsuits and punitive damage
claims against tobacco companies would be prohibited. President Clinton recently
announced that he would not support the Proposed Settlement unless significant
changes were incorporated. Therefore, the potential impact of the Proposed
Settlement on the cigar industry in general and the Company in particular is
uncertain. The State of Florida has entered into a separate settlement agreement
with major United States cigarette manufacturers with respect to tobacco
products including roll-your-own and little cigars. The settlement agreement
provides, in part, for a ban on billboard and transit advertising, significant
document disclosure by the settling cigarette companies, billions of dollars in
settlement payments, and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved it will
supercede the Mississippi settlement. The recent increase in the sales of cigars
and the publicity such increases have received may have the effect of increasing
the probability of legal claims.
In May 1996, the Fifth Circuit Court of Appeals reversed a Louisiana
district court's certification of a nationwide class consisting essentially of
nicotine dependent cigarette smokers. Notwithstanding the dismissal, new class
actions asserting claims similar to those in this action recently have been
filed in certain states. To date, two pending class actions against major
cigarette manufacturers have been
34
certified. The first case is limited to Florida citizens allegedly injured by
their addiction to cigarettes; the other is limited to flight attendants
allegedly injured through exposure to second-hand smoke.
Excise Taxes. Cigars have long been subject to federal, state and local
excise taxes, and such taxes frequently have been increased or proposed to be
increased in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 12.75% of the manufacturer's selling price, net of the
federal excise tax and certain other exclusions, capped at $30.00 per thousand
cigars.
In the past, there have been various proposals by the federal government to
fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund the Clinton Administration's health care reform program. The
Company believes that the volume of cigars sold would have been dramatically
reduced if excise taxes were enacted as originally proposed as part of the
Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company.
Tobacco products also are subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. Forty-two states impose excise taxes on cigars. State cigar excise taxes
are not subject to caps similar to the federal cigar excise tax. From time to
time, the imposition of state and local taxes has had some impact on sales
regionally. The enactment of new state excise taxes and the increase in existing
state excise taxes are likely to have an adverse effect on sales of cigars.
EMPLOYEES
As of June 30, 1997, the Company had a total of 37 full time and four part
time employees, all of whom are based in the United States. Of this total, 23
full time and four part time employees were engaged in sales and marketing,
seven full time employees were employed in administration and finance, and seven
full time employees were employed in shipping and receiving. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with employees to be
good.
FACILITIES
The Company's principal executive and administrative offices, as well as
its warehouse, shipping, call center and customer service facilities, are
located at its leased headquarters facility in Philadelphia, Pennsylvania. The
Company currently occupies 21,360 square feet of space in the Philadelphia
facility. This facility, which was opened in September 1997, is leased for a
term of five years (with options to extend) at an aggregate annual rental of
$74,760 plus certain common area expenses, which rental will increase in
proportion to increases in the consumer price index. The Company anticipates
that this new facility will be sufficient to meet the Company's needs for the
foreseeable future. The Company leases its 3,000 square foot Philadelphia retail
store from the Company's Chairman of the Board, Chief Executive Officer and
President, Robert G. Levin, for an initial term through October 31, 2004. The
Company has the right to renew this lease for an additional five year period.
The rent paid by the Company is $75,000 per year, which rent is fixed through
the end of the renewal term. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings which are
expected, individually or in the aggregate, to have a material adverse effect on
the Company's business, operating results or financial condition.
35
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
[Enlarge/Download Table]
NAME AGE POSITION
---- --- --------
Robert G. Levin...................... 51 Chairman of the Board, Chief Executive Officer and
President
Michael Pitkow....................... 48 Chief Operating Officer, Executive Vice President
and Director
Robert H. Levitt..................... 40 Chief Financial Officer
Carlos A. Fuente, Sr................. 62 Director
Carlos P. Fuente, Jr................. 43 Director
Harvey W. Grossman(1)(2)............. 59 Director
Marvin B. Sharfstein(1)(2)........... 53 Director
------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Robert G. Levin is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Levin has been engaged in the business of the
Company since 1972, and has been Chairman of the Board, Chief Executive Officer
and President since 1980.
Michael Pitkow joined the Company in October 1995 as Chief Operating
Officer and Executive Vice President and has been a Director of the Company
since September 1997. From 1985 through October 1995, Mr. Pitkow was the owner
of Pitkow Associates, a media service and marketing communications company. From
1983 to 1985, Mr. Pitkow was general manager of Cable AdNet, then Philadelphia's
largest cable advertising interconnect company.
Robert H. Levitt joined the Company as Chief Financial Officer in November
1996. From 1991 until November 1996, Mr. Levitt was a senior manager at
Schmeltzer o Master Group, P.C., the Company's independent accountants until May
1997. From 1989 through 1991, Mr. Levitt served as a controller for several
privately held companies. From 1981 through 1989, Mr. Levitt was a manager in
the emerging business group of Deloitte & Touche, L.L.P.
Carlos A. Fuente, Sr. became a Director in September 1997. Mr. Fuente, Sr.
has worked in the cigar industry his entire life, first working for his father,
Arturo Fuente, Sr., and then as President and Chairman of the Board of the
family manufacturing business which he acquired from his father in the early
1960's. The cigar manufacturing business is currently operated through Fuente
Cigar, a privately-held company owned by Fuente family interests. Mr. Fuente,
Sr. is the third of four generations of Fuente family members to own and operate
a cigar manufacturing business.
Carlos P. Fuente, Jr. became a Director in September 1993. Mr. Fuente, Jr.
is the son of Carlos A. Fuente, Sr. and has been employed by the Fuente family's
cigar manufacturing business since 1970. Mr. Fuente, Jr. has been the President
of Fuente Cigar since 1990.
Harvey W. Grossman became a Director in September 1997 and serves on the
Audit and Compensation Committees. Mr. Grossman is a certified public accountant
and a partner in Cogen Sklar LLP, a certified public accounting firm in Bala
Cynwyd, Pennsylvania. Mr. Grossman is a member of both the American and
Pennsylvania Institutes of Certified Public Accountants and was a member of the
Pennsylvania Institute of Certified Public Accountants' Forensic and Litigation
Services Committee from 1995 to 1996.
Marvin B. Sharfstein became a Director in September 1997, and serves on the
Company's Audit and Compensation Committees. Mr. Sharfstein has been a Director
of Holt's Cigar Company, Inc., and
36
Ashton Distributors, Inc. the Company's wholly owned subsidiaries, since January
1996. From 1983 through February 1996, Mr. Sharfstein served as the Vice
President of Corporate Finance and a Director of Cabot Medical Corp., a publicly
traded medical device manufacturer which he founded. Since February 1996, Mr.
Sharfstein has been a financial consultant to a variety of businesses through
MBS Capital Corp. a merchant banking firm.
TERMS OF OFFICE AND BOARD COMMITTEES
Prior to the consummation of the Offering, the Company's Certificate of
Incorporation will be amended to provide that directors of the Company shall be
divided into three classes, as nearly equal in number as possible. The initial
term of office of the Class I Directors shall expire on the day of the first
annual meeting of stockholders following the end of Fiscal 1998 (the "1998
Annual Meeting"); the initial term of office of the Class II Directors shall
expire on the day of the annual meeting of stockholders next succeeding the 1998
Annual Meeting; and the initial term of office of the Class III Directors shall
expire on the day of the second annual meeting of stockholders succeeding the
1998 Annual Meeting. At each annual meeting of stockholders, directors elected
to succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. Thus, after consummation of the Offering and effective upon the
amendment of the Certificate of Incorporation, directors will stand for election
only once in three years. Effective upon the amendment of the Certificate of
Incorporation, Messrs. Pitkow and Grossman are expected to serve as Class I
directors, Messrs. Fuente, Jr. and Sharfstein are expected to serve as Class II
directors, and Messrs. Fuente, Sr. and Levin are expected to serve as Class III
directors.
In accordance with the amendment, the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to alter, change, amend, repeal, or adopt any provision
inconsistent with, the provisions of the Certificate of Incorporation providing
for the classified Board of Directors.
The Audit and Compensation Committees consist of Messrs. Sharfstein and
Grossman. The Audit Committee reviews the adequacy of the Company's internal
control systems and financial reporting procedures, reviews the general scope of
the annual audit, reviews and monitors the performance of non-audit services by
the Company's independent public accountants and reviews interested transactions
between the Company and any of its affiliates. The Compensation Committee
administers the Company's Employee Stock Plan and makes recommendations to the
Board of Directors concerning salaries and non-stock compensation for the
Company's officers and employees.
