FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

(Mark One)

|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the fiscal year ended December 31, 1999
                                       OR

|_|    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ________ to ___________

Commission file number: 0-22675
                               800-JR Cigar, Inc.

                   (Exact name of Registrant as specified in its charter)

Delaware                                                     52-2022117
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

301 Route 10 East,  Whippany,  New  Jersey  07981,  USA  (Address  of  principal
executive offices) (Zip code)

                                  (973)884-9555

                   (Registrant's telephone number including area code)

                Securities registered pursuant to Section 12(b) of the Act: None
                   Securities  registered pursuant to section
12(g) of the Act:

Title of Securities: Common Stock, $.01 par value
Exchanges on which Registered: The Nasdaq National Market

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. |_|

                         (APPLICABLE ONLY TO CORPORATE REGISTRANTS)
         Indicate the number of shares  outstanding of each of the  registrant's
classes of common stock, as of the latest practicable date.

         The  aggregate  market  value  of  Registrants'  Common  Stock  held by
non-affiliates  as of March 20, 2000 was  $24,308,953  based on  2,627,995  such
shares outstanding on such date and the closing sales price for the Common Stock
on such date of $9.25 as reported by the Nasdaq National Market.

         The number of shares of Common Stock of the  registrant  outstanding at
March 20, 2000 was 11,927,995.

                       DOCUMENTS INCORPORATED BY REFERENCE

                    Notice and Proxy  Statement  for the 2000 Annual  Meeting of
Shareholders to be held May 16, 2000.

                      Incorporation  as to: Part III; Item 10, 11, 12 and 13.
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                                      Index

Part I

Item 1.           Business.................................................... 3
Item 2.           Properties..................................................14
Item 3.           Legal Proceedings...........................................14
Item 4.           Submission of Matters to a Vote of Security Holders.........15

Part II

Item 5.           Market for the Registrant's Common Equity and Related Security
                  Holder Matters..............................................15
Item 6.           Selected Financial Data.....................................16
Item 7.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operations...................................17
Item 7A.          Quantitative and Qualitative Disclosure about Market Risk...23
Item 8.           Financial Statements and Supplementary Data.................24
Item 9.           Changed in and Disagreements with Accountants on Accounting
                  and Financial Disclosure....................................24

Part III

Item 10.          Directors and Executive Officers of the Registrant..........24
Item 11.          Executive Compensation......................................24
Item 12.          Security Ownership of Certain Beneficial Owners and
                    Management................................................24
Item 13.          Certain Relationships and Related Transactions..............25

Part IV

Item 14.          Exhibits, Financial Statements, Schedules and Reports on
                    Form 8-K..................................................25

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Item 1.  BUSINESS

General

800-JR  Cigar is one of the largest  distributors  and  retailers  of brand name
premium cigars in the United States.  The Company's  primary products consist of
premium  cigars,  mass market cigars and  cigarettes,  which are  distributed to
retail  and  wholesale  customers.  The  Company's  highest  gross  margins  are
generated from the sale of premium cigars  (imported,  hand-made and hand-rolled
cigars made with long filler and all natural  tobacco leaf) and, as such, it has
targeted  premium cigars as its primary growth  vehicle.  The Company's  premium
cigars  consist  of  approximately  150  brands  of which  52 are the  Company's
proprietary or licensed  brands.  Among the Company's  proprietary  and licensed
products are nationally  recognized brand names such as Belinda(R),  Bolivar(R),
Casa Blanca(R),  El Rey del Mundo(R), Jose Marti(TM),  J.R Alternative(R),  J.R,
Ultimate(R),  La Finca(R), Romeo y Julieta(TM),  and Santa Clara(R). The Company
is the largest  customer for each of the world's  leading  cigar  manufacturers,
including  Consolidated Cigar Holdings,  Inc.  ("Consolidated  Cigar"),  General
Cigar Holdings, Inc. ("General Cigar"), Swisher International,  Inc. ("Swisher")
and Villazon & Company, Inc. ("Villazon").

800-JR Cigar,  Inc. is a holding company owning 100% of the outstanding  capital
stock of each of J.R. Tobacco of America,  Inc., Santa Clara, N.A., Inc., J.N.R.
Grocery Corp.,  J.R.  Tobacco NC, Inc., J&R Tobacco (New Jersey) Corp.,  J.R.
Tobacco Company of Michigan, Inc.,  J.R.-46th Street, Inc., J.R. Tobacco Outlet,
Inc., J.R. Statesville,  Inc., J R Cigar (DC), Inc., J.R. Tobacco of Burlington,
Inc., Casa Blanca, Inc. and JR Cigar.Com, Inc.

The  Company  is well  known for its  cigar  business,  principally  the sale of
premium  cigars,  at  discounted  prices.  Associated  sales of  other  discount
products,  including  cigarettes,  general  merchandise,  fragrances  and  other
tobacco related products, benefit from this recognition.

Marketing and Distribution

Retail  Operations.  The Company's retail  operations are comprised of a premium
cigar direct mail operation through which the Company markets cigars and tobacco
related  products,   six  stand  alone  cigar  stores  (four  in  the  New  York
metropolitan area, one outside Detroit,  Michigan, and one in Washington,  D.C.)
and three discount outlet stores in North Carolina.

Direct Mail. The Company markets a wide variety of premium cigars (including its
own brand names) and related tobacco  products on a retail basis  throughout the
United States by direct mail.  For over 26 years,  the Company has maintained an
extensive  proprietary  mail  order  list of regular  customers.  The  Company's
average order size is approximately  $99.00  Management  utilizes its mail order
catalogs as its primary  advertising  vehicle.  Each  glossy,  color  catalog is

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replete with humorous asides and anecdotes written by Lew Rothman, the Company's
President and Chief Executive  Officer,  who views the retail catalog as a means
of personally  communicating with the Company's  established  customer base. The
Company  catalog  frequently  highlights  the Company's  proprietary  cigars and
changes its product offerings and featured specials with each issue. On average,
each catalog offers 20 different brands of cigars from six different  countries;
however,  by dialing  1-800-JR-CIGAR,  a customer can order any cigar or tobacco
accessory  currently carried by the Company.  In the event that the Company does
not have a particular product in stock, a customer may place an order to ship on
arrival,  or  knowledgeable  telemarketers  may direct the  customer  to similar
products by utilizing  the  Company's  sophisticated  database.  The Company has
increased the frequency  and  circulation  of its mail order catalog and updated
its  website as an  additional  means of  advertising.  Retail  mail order sales
decreased  9.4% to $56.3  million  in 1999,  accounting  for 17.8% of net sales,
compared to $62.1 million in 1998, representing 21.7% of net sales.

Cigar Stores.  The Company currently  maintains six specialty cigar stores.  The
Company's  strategy  is to: (i) locate its stores in densely  populated,  highly
trafficked  areas  where  demand  for  premium  cigars  is high;  (ii)  maintain
exceptional  inventories of premium cigars;  and (iii) maintain fully humidified
and climate-controlled stores to ensure freshness. In December 1999, the Company
relocated  one of its New York stores to Fifth  Avenue from 45th  Street.  Sales
generated by the Company's cigar stores increased 27.3% to $32.6 million in 1999
accounting  for 10.3% of the Company's  net sales,  compared to $25.6 million in
1998, accounting for 9.0% of the net sales.

Discount Outlet Stores. The Company operates three large discount outlet stores.
The   Company's   strategy  for  discount   outlet  store  success  is  to:  (i)
strategically  locate its  stores on  interstate  highways;  (ii)  leverage  the
Company's  reputation for quality cigars and cigarettes at discount prices;  and
(iii) offer a broad and changing product mix to encourage multiple purchases. An
important  factor  contributing  to its  success  is its  status  as a  licensed
cigarette   distributor  in  North   Carolina  for  the  major  U.S.   cigarette
manufacturers.  Each discount outlet store maintains on the premises a wholesale
cigarette  cash-and-carry operation and a specialty cigar store. Sales generated
by the Company's  discount outlet stores were $67.9 million in 1999,  accounting
for 21.4% of net sales,  which was consistent  with 1998 sales of $68.0 million,
representing 23.7% of net sales.

Internet.  In April 1999, the Company  commenced  internet  sales.  For 1999 the
Company's  internet sales were $3.7 million or 1.2% of net sales.