SHAREHOLDERS AGREEMENT
Pursuant to the shareholders agreement between the Fuente Investment
Partnership and Robert G. Levin, Mr. Levin is required to vote for two directors
nominated by the Fuente Investment Partnership and the Fuente Investment
Partnership is required to vote for the balance of the Board of Directors
nominees nominated by Mr. Levin. Currently, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr. are the directors nominated by Fuente Investment Partnership. All
other directors are the nominees of Mr. Levin. In addition, each of the Fuente
Investment Partnership and Mr. Levin (i) has a right of first refusal to
purchase the others shares and (ii) the right to participate on a proportionate
basis in any sale of the other party's Common Stock.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company receives $1,000 for
each meeting of the Board attended and for each committee meeting attended.
Messrs. Carlos A. Fuente, Sr., Carlos P. Fuente, Jr., Sharfstein and Grossman
have been granted options to purchase 15,000 shares of the Common Stock, each,
pursuant to the Director Stock Plan, which options are all fully vested and
exercisable at a price equal to the initial public offering price per share. The
Director Stock Plan
37
provides that options will be granted to non-employee directors of the Company
pursuant to an automatic, non-discretionary grant mechanism. Following the
Offering, each new non-employee director will automatically be granted an option
to purchase 15,000 shares of the Common Stock. Each non-employee director will
subsequently be granted an option to purchase 15,000 at each annual meeting of
stockholders beginning with the 1998 Annual Meeting of Stockholders. Each such
option will be granted at the fair market value of the Common Stock on the date
of the grant. Options granted to non-employee directors under the Director Stock
Plan vest in full upon the grant, and may be exercised immediately. See "--
Stock Options -- The Non-Management Directors Stock Option Plan."
EXECUTIVE COMPENSATION
The following table and accompanying footnotes provide certain information
concerning the compensation earned by the Company's Chief Executive Officer and
the other executive officer of the Company whose salary and bonus was in excess
of $100,000 (the "Named Officers") for Fiscal 1997:
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
ANNUAL COMPENSATION ALL OTHER
-------------------------------------- COMPENSATION
NAME AND POSITION SALARY($) BONUS($) OTHER($)(1) ($)(2)
----------------- --------- ------------ ----------- ------------
Robert G. Levin............................ 335,973 -- -- 4,750
Chairman of the Board, Chief Executive
Officer and President
Michael Pitkow............................. 111,039 5,000 -- --
Chief Operating Officer and Executive
Vice President
------------------
(1) Pursuant to the Securities and Exchange Commission rules on executive
compensation disclosure, "All Other Compensation" does not include
perquisites because the aggregate amount of such compensation for each of
the persons listed did not exceed the lesser of (i) $50,000 or (ii) ten
percent of the combined salary and bonus for such person in Fiscal 1997.
(2) Represents the Company's matching contribution pursuant to its 401(k)
defined contribution plan.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Levin and Pitkow. Mr.
Levin's employment agreement, effective as of October 1, 1997, provides for a
minimum base salary of $400,000, to be reviewed at least annually and to be
adjusted based upon his performance, and has a term of five years which will be
automatically renewed for sucessive periods of one year if neither party gives
the required notice of termination. Mr. Pitkow's employment agreement, effective
as of October 1, 1997, provides for a minimum base salary of $150,000 per year,
to be reviewed at least annually, and expires on December 31, 1999.
STOCK OPTIONS
The 1997 Employee Stock Option Plan. The Employee Stock Plan, approved by
the Board of Directors and shareholders of the Company in September 1997, is
intended to provide incentives to the officers and other employees of the
Company by providing them with opportunities to purchase shares of Common Stock
pursuant to options granted which qualify as "incentive stock options" ("ISO's")
under Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code") or which do not qualify as ISO's ("Non-Qualified Options") (ISO and
Non-Qualified Options being referred to collectively as "Options"). Options for
up to a maximum of 300,000 shares of Common Stock can be issued under the
Employee Stock Plan.
38
The Employee Stock Plan is currently administered by the Board of
Directors, although it is the intent of the Board of Directors to transfer this
responsibility to the Compensation Committee following the Offering. The
Compensation Committee will have the authority to determine those employees of
the Company to whom Options will be granted. If any Option granted under the
Employee Stock Plan expires or terminates for any reason without having been
exercised in full or ceases for any reason to be exercisable in whole or in
part, the unpurchased shares subject to such Options are again available for
grants under the Employee Stock Plan.
Grants of Options under the Employee Stock Plan can be made at any time on
or after October 1, 1997 and prior to September 30, 2006. The exercise price of
all options to be granted under the Employee Stock Plan will be the fair market
value of the Common Stock on the date of grant defined in the Employee Stock
Plan. If an optionee ceases to be employed by the Company or certain affiliated
or successor entities other than by reason of death or disability, no further
installments of the Options shall generally become exercisable, and such
optionee's Options shall terminate after the passage of ninety days from the
date of termination or such optionee's employment. Upon the occurrence of
certain events such as stock dividends and stock splits, consolidations or
mergers, an optionee's rights with respect to Options granted are to be adjusted
as provided in the Employee Stock Plan. Pursuant to the Employee Stock Plan, the
Company has granted options to purchase an aggregate of 169,500 shares of Common
Stock at an exercise price equal to the initial public offering price per share.
These options vest as to one-third of the shares on each of the anniversary
dates of the date the Company granted such options, so long as the option holder
remains in the continuous employ of the Company during such period.
The Non-Management Directors Stock Option Plan. The Director Stock Plan,
approved by the Board of Directors and shareholders of the Company in September
1997, and is intended to provide incentives to the directors of the Company who
are not employees of the Company by providing them with options to purchase
shares of Common Stock. Options for up to a maximum of 180,000 shares of Common
Stock may be issued under the Director Stock Plan.
The Director Stock Plan is currently administered by the Board of
Directors. Each outside director of the Company is automatically granted options
to purchase 15,000 shares of the Common Stock at the fair market value thereof
as defined in the Director Stock Plan on the date of each grant of Options, and
each outside director is granted Options to purchase 15,000 shares of the Common
Stock at each annual meeting of the stockholders of the Company. All of these
Options vest immediately upon grant. Upon the occurrence of certain events such
as stock dividends and stock splits, consolidations or mergers, an optionee's
rights with respect to Options granted are to be adjusted as provided in the
Director Stock Plan.
Pursuant to the Director Stock Plan, the Company granted options to each of
Messrs. Fuente, Sr., Fuente, Jr., Sharfstein and Grossman to purchase 15,000
shares of Common Stock at the initial public offering price per share.
Other Options. In January 1996, options to purchase 201,000, 201,000 and
80,400 shares of the Common Stock were granted to Michael Pitkow, Chief
Operating Officer, Executive Vice President and a director of the Company,
Marvin Sharfstein, a director the Company and Carole Cohn, Mr. Levin's sister,
respectively. These options were granted at an exercise price of $.50 per share,
the estimated fair market value at the date of grant. At the time these options
were granted, Robert G. Levin and the Fuente Investment Partnership agreed that
these options granted by the Company would not dilute the ownership interest of
the Fuente Investment Partnership. Accordingly, Mr. Levin has agreed that upon
exercise of any such options he will contribute to the capital of the Company
one share of Common Stock for each share purchased pursuant to these options.
39
CERTAIN TRANSACTIONS
Relationships with Fuente Cigar and Related Parties. In Fiscal 1996,
Fiscal 1997 and for the three months ended June 30, 1997, the Company purchased
approximately $1.9 million, $3.6 million and $1.5 million, respectively, of
premium cigars from Fuente Cigar, representing approximately 39.2%, 47.0% and
45.4%, respectively, of premium cigar purchases for such periods. At June 30,
1997, approximately $491,000 was due to Fuente Cigar for premium cigars sold to
the Company. Two of the principal executive officers of Fuente Cigar, Carlos A.
Fuente, Sr. and Carlos P. Fuente, Jr., are directors of the Company and a
related family partnership will own approximately 24.4% of the shares of Common
Stock outstanding upon completion of the Offering. The Company has entered into
two agreements with Fuente Cigar. See "Risk Factors -- Dependence on Fuente
Cigar Ltd." and " -- Potential Conflicts of Interest" and "Business --
Suppliers." Mr. Levin and an affiliate of Fuente Cigar have also entered into a
consulting agreement whereby such affiliate paid Mr. Levin the sum of $50,000
per year for consulting services. This agreement will be terminated upon
completion of the Offering.
Shareholders Agreement. The Fuente Investment Partnership and Robert G.
Levin have entered into an agreement which provides that Mr. Levin will vote all
of his shares of Common Stock for the election of two directors nominated by the
Fuente Investment Partnership (currently Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr.) and the Fuente Investment Partnership will vote all of its shares
of Common Stock for the remainder of the directors to be nominated by Mr. Levin.
In addition, the agreement grants each party a right of first refusal on sales
of Common Stock by the other party and provides for each party to participate on
a percentage basis in any transaction involving the sale of Common Stock.