Wholesale Operations

Wholesale  activities are a major component of the Company's business,  enabling
the  Company to obtain  favorable  prices by giving it the  ability to  purchase
tobacco products,  particularly  cigars and cigarettes in large quantities,  and
the  flexibility  to  determine  the amount,  timing and manner by which it will
satisfy  demand in the  marketplace.  The  Company  attributes  its  competitive
advantage  over other  distributors  to:  (i) a large  quantity  and  variety of
products; (ii) a policy of no minimum order; (iii) convenience through "one stop

<PAGE>

shopping;"  and  (iv)  competitive  prices.  Sales  generated  by the  Company's
wholesale  division  grew  19.7%  to  $156.5  million  in 1999,  accounting  for
approximately 49.3% of net sales, compared to $130.8 million in 1998, accounting
for 45.6% of net sales.

Catalog.  The Company's  wholesale mail order business is focused on the sale of
premium  cigars.  The Company's  wholesale  catalog  consists of a comprehensive
price list of a wide  selection of Company  branded  products as well as premium
and mass market cigars  trademarked  by others.  The catalog is  distributed  to
approximately  8,000 smoke shops, fine restaurants,  taverns,  liquor stores and
other retail  outlets  throughout  the United  States.  Wholesale  catalog sales
increased  1.1% to $57.5  million  in 1999,  accounting  for 18.1% of net sales,
compared to $56.9 million in 1998, accounting for 19.8% of net sales.

Cash-and-Carry.  The Company's cash-and-carry wholesale operations are conducted
on a walk-in  basis at its three North  Carolina  discount  outlet  stores.  The
Company  maintains a 5,000 square foot wholesale  store within each of its three
discount  outlet stores,  which serve wholesale  customers.  The Company obtains
substantially all of its  cash-and-carry  wholesale  revenues at these locations
from the sale of a wide variety of premium  cigarettes,  generic  cigarettes and
deep discount label  cigarettes.  The remainder of the Company's  cash-and-carry
wholesale  revenues  are derived  from  mass-market  cigars,  smokeless  tobacco
products and pipe  tobaccos.  The Company's  cash-and-carry  sales grew 34.0% to
$99.0  million in 1999,  accounting  for 31.2% of net sales,  compared  to $73.9
million in 1998, accounting for 25.8% of net sales.

Products

Cigars and Other Tobacco Products

Sales of premium and mass market  cigars and other  tobacco  products  decreased
2.1% to $149.9  million for the year ended  December  31, 1999,  accounting  for
47.3% of net sales,  compared to $153.1  million for the year ended December 31,
1998, representing 53.4% of net sales.

Premium  Cigars.  Premium  cigars are  generally  imported,  100%  hand-made  or
hand-rolled  cigars  made  with  long  filler  and  all  natural  tobacco  leaf.
Approximately  90% of the cigars  sold by the  Company  in terms of dollars  are
premium cigars.

The Company sells  approximately  150 brands of premium cigars, of which over 50
are the Company's  proprietary brands. Sales of the Company's proprietary cigars
represent  approximately  45% of the Company's  total gross dollar premium cigar
sales.  The  Company  offers  most  of its  cigars  at  discounts  ranging  from
approximately 20% to 75% off of manufacturers' suggested retail prices.

The Company believes that its proprietary product offerings are unmatched in the
marketplace for superior  quality at affordable  prices.  The Company's  premium

<PAGE>

cigars are handmade and are principally  produced in five  countries,  including
Honduras, the Dominican Republic,  Nicaragua,  Mexico and Jamaica. While premium
cigars  generally  sell at price  points  ranging up to $15.00  per  cigar,  the
Company's  branded  premium cigars are typically sold at prices ranging  between
$1.75 to $5.00 per cigar with J.R  Alternatives  selling at price points ranging
from $.75 to $1.50 per cigar. In addition,  the Company holds exclusive licenses
to distribute  additional  brands of premium cigars for certain periods of time.
The  Company  has the  right  to  market  exclusively  the El Rey del  Mundo(R),
Belinda(R)  and  Bolivar(R)  as well as Romeo Y Julieta  brand names.  Among the
Company's premium brands,  several have received from Cigar Aficionado  magazine
the highest ratings of cigars sold, including, among others El Rey del Mundo, La
Finca, Belinda, Casa Blanca, Santa Clara, Romeo Y Julieta and Cuba Aliados.

The following premium cigars are either trademarks or pending  trademarks of the
Company or brands exclusively licensed to or distributed by the Company:

Honduras: Belinda, Chivis, Consuegra,  Honduran Specials, J.R Alternatives,  J.R
Ultimate,  La Rosa  Especiales,  Lew's  Smokers,  Maria  Mancini,  Mocha,  Mocha
Supreme, Rey del Mundo, Tena Y Vega, Vintage Hondurans, Plasencia,  LaEscepcion,
Cuba Aliados.

Dominican  Republic:  Bolivar,  Casa  Blanca,  Casa  Blanca  Reserve,  Dominican
Estates, Five Star, Five Star Seconds, J.R Alternatives,  J.R Special Caribbean,
J.R Special Corona,  J.R Special  Jamaicans,  Jose Marti,  Matasa 2nds,  Quorum,
Romeo Y Julieta, Royal Dominicana, Flamenco, Bock y Cia.

Nicaragua:  Jose Marti, La Finca, Rosa Cuba, Villar y Villar, Remedios, Flor de
Farach, Mayorga.

Mexico:  Mocambo, Santa Clara, Shane.

Jamaica: J.R Alternatives, Whitehall, Temple Hall, Alvarez Lopez, La Corona.

Philippines:  Harrows.

Ireland:  Mocambo Cigarillos.

Mass Market  Cigars.  Mass market cigars  generally  are domestic,  machine-made
cigars  that  use  less  expensive  short  filler  tobacco  and  are  made  with
homogenized  tobacco  binders and either  homogenized  sheet wrappers or natural
leaf wrappers.  The Company sells  approximately 75 mass-market large cigars, as
well as four proprietary brands of mass-market cigars. The Company's proprietary
mass-market  cigars sell at prices as low as $.50 per cigar.  These products are
manufactured  for the Company in the United  States and are sold under the brand
names Garcia Grande, Henry IV, J.R. Famous and Mr. B.

Smokeless  Tobacco  Products and Pipe  Tobacco.  The Company  sells moist snuff,

<PAGE>

loose  leaf  chewing  tobacco,  and dry  snuff  in each  of its  retail  stores,
including its three discount outlet stores in North Carolina.  Smokeless tobacco
products  are made from tobacco that has been cured,  aged,  fermented  and then
dried and flavored.  In addition to cigars and smokeless tobacco  products,  the
Company sells pipe tobaccos of various  types,  grades,  countries or origin and
crop years.

Tobacco  Accessories.   The  Company  also  sells  a  wide  variety  of  tobacco
accessories, including, among other things, humidors, cutters, pipes, disposable
lighters, cigar cases and ashtrays.  Although sales of such products represent a
small component of the Company's  overall  business,  the Company  believes that
their  inclusion  among  the  Company's  product  mix  enhances  the look of the
Company's  retail  catalog and rounds out the range of  products  offered by the
Company.

New  Product  Development.  The Company is  continually  engaging in new product
development,  and expects to launch six new premium cigar brands during 2000: H.
Upmann,  Connoisseur  Cabinet,  Montecristo  Connoisseur  Cabinet  and  Meadly Y
Garcia,  which will be produced in the  Dominican  Republic,  and  Placencia and
LaEscepcion, which will be produced in Honduras.

Cigarettes

The Company purchases its cigarettes from major  manufacturers for resale in its
discount outlet stores and from  distributors for resale in certain of its cigar
stores,  including  brands such as Marlboro and Winston and discount labels such
as Basic and GPC. The availability of discount cigarettes generates  substantial
customer  traffic at the Company's  discount  outlet stores.  Overall  cigarette
sales grew 26.3% to $137.1  million in 1999,  accounting  for 43.2% of net sales
compared to $108.6 million in 1998.

Fragrances and Other Merchandise.