Philadelphia Retail Store Lease. The Company currently leases from Robert
G. Levin, the Chairman of the Board, Chief Executive Officer and President of
the Company, the entire two-story building comprising approximately 4,700 square
feet in which the Company's retail store is located. The Company's retail store
occupies 3,000 square feet on the street level, and the Company sublets
approximately 1,700 square feet on the second floor to an unrelated third party.
The Company paid approximately $48,000 and $54,000 to Mr. Levin under this lease
in Fiscal 1996 and Fiscal 1997, respectively. The term of this lease extends
through October 31, 2004 and the Company has the right to renew this lease for
an additional five year term. The current rent paid to Mr. Levin is $6,250 per
month, or $75,000 per year, which rent is fixed through the end of the renewal
term.
Guaranty of Loan. The Company guaranteed certain debt of Mr. Levin
relating to the acquisition of the building in which the Company's Philadelphia
retail store is located. The balance on that loan was $435,567 at June 30, 1997.
Mr. Levin currently guarantees certain indebtedness of the Company. The total of
this indebtedness was $425,607 at June 30, 1997.
All of the foregoing transactions between the Company and the foregoing
persons and entities were on substantially the same terms and conditions as if
such transactions would have been entered into with unrelated third parties. The
Company has a policy to the effect that any future transactions between it and
any of its officers, directors, principal stockholders or the affiliates of the
foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent third
parties, and that any such transactions also be approved by a majority of the
Company's directors who are disinterested in the transaction.
40
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization and as adjusted to reflect the sale of the shares of Common Stock
offered hereby, by (i) each director of the Company, (ii) each person who is
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (iii) the Named Officers, (iv) the Selling Shareholder, and (v)
all of the Company's executive officers and directors as a group.
[Enlarge/Download Table]
PERCENTAGE OWNED
-------------------
SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
--------------------------------------- ------------------ -------- --------
Robert G. Levin(2).................................... 2,613,015 65.0% 45.3%
Fuente Investment Partnership(3)...................... 1,406,985 35.0 24.4
Carlos A. Fuente, Sr.(4).............................. 1,421,985 35.2 24.6
Carlos P. Fuente, Jr.(4).............................. 1,421,985 35.2 24.6
Marvin B. Sharfstein(5)............................... 216,000 5.4 3.7
Michael Pitkow(5)..................................... 201,000 5.0 3.5
Harvey W. Grossman(5)................................. 15,000 * *
All directors and executive officers as a group
(7 persons)......................................... 4,080,000 100.0% 70.0%
------------------
*Less than 1% of outstanding shares of Common Stock.
(1) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to the shares
beneficially owned by them. The address for Messrs. Levin, Pitkow and
Sharfstein is 12270 Townsend Road, Philadelphia, Pennsylvania 19154, the
address for the Fuente Investment Partnership and Messrs. Fuente is c/o
Fuente Cigar Ltd., Zona Franca, Santiago, Dominican Republic.
(2) If the Underwriters' over-allotment option is exercised in full, Mr. Levin
will sell 262,500 shares of Common Stock, reducing his beneficial ownership
to 2,350,515 shares of Common Stock or 40.7% of the outstanding shares.
Further, in the event options to purchase up to 482,400 shares of Common
Stock are exercised by certain option holders including options to purchase
201,000 shares of Common Stock held by each of Messrs. Sharfstein and
Pitkow, Mr. Levin has agreed to contribute an equal number of shares owned
by him to the Company. See "Management -- Stock Options."
(3) The Fuente Investment Partnership is a Florida general partnership, the
partnership interests are beneficially owned by Carlos A. Fuente, Sr.,
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez, principals in Fuente Cigar.
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez are the children of Carlos
A. Fuente, Sr.
(4) Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr. are deemed the beneficial
owners of the shares of Common Stock owned by such partnership. Also
includes options to purchase 15,000 shares of Common Stock each granted
pursuant to the Director Stock Plan.
(5) Represents shares of Common Stock which may be acquired upon the exercise of
options granted by the Company.
41
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will be authorized to issue
25,000,000 shares of Common Stock and 1,000,000 shares of preferred stock
immediately after the completion of the Offering, there will be 5,770,000 shares
of Common Stock outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of the Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors of
the Company. In such event, the holders of the remaining shares of Common Stock
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing of future agreements
between the Company and its debtholders. In the event of the liquidation,
dissolution or winding up of the Company, the holders of the Common Stock are
entitled to share ratably in all assets legally available for distribution after
payment of all debts and other liabilities.
PREFERRED STOCK
The Board of Directors, by unanimous consent, are authorized, subject to
certain limitations prescribed by law, without further stockholder approval, to
issue from time to time up to an aggregate of 1,000,000 shares of preferred
stock in one or more series and to fix the relative rights, preferences and
limitations of the shares within each series, including the dividend rights,
voting rights, redemption and sinking fund provisions, liquidation preferences,
conversion rights and preemptive rights and the number of shares constituting
any series. The issuance of preferred stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could adversely affect the voting and other rights of holders of
Common Stock and, under certain circumstances, make it more difficult or costly
for a third party to acquire, or discourage a third party from attempting to
acquire, control of the Company. The Company has no present plans to issue any
shares of preferred stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by person who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the
42
three year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
amendment to the Certificate of Incorporation shall not become effective until
12 months after the date that it is adopted. The Company has not adopted such an
amendment to the Certificate of Incorporation or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation and under Delaware
laws, directors of the Company are not liable to the Company or its stockholders
for monetary damages, for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
The Company's Certificate of Incorporation provides for mandatory
indemnification of directors and officers of the Company against any expense,
liability and loss to which they become subject, or which they may incur as a
result of having been a director or officer of the Company. In addition, the
Company must advance or reimburse directors and officers for expenses incurred
by them in connection with certain claims.
In addition to the indemnification provision in the Certificate of
Incorporation, the Company will enter into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individuals
may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will
continue to be, provided to them.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-laws of the Company contain
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited proposal
from a third party which has acquired a block of stock of the Company, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders.
The Certificate of Incorporation provides that the Board be divided into
three classes of directors serving staggered three year terms. The
classification of the Board has the effect of making it more difficult for
stockholders to change the composition of the Board in a relatively short period
of time. At least two annual meetings of stockholders, instead of one, generally
will be required to effect a change in a majority of the Board. Such a delay may
help ensure that the Board and the stockholders, if confronted with an
unsolicited proposal by a stockholder attempting to force a stock repurchase at
a premium above market, a proxy contest or an extraordinary corporate
transaction, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interest of the stockholders. Directors, if any, elected by holders of preferred
stock voting as a class, will not be classified as aforesaid. In addition, under
Delaware law, in the case of a corporation having a classified board,
stockholders may remove a director only for cause. This provision will preclude
a stockholder from removing incumbent directors without cause.
43
In addition, the Certificate of Incorporation restricts the ability of the
stockholders to take any action by written consent by requiring the approval of
two-thirds, instead of a majority, of the outstanding capital stock, and
contains a fair price requirement, pursuant to which certain merger, combination
or sale transaction proposals shall require the approval of two-thirds, instead
of a majority, of the outstanding capital stock, unless the proposal is approved
by two-thirds of the full Board of Directors or all holders of the then
outstanding capital stock (other than the stockholder making the bid) receive
cash in an amount at least equal to the highest price paid by the bidding
stockholder for shares of the capital stock of the Company during the three year
period preceding the date of such stockholder's offer or proposal. Such a
provision may have the effect of deterring takeover offers. The Certificate of
Incorporation also provides that the stockholders may not amend any of the
foregoing provisions without the approval of two-thirds of the outstanding
capital stock.
REGISTRATION RIGHTS
Pursuant to the options (the "Options") to purchase an aggregate of 482,400
shares of Common Stock which were granted to Michael Pitkow, Marvin B.
Sharfstein and Carol Cohn (the "Optionholders"), the Optionholders were granted
the right to demand that the Company register the shares of Common Stock
issuable upon the exercise of the Options at any time commencing nine months
after the effective date of this Prospectus. In addition, the Optionholders have
certain "piggy-back" registration rights. These registration rights expire on
December 31, 2005, at the expiration of the Options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
44
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,770,000 shares of
Common Stock outstanding, 1,750,000 (2,012,500 if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or requirement of further registration under the Securities Act. All
of the remaining 4,020,000 shares of Common Stock are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act.
Upon completion of the Offering, no shares will be eligible for sale in the
public market immediately following commencement of the offering, and, beginning
90 days after commencement of the Offering, 4,020,000 shares will become
eligible for sale pursuant to Rule 144. Upon expiration of the lock-up
agreements, no shares will become immediately eligible for sale without
restriction pursuant to Rule 144(k) (described below), and approximately
4,020,000 shares will be eligible for sale subject to the timing, volume, and
manner of sale restrictions of Rule 144. In addition, 542,400 additional shares
of Common Stock subject to outstanding vested stock options could also be sold,
subject in some cases to compliance with certain volume limitations as described
below.