The  Company  believes  that  diversification  in  its  product  mix  encourages
increased  retail  sales.  The  Company  purchases  a wide  variety of  designer
fragrances and specialty goods from  distributors for resale  exclusively in its
discount  outlet stores and, to a lesser  extent,  other Company  retail stores.
Such specialty  goods include,  among other things,  books,  collectibles,  gift
items,  toys,  household  items,  jewelry,  jeans and other clothing items.  The
Company  offers  all  such  products  at  significantly   reduced  prices,  with
fragrances  frequently  sold at prices ranging from 20% to 75% off the suggested
retail  price.  The Company  believes  that  diversification  in its product mix
encourages  customers to purchase more than one type of item and  contributes to
increased  sales.  Although  the  majority  of such  products  are sold from the
Company's three discount outlet stores, the Company is able to ship inventory to
its other retail stores at targeted times, such as the Christmas holiday season,
to maximize  sales at these stores.  Sales of fragrances  and other  merchandise
grew 21.0% to $30.0 million in 1999,  accounting for 9.5% of net sales, compared
to $24.8 million in 1998, accounting for 8.7% of net sales.

<PAGE>

Sources of Supply

The Company believes that the quality and strength of its business relationships
with the world's  leading  manufacturers  developed  over a 26-year  period have
positioned  it to  obtain an  adequate  supply of  merchandise.  As the  world's
largest premium cigar customer,  the Company is able to purchase its products at
a preferential basis.

An important  factor in the success of the Company's  discount outlet stores has
been its  status  as a  licensed  cigarette  distributor  in the  State of North
Carolina for  virtually  every major U.S.  cigarette  manufacturer.  As a direct
buying  account the Company is eligible to  participate in various goal oriented
promotions  and  to  receive  display  allowances,   which  enable  it  to  pass
substantial  savings  onto  its  customers.  Another  important  factor  in  the
Company's discount store growth has been the Company's  experience in purchasing
general  merchandise  directly  from  manufacturers  and other vendors at prices
substantially  below those generally paid by conventional  vendors.  The Company
regularly  purchases  overstocked or overproduced  items from  manufacturers and
other  retailers,   including   end-of-season,   out-of-season   and  end-of-run
merchandise and manufacturers'  slight irregulars.  As a result of the Company's
relationships,  experience  and reputation  for prompt  payment,  many suppliers
offer  special  purchase  opportunities  to the Company  prior to  attempting to
dispose of merchandise through other channels.

Seasonality

The Company  historically  has experienced and expects to continue to experience
certain seasonal fluctuations in its sales and net income. The Company generally
has experienced  relatively lower sales for the first half of the calendar year,
and a substantial  increase in sales from the summer vacation season through the
Christmas  holiday  season.  The Company  expects this trend to continue for the
foreseeable  future.  The Company's  quarterly  results of  operations  may also
fluctuate  as a result of a variety of  factors,  including  the timing of store
renovations and net store openings and the net sales contributed by such stores.

Sales and Advertising

The Company has relied successfully upon the strength of its reputation and word

<PAGE>

of mouth to achieve  steadily  increasing sales during years of industry decline
as well as industry  prosperity,  and believes that 25% of the nation's  premium
cigar smoking public represents its customer base. The Company's Chief Executive
Officer,  Lew  Rothman,  is a  well-known  figure in the world of cigars and the
Company's  products  are  widely  reputed to be of high  quality  at  affordable
prices. As such, the Company is frequently  featured in articles printed by such
publications  as  Cigar  Aficionado,  Smoke  and the  Tobacconist  and  numerous
newspapers.  Consequently, the Company has not been required to maintain a sales
force (except for retail store staff) or to expend substantial  amounts of money
to promote  its image or its  products.  The Company  believes  that the lack of
significant marketing  expenditures enables it to fulfill its mission to provide
quality and affordability.

The Company does,  however,  conduct a limited  amount of  advertising  in local
newspapers   catering  to  the  Company's  retail  communities  and  on  highway
billboards located within a 20 to 90 mile radius surrounding the Company's North
Carolina discount outlet stores. The Company spends  approximately 1% of its net
sales  annually in  advertising.  In 1999, the Company issued eight catalogs and
plans to distribute six during 2000.

Information Systems

Over the past several  years,  the Company has made a substantial  investment in
its information  systems in order to manage its inventory and monitor sales on a
real time basis.

Approximately  90% of the  Company's  purchased  inventory  is  bar-coded by the
manufacturer,  and the  Company  uses  alpha  numeric  coding  to  identify  its
remaining  inventory,  consisting  principally of premium cigars.  The Company's
headquarters and warehouse are electronically linked to each discount outlet and
cigar store location,  enabling the Company's senior management to monitor daily
sales and inventory levels at each location by SKU. As a result,  the Company is
able to identify the best selling items and forecast  product  demand by SKU. In
addition, the Company's software is able to identify low stock situations and to
communicate  product re-orders  directly to its North Carolina  warehouse,  thus
greatly reducing out-of-stock situations in its retail outlets.

MC Management, the Company's telemarketing provider, has access to the Company's
information  systems,  and is able to obtain in-stock  product  information on a
real time basis, as well as access a variety of information  regarding any cigar
in which a customer may be interested, as well as a list of comparable cigars to
be  recommended if the desired cigar is out of stock.  In addition,  because the
Company's  systems are on-line with all major credit cards,  the Company is able
to obtain  instant  authorization  prior to the  release  of an  order,  thereby
reducing the Company's bad debt experience.

Competition

The Company operates in a large and highly fragmented industry  characterized by
multiple  and  relatively  undeveloped  channels  of  distribution.  The Company
believes that no single  corporation  competes against the Company in all of the
Company's  lines of business,  although  several  companies  compete against the
Company  in one or  more  of its  market  segments.  The  Company  faces  retail
competition  from numerous small smoke shops.  Likewise,  the Company's cash and
carry wholesale  stores face price  competition  from Sam's Clubs, a division of
Wal-mart  Stores,  Inc.,  in its local  markets.  Sam's Clubs has  substantially
greater resources than the Company and is better able to sustain prolonged price
competition.

Intellectual Property

The  Company  markets  a number  of  cigar  brand  names  which  are  registered
trademarks  of the  Company:  Quorum(R),  5 Star  Seconds(R),  J.R  Ultimate(R),

<PAGE>

Mocambo(R), Maria Mancini(R),  Consuegra(R), La Finca(R), Whitehall(R), Garcia y
Garcia(R), Rey del Rey(R), Mocha(R),  Farach(R), Casa Blanca(R), Santa Clara(R),
Robustos de Manuel Zavalla(R),  Jose Marti(R), Villar y Villar(R) and El Secreto
del Rio  Jagua(R).  The  Company  has also  registered  the J.R(R)  mark,  which
precedes  Company brand names such as J.R Special  Jamaica,  J.R Special Corona,
and J.R Special Caribbean.  The J.R Alternative(R)  brand name, which is used to
market cigars that are  manufactured  for the Company in Jamaica,  the Dominican
Republic, Nicaragua and Honduras, is also a registered trademark of the Company.
Trademark applications are pending for LaguitoTM,  and La MecaTM brand names. In
addition to the  foregoing,  the Company  holds  trademarks  for the  following:
1-800-JR-CIGARTM  ,  Remedios(R),  Principales(R),  Clemenceau(R),  Reynitas(R),
Jeroboam(R)  and Habana  2000 and  trademark  applications  are  pending for the
RectangulareTM and ValentinosTM. Each of the aforementioned trademarks are valid
for ten years from the date of  registration  with the U.S. Patent and Trademark
Office and are subject to renewals.  The Company also possess 49 internet domain
names including: 1800jr.com, 1800jrcigars.com,  1-800-jrtobacco.com, 1888jr.com,
1888jrcigars.com,    1888jrtobacco.com,    elreydelmundo.com,    jrcharutos.com,
jrcigares.com,  jrcigarros.com,  jrcigars.com, jrsigari.com,  jrzigarren.com and
santaclaracigars.com.

Employees

As of December  31,  1999,  the Company  had 1,059  employees,  of whom 418 were
engaged in sales, 37 in finance and administration, 232 in operations and 372 in
various part-time and temporary capacities. The Company will be required to hire
additional  employees on a periodic basis in connection  with future  facilities
and expanded direct mail  operations.  The Company  considers its relations with
its employees to be good.