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year (including
the holding period of any prior owner except an affiliate from whom such shares
were purchased) is entitled to sell in "brokers transactions" or to market
makers, within any three month period commencing 90 days after the date of this
Prospectus, a number of shares that does not exceed the greater of (i) one
percent of the number of shares of Common Stock then outstanding (approximately
57,700 shares immediately after the completion of the Offering) or (ii)
generally, the average weekly trading volume in the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to such
sale. Sales under Rule 144 are generally subject to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years (including the holding period of any prior owner other
than an affiliate from whom such shares were purchased), is entitled to sell
such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Pursuant to lock-up agreements, all of the Company's officers and
directors, and all shareholders and certain option holders, including the
Selling Shareholder, owning upon completion of the Offering, in the aggregate,
4,020,000 shares of Common Stock and options to purchase 582,400 shares of
Common Stock, and the Company have executed agreements pursuant to which they
have agreed that they will not, for a period of 180 days from the date of this
Prospectus, directly or indirectly, offer, sell, offer to sell, contract to
sell, pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other sale or disposition) of any shares of Common Stock
or other capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for, any shares of Common Stock, or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except that such agreement does not
prevent the Company from granting additional options under the Employee Stock
Plan or the Director Stock Plan. Prudential Securities Incorporated may in its
sole discretion, at any time and without notice, release all or any portion of
the securities subject to such lock-up agreements.
Approximately 180 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering an aggregate of
approximately shares of Common Stock (including the
shares subject to outstanding options) that have been reserved for issuance
under its stock option and stock purchase plans, thus permitting the resale of
such shares in the public market without restriction under the Securities Act.
45
The holders of an aggregate of 482,400 shares of Common Stock (including
shares issuable upon exercise of vested options) or their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. See "Description of Capital Stock -- Registration Rights."
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
46
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Janney Montgomery Scott Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement, (the "Underwriting
Agreement") to purchase from the Company the number of shares of Common Stock
set forth opposite their respective names:
NUMBER
OF SHARES
UNDERWRITER ---------
Prudential Securities Incorporated..........................
Janney Montgomery Scott Inc.................................
---------
Total.................................................. 1,750,000
=========
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Stock initially at the initial public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may reallow a concession of $ per share
to certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representatives.
The Selling Shareholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 262,500
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriters' name in the preceding table bears to 1,750,000.
The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company, its officers and directors, the Selling Shareholder, all other
beneficial owners of the Common Stock and holders of options to purchase Common
Stock have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise
47
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock or any securities convertible into
or exercisable or exchangeable for any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this Prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. Prudential Securities Incorporated may in its sole
discretion, at any time and without notice, release all or any portion of the
securities subject to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices of securities for companies in
businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Shareholder, and
in such case may purchase Common Stock in the open market following the closing
of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
262,500 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Fox, Rothschild, O'Brien &
Frankel, LLP. Certain legal matters related to the Offering will be passed upon
for the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The financial statements as of March 31, 1997 and for the year ended March
31, 1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements as of March 31, 1996 and for each of the two years
in the period ended March 31, 1996 included in this Prospectus have been so
included in reliance on the report of SchmeltzeroMaster Group, P.C., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
48
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective as of May 30, 1997, the Company's Board dismissed
SchmeltzeroMaster Group, P.C. and appointed Price Waterhouse LLP as the
Company's independent accountants. The report of SchmeltzeroMaster Group, P.C.
on the Company's combined financial statements as of March 31, 1996 and for each
of the two years in the period then ended did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. In connection with the audits for the years
ended March 31, 1995 and 1996 and through May 30, 1997, there were no
disagreements with SchmeltzeroMaster Group, P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
SchmeltzeroMaster Group, P.C. would have caused them to make reference thereto
in their report on the financial statements for such years. Prior to retaining
Price Waterhouse LLP, the Company had not consulted with Price Waterhouse LLP
regarding the application of accounting principles or the type of audit opinion
that might be rendered on the Company's financial statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement of Form
S-1 under the Securities Act with respect to the Company's Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in the Prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the Registration Statement and the exhibits and schedules thereto. The
information so omitted, including exhibits and schedules, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004.
Such materials also may be accessed electronically by means of the Commission's
home page on the Internet at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants.
49
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
INDEX TO COMBINED FINANCIAL STATEMENTS
[Download Table]
PAGE(S)
----------
Reports of Independent Accountants.......................... F-2, F-3
FINANCIAL STATEMENTS
Combined Balance Sheets................................... F-4
Combined Statements of Operations......................... F-5
Combined Statements of Stockholders' Equity............... F-6
Combined Statements of Cash Flows......................... F-7
Notes to Combined Financial Statements.................... F-8 - F-18
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of Holt's Cigar Holdings, Inc. and Affiliates
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates at March 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
July 2, 1997
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Holt's Cigar Holdings, Inc. and Affiliates
We have audited the accompanying combined balance sheet of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
Schmeltzer o Master Group, P.C.
Certified Public Accountants
Wyncote, Pennsylvania
August 13, 1996
F-3
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
[Enlarge/Download Table]
MARCH 31, PRO FORMA
----------------------- JUNE 30, JUNE 30,
1996 1997 1997 1997
---------- ---------- ----------- -----------
(UNAUDITED)
Current assets:
Cash................................. $ 639,450 $ 515,520 $ 841,218 $ 841,218
Accounts receivable (net of allowance
for doubtful accounts of $19,500,
$34,500 and $40,000 (unaudited) at
March 31, 1996, 1997, and June 30,
1997.............................. 464,740 1,235,669 1,186,607 1,186,607
Inventory............................ 1,557,207 2,583,877 2,623,277 2,623,277
Loan receivable -- officer........... 18,830 23,396 23,396 23,396
Prepaid expenses and other current
assets............................ 41,724 51,408 29,569 29,569
---------- ---------- ---------- ----------
Total current assets.............. 2,721,951 4,409,870 4,704,067 4,704,067
Property and equipment, net............ 817,938 848,226 1,038,966 1,038,966
Deposits............................... 8,302 15,495 15,495 15,495
Goodwill............................... -- -- -- 244,340
Other assets (net of accumulated
amortization of $120,770, $104,036
and $111,314 (unaudited) at March 31,
1996, 1997 and June 30, 1997......... 138,291 131,919 128,937 128,937
---------- ---------- ---------- ----------
Total assets........................... $3,686,482 $5,405,510 $5,887,465 $6,131,805
========== ========== ========== ==========
Current liabilities:
Lines of credit...................... $ 5,000 $ -- $ -- $ --
Current portion of long-term debt.... 148,666 129,441 122,470 122,470
Accounts payable..................... 383,671 892,999 852,101 852,101
Due to related party................. 504,000 713,800 491,000 491,000
Accrued expenses and other current
liabilities....................... 183,564 165,870 46,630 46,630
Income taxes payable................. 462,300 296,351 399,309 399,309
Stockholder distributions payable.... -- -- -- 2,700,000
---------- ---------- ---------- ----------
Total current liabilities......... 1,687,201 2,198,461 1,911,510 4,611,510
Long-term debt -- less current
portion.............................. 342,995 182,440 324,940 324,940
Deferred income taxes.................. 3,400 -- -- --
Commitments
Stockholders' equity:
Preferred stock (pro forma) no par
value, 1,000,000 shares
authorized, none
issued............................ -- -- -- --
Common stock (proforma) $.001 par
value, 25,000,000 shares
authorized, 4,020,000 issued and
outstanding....................... 91,114 91,114 91,114 4,020
Additional paid-in capital........... 303,607 303,607 303,607 585,041
Retained earnings.................... 1,308,165 2,679,888 3,306,294 606,294
---------- ---------- ---------- ----------
1,702,886 3,074,609 3,701,015 1,195,355
Treasury stock, 18,000 shares at
cost.............................. (50,000) (50,000) (50,000) --
---------- ---------- ---------- ----------
Total stockholders' equity........... 1,652,886 3,024,609 3,651,015 1,195,355
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity............................... $3,686,482 $5,405,510 $5,887,465 $6,131,805
========== ========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
[Enlarge/Download Table]
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
------------------------------------- -----------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ---------- ----------
(UNAUDITED)
Net sales................. $5,662,215 $9,466,848 $17,277,940 $3,450,249 $6,361,422
Cost of goods sold........ 3,041,490 5,158,563 9,565,964 1,978,310 3,612,127
---------- ---------- ----------- ---------- ----------
Gross profit.............. 2,620,725 4,308,285 7,711,976 1,471,939 2,749,295
Operating expenses........ 1,948,670 3,483,645 4,894,829 1,033,976 1,392,816
---------- ---------- ----------- ---------- ----------
Income from operations.... 672,055 824,640 2,817,147 437,963 1,356,479
Other income.............. -- 21,610 31,976 3,951 13,933
---------- ---------- ----------- ---------- ----------
Income before income tax
expense................. 672,055 846,250 2,849,123 441,914 1,370,412
Income tax expense........ 209,400 318,200 576,600 89,000 317,000
---------- ---------- ----------- ---------- ----------
Net income................ $ 462,655 $ 528,050 $ 2,272,523 $ 352,914 $1,053,412
========== ========== =========== ========== ==========
Pro forma and supplemental
pro forma income data
(unaudited) (Note 15):
Income before income tax
expense, as
reported............. $ 2,849,123 $ 441,914 $1,370,412
Pro forma amortization
of goodwill.......... 12,217 3,054 3,054
----------- ---------- ----------
Pro forma income before
income tax expense... 2,836,906 438,860 1,367,358
Pro forma income
taxes................ 1,135,000 176,000 547,000
----------- ---------- ----------
Pro forma net income.... $ 1,701,906 $ 262,860 $ 820,358
=========== ========== ==========
Pro forma net income per
share................ $ .41 $ .06 $ .20
=========== ========== ==========
Pro forma weighted
average number of
shares............... 4,164,356 4,164,356 4,164,356
Supplemental pro forma
net income........... $ 1,745,906 $ 273,860 $ 824,758
=========== ========== ==========
Supplemental pro forma
net income per
share................ $ .42 $ .07 $ .20
=========== ========== ==========
Supplemental pro forma
weighted average
number of shares..... 4,198,475 4,202,189 4,196,596
The accompanying notes are an integral part of these financial statements.
F-5
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
[Enlarge/Download Table]
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ---------- ---------- -------- ----------
Balance at March 31, 1994........ $91,100 $204,621 $ 396,960 $(50,000) $ 642,681
Net income..................... -- -- 462,655 -- 462,655
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1995........ 91,107 254,114 859,615 (50,000) 1,154,836
Net income..................... -- -- 528,050 -- 528,050
Stockholders' distributions.... -- -- (79,500) -- (79,500)
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1996........ 91,114 303,607 1,308,165 (50,000) 1,652,886
Net income..................... -- -- 2,272,523 -- 2,272,523
Stockholders' distributions.... -- -- (900,800) -- (900,800)
------- -------- ---------- -------- ----------
Balance at March 31, 1997........ 91,114 303,607 2,679,888 (50,000) 3,024,609
Net income (unaudited)......... -- -- 1,053,412 -- 1,053,412
Stockholders' distributions
(unaudited)................. -- -- (427,006) -- (427,006)
------- -------- ---------- -------- ----------
Balance at June 30, 1997
(unaudited).................... $91,114 $303,607 $3,306,294 $(50,000) $3,651,015
======= ======== ========== ======== ==========
The accompanying notes are an integral part of these financial statements.
F-6
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
[Enlarge/Download Table]
THREE MONTHS ENDED
YEAR ENDED MARCH 31, JUNE 30,
-------------------------------- -------------------------
1995 1996 1997 1996 1997
-------- -------- ---------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income..................................... $462,655 $528,050 $2,272,523 $352,914 $1,053,412
Adjustments to reconcile net income to net cash
provided by operations:
Allowance for doubtful accounts.............. 3,215 11,785 15,000 -- 5,500
Depreciation and amortization................ 54,102 114,758 140,852 30,256 28,797
Deferred income taxes........................ -- 3,400 (3,400) -- --
(Increase) decrease in:
Accounts receivable........................ (261,663) (147,803) (785,929) (244,688) 43,562
Inventory.................................. (191,982) (462,918) (1,026,670) 6,785 (39,400)
Prepaid expenses and other current
assets.................................. (34,543) 22,115 (9,684) (14,217) 21,839
Deposits................................... (1,560) 1,721 (7,193) (5,607) --
Increase (decrease) in:
Accounts payable and due to related
party................................... 236,937 209,241 719,122 92,534 (262,363)
Accrued expenses and other current
liabilities............................. 62,458 134,423 (17,694) 32,328 (119,240)
Income taxes payable....................... 209,400 254,200 (165,949) (161,177) 102,958
-------- -------- ---------- -------- ----------
Net cash provided by operating
activities............................ 539,019 668,972 1,130,978 89,128 835,065
-------- -------- ---------- -------- ----------
Cash flows from investing activities:
Purchase of property, equipment and other
assets....................................... (256,061) (61,948) (142,762) (21,194) (217,896)
Proceeds from (advances on) loan receivable --
officer...................................... 12,120 (18,830) (4,566) (4,566) --
-------- -------- ---------- -------- ----------
Net cash used in investing activities... (243,941) (80,778) (147,328) (25,760) (217,896)
-------- -------- ---------- -------- ----------
Cash flows from financing activities:
Net (payments) proceeds from lines of credit... (194,198) 5,000 (5,000) -- --
Payments on long-term debt..................... (20,755) (41,442) (201,780) (77,299) (34,465)
Payments on loan payable -- officer............ 48,218 (48,218) -- -- --
Proceeds from issuance of common stock......... 49,500 -- -- -- --
Stockholder distributions...................... -- (79,500) (900,800) (135,000) (427,006)
Proceeds from long-term debt................... -- -- -- -- 170,000
-------- -------- ---------- -------- ----------
Net cash used in financing activities... (117,235) (164,160) (1,107,580) (212,299) (291,471)
-------- -------- ---------- -------- ----------
Net (decrease) increase in cash.................. 177,843 424,034 (123,930) (148,931) 325,698
Cash -- beginning of the year.................... 37,573 215,416 639,450 639,450 515,520
-------- -------- ---------- -------- ----------
Cash -- end of the year.......................... $215,416 $639,450 $ 515,520 $490,519 $ 841,218
-------- -------- ---------- -------- ----------
Supplemental disclosures:
Interest paid.................................. $ 18,486 $ 50,048 $ 73,184 $ 15,569 $ 7,467
======== ======== ========== ======== ==========
Income taxes paid (refunded)................... $(14,749) $ 60,594 $ 487,739 $145,000 $ 325,150
======== ======== ========== ======== ==========
Supplementary information regarding
non-cash investing and financing
activities:
Non-cash acquisition of property............... $ 4,709 $574,634 $ 22,000 $ 20,000 $ --
======== ======== ========== ======== ==========
Non-cash disposition of property............... $ -- $(50,829) $ -- $ -- $ --
======== ======== ========== ======== ==========
The accompanying notes are an integral part of these financial statements.
F-7
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the historical
accounts of Holt's Cigar Company, Inc., Ashton Distributors, Inc. and Ashton
Holdings, Inc. all of which are controlled by a single stockholder (together the
"Company") and reflect their combined financial position, results of operations
and cash flows after elimination of intercompany accounts and transactions. The
Company is engaged in the wholesale and retail sale of premium cigars and
cigar-related accessories.
The combined financial statements have been presented as if the Company had
operated as a single combined entity for all periods presented. Such financial
statements may not necessarily present the financial position, results of
operations and cash flows the Company would have reported as a single entity
because in part, Ashton Distributors, Inc. is a Subchapter S Corporation and the
Subchapter S election will terminate upon consummation of the Company's
reorganization. (See Note 15 for unaudited combined pro forma financial
information.)
Corporate Reorganization (unaudited)
In conjunction with the Company's initial public offering, the companies
will be reorganized in a transaction among entities under common control. Prior
to the reorganization, the controlling stockholder owned 100% of the outstanding
common stock of both Holt's Cigar Company, Inc. and Ashton Distributors, Inc.
and 60% of the outstanding common stock of Ashton Holdings, Inc. Ashton
Holdings, Inc. which changed its name to Holt's Cigar Holdings, Inc., will
acquire all the outstanding common stock of Holt's Cigar Company, Inc. and
Ashton Distributors, Inc. The assets acquired and liabilities assumed of Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. are reflected in the unaudited
proforma combined balance sheet at historical costs except for the ownership
interests (represented by options) held by individuals other than the
controlling stockholder or his immediate family which have been recorded as the
acquisition of minority interests at estimated fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying disclosures at the date of the financial statements.
Differences from those estimates, if any, are recorded in the period they become
known.
Inventory
Inventory is stated at the lower of average cost or market. Cost is
determined by the first-in first-out method. Inventory is composed of finished
goods held for re-sale.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
cash and trade accounts receivable. The Company places its temporary cash
investments with high credit quality financial institutions to limit its credit
exposure. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, their dispersion across different geographic areas and generally short
payment terms.
F-8
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable, accrued expenses and other liabilities approximate fair value
because of the short maturity of those instruments.
The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the Company
for debt with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations. Renewals and betterments that materially
extend the life of the asset are capitalized. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets. Useful lives range from five to thirty-nine years.