As of December 31, 1999,  various  administrative  and other  services have been
performed for the Company by MC Management who had 121  employees,  including 85
telemarketers  involved  in retail and  wholesale  direct mail  operations.  The
Company will be required to hire  additional  employees on a periodic  basis, in
connection with the construction, and subsequent operation, of future facilities
and expanded direct mail operations.

Tobacco Industry Litigation

Regulation.  The tobacco industry is subject to regulation at federal, state and
local levels. Federal law has recently required states, in order to receive full
funding for federal  substance abuse block grants, to establish a minimum age of
18  years  for the  sale  of  tobacco  products,  together  with an  appropriate
enforcement  program.  The recent trend is toward  increasing  regulation of the
tobacco  industry,  and the  increase in  popularity  of cigars could lead to an
increase in regulation of cigars.

In August 1996, the Food and Drug  Administration  (the "FDA")  determined  that
nicotine is a drug and that it had  jurisdiction  over  cigarettes and smokeless
tobacco  products,  as  nicotine-delivering   medical  devices,  and  therefore,
promulgated  regulations  restricting  and limiting the sale,  distribution  and

<PAGE>

advertising  of  cigarette  and  smokeless  tobacco  products.  Cigars  were not
included in the FDA's  regulations.  The  prohibition  on retailers from selling
cigarettes,  cigarette  tobacco or smokeless tobacco to persons under the age of
18 and requiring  retailers to check the  photographic  identification  of every
person under the age of 27 became effective on February 28, 1997.

Additional  efforts  by  the  FDA  to  increase   regulation  over  tobacco  and
tobacco-related  products  have been  forestalled  by a recent  decision  in the
Fourth  Circuit of the U.S. Court of Appeals.  In August 1998,  that court ruled
that the FDA lacks jurisdiction to regulate tobacco products and struck down all
the  provisions  of the FDA's 1996  regulations.  Brown & Williamson v. FDA, 153
f.3d 155 (4th Cir. 1998). The Fourth Circuit denied a U.S. Department of Justice
petition for rehearing by the Panel or en banc.

On January  19,  1999,  the  Solicitor  General  filed a petition  for a writ of
certiorari  requesting the U.S. Supreme Court review the August 1998 decision of
the Fourth Circuit. On March 21, 2000 the U.S. Supreme Court ruled that the FDA
lacks the power to regulate tobacco products.

The U.S.  Department of Health and Human Services (the "HHS") Inspector  General
issued a report in February 1999, urging the Federal Trade Commission to require
cigars to carry warning labels similar to those contained on cigarette packages.
This report marks the first time that cigars have  specifically  been identified
for increased regulatory oversight by a federal heath agency.

While the cigar industry has not been subject to federal  regulatory  efforts to
date,  there can be no  assurance  that there will not be an increase in federal
regulation in the future against cigar  manufacturers or  distributors.  The HHS
report   indicates  that  federal   regulatory   effort  directed  toward  cigar
manufacturers and distributors may be increasingly  likely.  The costs to 800-JR
Cigar,  Inc. of increased  government  regulations could have a material adverse
effect on the Company's business and results of operation.

In  addition,  the  majority of states  restrict or prohibit  smoking in certain
public  places and  restrict  the sale of  tobacco  products  to  minors.  Local
legislative  and  regulatory  bodies  have also  increasingly  moved to  curtail
smoking by  prohibiting  smoking in certain  buildings  or areas or by requiring
designated  "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations.  Numerous proposals also have been
considered at the state and local level  restricting  smoking in certain  public
areas,  regulating  point of sale placement and promotion and requiring  warning
labels.

Federal  law has  required  health  warnings  on  cigarettes  since  1965 and on
smokeless  tobacco  since  1986.  Although  there is no  federal  law  currently
requiring  that  cigars or pipe  tobacco  carry such  warnings,  California  has
enacted legislation  requiring that "clear and reasonable"  warnings be given to
consumers  who are exposed to  chemicals  known to the state to cause  cancer or
reproductive  toxicity,  including  tobacco smoke and several of its constituent
chemicals.  Violations  of this law,  known as  Proposition  65, can result in a
civil penalty not to exceed $2,500 per day for each violation.  Although similar

<PAGE>

legislation has been introduced in other states, no action has been taken. There
can be no assurance that such legislation introduced in other states will not be
passed in the future or that other  states will not enact  similar  legislation.
Consideration  at both the  federal  and  state  level  also  has been  given to
consequences  of  tobacco  smoke  on  others  that  are  not  presently  smoking
(so-called  "second-hand"  smoke).  There can be no assurance  that  regulations
relating to  second-hand  smoke will not be adopted or that such  regulations or
related  litigation  would not have a material  adverse  effect on the Company's
results of operations or financial condition.