Long-lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1997, the
Company adopted this statement and determined that no impairment loss need be
recognized for applicable assets of continuing operations.
Revenue Recognition
Sales are recognized upon shipment of products.
Cost of Goods Sold
Cost of goods sold comprises the following:
[Enlarge/Download Table]
YEAR ENDED MARCH 31,
------------------------------------ THREE MONTHS ENDED
1995 1996 1997 JUNE 30, 1997
---------- ---------- ---------- ------------------
(UNAUDITED)
Beginning inventory............... $ 902,307 $1,094,289 $1,557,207 $ 2,583,877
Purchases from:
Related party supplier
(Notes 11 and 12)............ 1,020,929 1,853,269 3,631,481 1,479,478
Other suppliers................. 2,212,543 3,768,212 6,961,153 2,172,049
Less: ending inventory............ (1,094,289) (1,557,207) (2,583,877) (2,623,277)
---------- ---------- ---------- -----------
Cost of goods sold................ $3,041,490 $5,158,563 $9,565,964 $ 3,612,127
========== ========== ========== ===========
F-9
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Stock Options
The Company applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans.
Net Income Per Share
Net income per share is presented on a pro forma basis only. See Note 15.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Holt's Cigar Company, Inc. (Holt's) and Ashton Holdings, Inc. (Holdings)
are subchapter C corporations and therefore subject to federal and state
corporate income taxes.
Ashton Distributors, Inc. (Ashton) has elected to be taxed under the
provisions of subchapter S of the Internal Revenue Code and Pennsylvania Tax
Reform Code. Under these provisions, Ashton does not pay federal or state income
taxes on its taxable income. Instead, Ashton's income, losses and credits are
included in the individual tax return of Ashton's stockholder.
Interim Financial Statements
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
interim period and are prepared on the same basis as the audited annual
financial statements.
Advertising
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotions costs amounted to $228,029, $328,111, $329,057 and
$111,064 (unaudited) for the years ended March 31, 1995, 1996 and 1997 and the
three months ended June 30, 1997, respectively.
Recently Issued Accounting Standards
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This Statement establishes a fair
value method of accounting for, or disclosing, stock-based compensation plans.
The Company adopted the disclosure provisions of SFAS No. 123 which require
disclosing the pro forma effect on net income and earnings per share of the fair
value method of accounting for stock-based compensation. The adoption of the
disclosure provisions did not affect the Company's combined financial condition,
results of operations, or cash flows. See Note 13.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS No. 128"). This statement requires companies to present basic earnings
per share, and if applicable, diluted earnings per share instead of primary and
fully diluted earnings per share. Basic earnings per share include the weighted
average number of common shares outstanding during the period, and does not
include common stock equivalents. Under SFAS No. 128, diluted earnings per share
include the weighted average number of shares outstanding and common stock
equivalents. SFAS No. 128 must be adopted by the Company in the third quarter of
fiscal year 1998. Early adoption of SFAS No. 128 is
F-10
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
not permitted. Adoption of SFAS 128 is not expected to have material effect on
the Company's earnings per share.
2. LOAN RECEIVABLE -- OFFICER
Loan receivable -- officer represents a short-term advance to an officer
with no interest being charged.
3. INCOME TAXES
As discussed in Note 1, the Company utilizes the liability method of
accounting for income taxes in accordance with SFAS 109. The effective tax rates
differ from the statutory rate primarily due to the Company's historical
corporate structure. The income recorded in Ashton Distributors, Inc. was not
subject to corporate taxation, rather the tax consequences were the
responsibility of the individual stockholder, resulting in a permanent
difference. The historical income tax expense is detailed as follows on a
separate company basis, after the effects of eliminations:
For the year ended March 31, 1997:
[Enlarge/Download Table]
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- ----------
Income (loss) before income
tax expense................ $1,399,619 $1,603,634 $(154,130) $2,849,123
Current tax provision
Federal income tax...... 435,000 -- -- 435,000
State income tax........ 141,600 -- -- 141,600
---------- ---------- --------- ----------
Income tax expense........... 576,600 -- -- 576,600
---------- ---------- --------- ----------
Net income (loss)............ $ 823,019 $1,603,634 $(154,130) $2,272,523
========== ========== ========= ==========
For the year ended March 31, 1996:
[Enlarge/Download Table]
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
Income (loss) before income
tax expense................. $752,139 $261,512 $(167,401) $846,250
Current tax provision
Federal income tax.......... 237,500 -- -- 237,500
State income tax............ 77,300 -- -- 77,300
Deferred income taxes......... 3,400 -- -- 3,400
-------- -------- --------- --------
Income tax expense............ 318,200 -- -- 318,200
-------- -------- --------- --------
Net income (loss)............. $433,939 $261,512 $(167,401) $528,050
======== ======== ========= ========
F-11
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES -- (CONTINUED)
For the year ended March 31, 1995:
[Enlarge/Download Table]
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
Income (loss) before income
tax expense................. $494,210 $296,531 $(118,686) $672,055
Current tax provision
Federal income tax.......... 160,400 -- -- 160,400
State income tax............ 49,000 -- -- 49,000
-------- -------- --------- --------
Income tax expense............ 209,400 -- -- 209,400
-------- -------- --------- --------
Net income (loss)............. $284,810 $296,531 $(118,686) $462,655
======== ======== ========= ========
The historical losses in Ashton Holdings, Inc. result in a net operating
loss carryforward for tax purposes of $63,000. The tax loss carryforward is less
than the historical book losses due to the effects of the elimination of
intercompany transactions. The Company has recorded a valuation allowance
against the entire deferred tax asset of $25,830.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment is detailed as follows:
[Download Table]
MARCH 31,
--------------------- JUNE 30,
1996 1997 1997
-------- ---------- -----------
(UNAUDITED)
Equipment.................................. $122,295 $ 223,963 $ 240,238
Furniture and fixtures..................... 185,800 205,800 205,800
Leasehold improvements..................... 617,224 636,638 832,622
-------- ---------- ----------
925,319 1,066,401 1,278,660
Accumulated depreciation................... (107,381) (218,175) (239,694)
-------- ---------- ----------
Property and equipment, net................ $817,938 $ 848,226 $1,038,966
======== ========== ==========
Depreciation expense amounted to $16,768, $80,049, $110,794 and $21,519
(unaudited) in the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
5. STOCKHOLDERS' EQUITY
Stockholders' equity comprised the following:
[Enlarge/Download Table]
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
Common stock
Holt's Cigar Company, Inc. -- No par value, $1
stated value, 100,000 shares authorized,
90,000 shares issued and 72,000
outstanding.................................. $ 90,000 $ 90,000 $ 90,000
Ashton Holdings, Inc. -- $.01 par value, 20,000
shares authorized, 10,000 shares issued and
outstanding.................................. 114 114 114
Ashton Distributors, Inc. -- No par value, 1,000
shares authorized, issued and outstanding.... 1,000 1,000 1,000
---------- ---------- ----------
$ 91,114 $ 91,114 $ 91,114
========== ========== ==========
F-12
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
[Enlarge/Download Table]
MARCH 31,
----------------------- JUNE 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
Additional paid-in capital
Holt's Cigar Company, Inc....................... $ 4,721 $ 4,721 $ 4,721
Ashton Holdings, Inc............................ 298,886 298,886 298,886
---------- ---------- ----------
$ 303,607 $ 303,607 $ 303,607
========== ========== ==========
Retained earnings (accumulated deficit)
Holt's Cigar Company, Inc....................... $1,196,096 $2,019,115 $2,474,395
Ashton Holdings, Inc............................ (149,572) (303,702) (392,693)
Ashton Distributors, Inc........................ 261,641 964,475 1,224,592
---------- ---------- ----------
$1,308,165 $2,679,888 $3,306,294
========== ========== ==========
6. OTHER ASSETS
Other assets include several intangible assets including restrictive
covenants, trademarks, trade name, customer list and organization costs. The
assets are being amortized over periods ranging from five to twenty years.
7. BORROWINGS
Lines of Credit
The Company maintained a line of credit of $200,000 with a bank, payable on
demand of which $5,000 was outstanding at March 31, 1996. Interest was payable
at the bank's prime rate (8.25% at March 31, 1996) plus 1%. The line was
collateralized by the personal guarantee of a stockholder. The line was
terminated in 1997.
The Company maintains another line of credit of $400,000 with a bank,
payable on demand of which no amounts were outstanding at March 31, 1996 and
1997. Interest is payable at the bank's prime rate (8.5% at both March 31, 1997
and 1996). The line is collateralized by Company assets and the personal
guarantee of a stockholder.
F-13
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
Long-term Debt
Long-term debt consists of the following:
[Enlarge/Download Table]
MARCH 31,
--------------------- JUNE 30,
1996 1997 1997
--------- --------- -----------
(UNAUDITED)
Note payable -- bank -- due in monthly payments of $1,042
plus interest at the bank's prime rate (8.25% at both
March 31, 1997 and 1996) plus 1%, collateralized by
inventory, property and the guarantee of a stockholder. $ 36,450 $ 22,894 $ 18,726
Payments extend through February, 1999....................
Notes payable -- equipment -- due in various monthly
payments ranging from $148 to $709 including interest from
9.9% to 14%, collateralized by equipment. Payments extend
through March, 1999....................................... 22,273 25,841 21,803
Note payable -- bank-- due in monthly payments of $1,208
including interest at 8.5% (using a twenty-five year
amortization), collateralized by a second mortgage on the
retail location property owned by the stockholder, an
insurance policy on the life of a stockholder and the
guarantee of a stockholder. In June, 2000 the interest
rate changes to the prime rate plus 1%. Payments extend
through June, 2020........................................ 148,811 147,078 146,613
Note payable -- bank -- due in monthly payments of $4,042
including interest at 9%. Monthly payments increased to
$9,470 in September, 1996. Collateralized by the
assignment of rents on the real property at the retail
location, accounts receivable, inventory and a mortgage on
the retail location property, along with the guarantee of
a stockholder. Payments extend through April, 1998........ 284,127 116,068 90,268
Note payable -- bank -- construction loan agreement --
Maximum amount available -- $450,000. Interest is charged
at 8.75% for the initial thirty months, prime plus .25%
for the next thirty months, adjusted thereafter based on
prime for each thirty month period. Payable over a ten and
a half year period. First six monthly payments interest
only -- monthly installments of principal and accrued
interest begin January 1, 1998. Secured by a third lien on
the accounts receivable, inventory and property and
guaranteed by a stockholder. Payments extend through
December, 2008............................................ -- -- 170,000
--------- --------- ---------
Total..................................................... 491,661 311,881 447,410
Less: current portion..................................... (148,666) (129,441) (122,470)
--------- --------- ---------
Long-term debt............................................ $ 342,995 $ 182,440 $ 324,940
========= ========= =========
F-14
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
The following is a schedule of long-term debt maturities as of March, 31,
1997:
1998.............................. $129,441
1999.............................. 39,734
2000.............................. 2,492
2001.............................. 2,712
2002.............................. 2,951
Thereafter........................ 134,551
--------
$311,881
========
Total interest expense amounted to $18,486, $50,048, $73,184 and $7,467
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
8. LEASE COMMITMENTS
The Company leases warehouse space in Philadelphia under a noncancelable
operating lease expiring in December, 1998. The lease also requires payment of
the tenant's common area maintenance expenses. The Company also leases retail
space from a stockholder under an operating lease expiring in October, 2004. The
lease includes a five year renewal option.
The Company leases various office and warehouse equipment and an automobile
under operating leases expiring through April, 2002. The Company entered into an
operating lease agreement for a new office and warehouse facility in
Philadelphia expiring in June, 2002 with one five year renewal option.
The following is a schedule of future minimum rental payments required
under the above operating leases as of March 31, 1997:
1998.............................. $161,976
1999.............................. $181,896
2000.............................. $158,400
2001.............................. $153,303
2002.............................. $152,268
Rental expense amounted to $67,244, $100,008, $103,044 and $31,898
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the three
months ended June 30, 1997, respectively.
9. PROFIT SHARING PLAN
The Company sponsors a 401(k) contributory qualified profit sharing plan
covering substantially all of its employees. Under the Plan, the Company's
contributions are based upon the employee's elective deferral contribution. The
Company's contribution is equal to 50% of the employee's contribution up to 6%
of the employee's pre-tax salary. Contributions for the years ended March 31,
1995, 1996 and 1997 and the three months ended June 30, 1997, amounted to
$8,397, $18,463, $23,233 and $6,442 (unaudited), respectively.
10. MAJOR SUPPLIERS
During fiscal years 1995, 1996 and 1997, the Company purchased
approximately 37%, 39% and 47%, respectively, of its cigars from one supplier.
At March 31, 1996, 1997 and June 30, 1997, amounts due to the supplier were
approximately $504,000, $713,800 and $491,000 (unaudited), respectively and are
included in due to related party. This supplier is a company controlled by an
affiliate of a stockholder of the Company. During fiscal 1997, approximately 18%
of the Company's
F-15
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR SUPPLIERS -- (CONTINUED)
purchases were from one other supplier. At March 31, 1997, approximately
$256,000 was due to the other supplier and included in accounts payable.
11. COMMITMENTS
The Company is required to pay royalties to an unaffiliated individual
related to the purchase of the "Ashton" name. Royalties are based on 1% of all
purchases of cigars bearing the Ashton name through January 1, 2000. Royalties
incurred for the years ended March 31, 1995, 1996 and 1997 and the three months
ended June 30, 1997 were $12,000, $16,150, $31,616 and $16,190 (unaudited),
respectively.
The Company has guaranteed certain debt of the controlling stockholder. The
balance on such debt was $443,714 and $436,783 at March 31, 1996 and 1997,
respectively.
The Company has certain employment contracts for executives which extend
for up to five years.
12. RELATED PARTY TRANSACTIONS
The Company has a loan receivable due from the controlling stockholder (see
Note 2).
The controlling stockholder guarantees certain debt of the Company (see
Note 7).
The Company guarantees certain debt of the controlling stockholder (see
Note 11).
The Company paid rent of approximately $0, $48,000, $54,000 and $18,750
(unaudited) to the controlling stockholder for the years ended March 31, 1995,
1996 and 1997 and the three months ended June 30, 1997, respectively (see Note
8).
The major supplier mentioned in Note 10 is a company controlled by a
stockholder of the Company. Amounts due to the related party are separately
shown on the face of the balance sheet.
13. STOCK OPTIONS
Effective January 1, 1996, three individuals were granted stock options to
purchase common stock of each of the three companies at estimated fair market
value. The individuals were an employee, an outside director, and a member of
the controlling stockholder's immediate family, respectively. After giving
effect to the reorganization, an aggregate of 482,400 shares are issuable
pursuant to these options at an exercise price of $.50 per share. The Company
has adopted the disclosure-only provisions of SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). The options expire on December 31,
2005. If the Company had elected to recognize compensation cost consistent with
the method prescribed by SFAS 123, net income and earnings per share would not
have been significantly different than reported. The controlling stockholder has
agreed that upon exercise of any such options he will contribute to the capital
of the Company one share of common stock for each share purchased pursuant to
those options.
14. CAPITAL STRUCTURE (UNAUDITED)
As discussed in Note 1, the Company reorganized in September 1997. After
the reorganization, Holt's Cigar Holdings, Inc. has one class of common stock
with a par value of $.001. The Company, after reorganization, will have options
outstanding for the purchase of 711,900 shares of common stock. In addition, the
Company is authorized to issue 1,000,000 shares of preferred stock, the features
of which are subject to designation by the Board of Directors.
F-16
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED)
Pro Forma Balance Sheet Information
The unaudited pro forma balance sheet reflects the S Corporation estimated
distribution of $2,700,000 and the related effects of the revised capital
structure including the termination of the Company's S Corporation status
assuming such termination had occurred at June 30, 1997. No deferred taxes
resulted from such termination.
The pro forma balance sheet also includes the goodwill resulting from the
application of purchase accounting to option holder minority interests in Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. acquired in the reorganization
described in Note 1 utilizing an estimated $13.00 per share offering price. The
pro forma balance sheet includes reclassifications of certain stockholders'
equity accounts to reflect the Company's capital structure after the
reorganization.
Pro Forma Income Before Income Taxes
Pro forma net income per share is based on net income per share decreased
to give effect to the increased amortization costs of $12,217 for the year ended
March 31, 1997 and $3,054 for the three months ended June 30, 1997, and which
would have resulted if the goodwill created at the reorganization had existed at
March 31, 1996. Such goodwill is being amortized over 20 years.
Pro Forma Income Taxes
As discussed in Note 1 and reported in Note 3, Ashton Distributors, Inc.
does not pay federal or state income tax. Upon consummation of the
reorganization Ashton will terminate its S Corporation status and be subject to
federal and state income taxes. The pro forma provision for income taxes
represents the income tax provisions that would have been reported had the
Company been a combined C Corporation during the year ended March 31, 1997 and
the three months ended June 30, 1997:
[Download Table]
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- ------------------
(UNAUDITED)
Pro forma income before taxes................... $2,836,906 $1,367,358
Current tax provisions
Federal income tax......................... 965,000 465,000
State income tax........................... 170,000 82,000
---------- ----------
Income tax expense......................... 1,135,000 547,000
---------- ----------
Pro forma net income............................ $1,701,906 $ 820,358
========== ==========
F-17
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED) -- (CONTINUED)
The reconciliation between the effective pro forma income tax rate and the
U.S. federal statutory rate is as follows:
[Download Table]
YEAR ENDED THREE MONTHS ENDED
MARCH 31, 1997 JUNE 30, 1997
-------------- ------------------
U.S. Federal taxes at statutory rate............ 34.0% 34.0%
State and local taxes, net...................... 5.9 6.3
---- ----
Income tax provision............................ 39.9% 40.3%
==== ====
Pro Forma Net Income Per Share
The computation of pro forma earnings per share is based on the weighted
average number of outstanding common shares during the period plus common stock
equivalents, if dilutive. Pursuant to the requirements of the Securities and
Exchange Commission, the weighted average number of outstanding common shares
includes the effects of the incremental number of shares required to fund
distributions to the shareholder of Ashton Distributors, Inc. in excess of
earnings for the preceding 12 months (including the estimated distribution of
$2,700,000). As discussed in Note 1, the Company reorganized in September 1997.
After the reorganization, Holt's Cigar Holdings, Inc. has one class of common
stock with a par value of $.001. As discussed in Note 13, the Company, after
reorganization, will have options outstanding for the purchase of 482,400 shares
of common stock. The controlling stockholder has agreed that upon exercise of
any such options he will contribute to the capital of the Company one share of
common stock for each share purchased pursuant to those options, thereby
reducing his ownership interest. Historical net income per share data has not
been presented since such amounts are not deemed to be meaningful due to the
significant change in the Company's capital structure which is to occur in
connection with the Offering.
Supplemental Pro Forma Net Income Per Share
The supplemental pro forma net income per share is based on pro forma net
income, (i) increased to give effect to the reduction in interest costs of
$44,000 for the year ended March 31, 1997, $11,000 for the three months ended
June 30, 1996, $4,400 for the three months ended June 30, 1997 (net of the
applicable income taxes), which would have resulted assuming the application of
a portion of the net proceeds from the Offering were used to repay certain
indebtedness of the Company and (ii) divided by proforma weighted average shares
plus the incremental shares issued to repay the debt.
16. SUBSEQUENT EVENTS (UNAUDITED)
In September 1997, the Board of Directors approved an Employee Stock Option
Plan. The plan allows for options to purchase up to 300,000 shares of common
stock to be granted, at their fair market value on the date of grant. The
Company expects to grant options to purchase an aggregate of 169,500 shares at
the effective date of the Offering.
In September 1997, the Board of Directors approved a "Non-Management
Directors Stock Option Plan" which allows for options to purchase up to 180,000
shares. The Company expects to grant outside directors options to purchase an
aggregate of 60,000 shares at the effective date of the Offering. Such options
will vest immediately and will be granted at their fair market value on the date
of grant.
F-18
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Reorganization of the Company................... 16
Use of Proceeds................................. 17
Dividend Policy................................. 17
Capitalization.................................. 18
Dilution........................................ 19
Selected Financial Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business........................................ 26
Management...................................... 36
Certain Transactions............................ 40
Principal and Selling Shareholders.............. 41
Description of Capital Stock.................... 42
Shares Eligible for Future Sale................. 45
Underwriting.................................... 47
Legal Matters................................... 48
Experts......................................... 48
Change in Independent Accountants............... 49
Additional Information.......................... 49
Index to Financial Statements................... F-1
1,750,000 Shares
HOLT'S CIGAR
HOLDINGS, INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
November , 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered hereby, other than underwriting discounts and
commissions, are itemized below.
Securities and Exchange Commission registration fee......... $ 8,538
NASD filing fee............................................. 3,318
Nasdaq National Market listing fee.......................... 50,000
Accounting Fees and Expenses................................ 150,000
Legal fees and expenses..................................... 175,000
Printing and engraving expenses............................. 120,000
Blue Sky fees and expenses (including legal fees)........... 2,500
Transfer Agent and Registrar fees and expenses.............. 10,000
Miscellaneous............................................... 30,644
--------
Total.................................................. $550,000
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertakes to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually and
reasonably incurred in connection therewith. The indemnification provided is not
deemed to be exclusive of any other rights to which an officer or director may
be entitled under any corporation's by-law, agreement, vote or otherwise.
The Company's Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of their fiduciary duty to the
maximum extent permitted by the DGCL. The DGCL does not permit liability to be
eliminated (i) for any breach of a director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions, as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. In addition, as permitted in Section 145
of the DGCL, the Certificate of Incorporation and By-Laws of the Company provide
that the Company shall
II-1
indemnify its directors and officers to the fullest extent permitted by the
DGCL, including those circumstances in which indemnification would otherwise be
discretionary, subject to certain exceptions. The By-Laws also provide that the
Company shall advance expenses to directors and officers incurred in connection
with an action or proceeding as to which they may be entitled to
indemnification, subject to certain exceptions.
The indemnification provisions in the Company's Certificate of
Incorporation and By-Laws may permit indemnification for liabilities arising
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company currently expects to carry director and officer liability
insurance following this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following shares were sold by the Company
without registration under the Securities Act of 1933, as amended (the "Act").
All references to shares of the Company's Common Stock give effect to the
Reorganization.
The Company relied on the exemption from registration set forth in Section
4(2) of the Act. No fees were paid in connection with the foregoing sales of
securities.
During December 1995, the Company sold 234,497 shares of Common Stock for
an aggregate purchase price of $49,500 to Fuente Investment Partnership pursuant
to the exercise of an option.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
1 Form of Underwriting Agreement
2 Plan of Reorganization*
3.1 Amended Articles of Incorporation*
3.2 By-Laws*
4 Form of Option Agreement*
5 Opinion re: Legality and Consent of Fox, Rothschild, O'Brien
& Frankel, LLP*
10.1 Employment Agreement dated October 1, 1997, with Robert G.
Levin*
10.2 Employment Agreement dated October 1, 1997, with Michael
Pitkow*
10.3 Employment Agreement dated October 1, 1997, with Robert H.
Levitt*
10.4 Private Label Manufacturing Agreement dated April 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.*
10.5 Exclusive Distributorship Agreement dated
between Ashton Distributors, Inc. and Fuente Cigar Ltd.*
10.6 Lease Agreement dated March 20, 1997 between the Company and
P. D'Andrea, Inc.*
10.7 Lease Agreement between Robert G. Levin and Suzanne J. Levin
and Holt's Cigar Company Inc. dated as of November 1, 1994*
10.8 License Agreement dated May 4, 1993 between Ashton Holdings
Inc. and William Ashton Taylor*
10.9 1997 Employee Stock Option Plan
10.10 Non-Management Director Stock Plan
10.11 Shareholder Agreement*
II-2
11.1 Computation of Pro Forma Net Income Per Share
11.2 Computation of Supplemental Pro Forma Net Income Per Share
16 Letter re change in certifying accountant
23.1 Consent of Schmeltzer Master Group, P.C.
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Fox, Rothschild, O'Brien & Frankel, LLP, included
as Exhibit 5*
27 Financial Data Schedule
------------------
* To be filed by amendment.
(b) No Financial Statements Schedules are filed as part of this Registration
Statement
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on September 24, 1997.
HOLT'S CIGAR HOLDINGS, INC.
By: /s/ ROBERT G. LEVIN
----------------------------------
Robert G. Levin,
Chairman of the Board, Chief
Executive
Officer and President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Robert G. Levin and Michael Pitkow, and
each or any of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement and other registration
statements and amendments thereto relating to the Offering contemplated by this
Registration Statement (including registration statements under Rule 462
promulgated under the Securities Act of 1933, as amended), and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents, or any of them, or their, his or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 has been signed by the following persons in
their capacities and on the date signed.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT G. LEVIN Chairman of the Board, Chief September 24, 1997
------------------------------- Executive Officer and President
Robert G. Levin
/s/ MICHAEL PITKOW Director, Chief Operating Officer September 24, 1997
------------------------------- and Executive Vice President
Michael Pitkow
/s/ MARVIN B. SHARFSTEIN Director September 24, 1997
-------------------------------
Marvin B. Sharfstein
/s/ CARLOS A. FUENTE, SR. Director September 24, 1997
-------------------------------
Carlos A. Fuente, Sr.
/s/ CARLOS P. FUENTE, JR. Director September 24, 1997
-------------------------------
Carlos P. Fuente, Jr.
/s/ HARVEY W. GROSSMAN Director September 24, 1997
-------------------------------
Harvey W. Grossman
/s/ ROBERT H. LEVITT Chief Financial Officer September 24, 1997
------------------------------- (Principal Financial
Robert H. Levitt and Accounting Officer)
II-4
Dates Referenced Herein and Documents Incorporated by Reference
↑Top
Filing Submission 0000950115-97-001478 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Mon., May 13, 2:11:01.2pm ET