The U.S.  Environmental  Protection  Agency  (the  "EPA")  published a report in
January  1993 with  respect to the  respiratory  health  effects of  second-hand
smoke, which concluded that widespread  exposure to environmental  tobacco smoke
presents a serious  and  substantial  public  health  concern.  Issuance  of the
report,  which is based primarily on studies of passive cigarette  smokers,  may
lead to further  legislation  designed  to protect  non-smokers.  Also,  a study
recently  published in the journal  Science  reported  that a chemical  found in
cigarette  smoke has been  found to cause  genetic  damage in lung cells that is
identical to damage observed in many malignant tumors of the lung and,  thereby,
directly links lung cancer to smoking.  The study and these reports could affect
pending and future tobacco regulation and litigation.

Increased  cigar  consumption  and the publicity that such increase has received
may increase the risk of additional regulation.  There can be no assurance as to
the ultimate content,  timing, or effect of any additional regulation of tobacco
products by any federal,  state,  local or regulatory  body, and there can be no
assurance  that any such  legislation  or  regulation  would not have a material
adverse effect on the Company's business.

Litigation.  Historically,  the cigar industry has experienced less
health-related  litigation than the cigarette and smokeless tobacco industries
have experienced.

Litigation  against the  cigarette  industry  has  historically  been brought by
individual  cigarette  smokers.  In 1992,  the United  States  Supreme  Court in
Cippollone v. Liggett  Group,  Inc. ruled that federal  legislation  relating to
cigarette  labeling  requirements  preempts  claims  based  on  failure  to warn
consumers  about the health hazards of cigarette  smoking,  but does not preempt
claims based on express warranty,  misrepresentation,  fraud, or conspiracy.  To
date,  individual  cigarette smokers' claims against the cigarette industry have
been  generally  unsuccessful.  However in February  1999, a jury in California,
awarding the  plaintiffs a total of  $51,500,000  in  compensatory  and punitive
damages.

Current tobacco litigation generally falls within one of three categories: class
actions,  individual  actions  (which  have  been  filed  mainly in the State of
Florida) or actions brought by individual  states  generally to recover Medicaid
costs allegedly attributable to tobacco-related  illnesses.  The pending actions
allege a broad range of injuries  resulting from the use of tobacco  products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases,  punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.

<PAGE>

In May 1996, the Fifth Circuit Court of Appeals in Castano v. American  Tobacco,
et al. reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers.  Notwithstanding
the dismissal,  new class actions  asserting  claims similar to those in Castano
have recently been filed in certain  states.  To date, two pending class actions
against major cigarette  manufacturers  have been  certified.  The first case is
limited to Florida citizens  allegedly injured by their addiction to cigarettes;
the other is limited to flight attendants  allegedly injured through exposure to
second-hand smoke.

The tobacco industry  recently  negotiated  settlements  totaling more that $240
billion with the states seeking  reimbursement  for expenditures by state-funded
medical programs for treatment of tobacco related illnesses.

The federal  government has sued the tobacco industry seeking  reimbursement for
billions of dollars spent by government  held programs to treat  smoking-related
illnesses.  This  litigation  could  have  a  material  adverse  affect  on  the
profitability of tobacco and tobacco related products.

While  the  cigar  industry  has not  been  subject  to  similar  health-related
litigation to date, there can be no assurance that there will not be an increase
in  health-related  litigation  in the future  against  cigar  manufacturers  or
distributors.  The costs to the Company of defending prolonged litigation and an
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business and results of operation.

Excise Taxes.  Cigars long have been subject to federal,  state and local excise
taxes,  and  such  taxes  frequently  have  been  increased  or  proposed  to be
increased, in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 18.06% of the manufacturer's selling price, capped at $42.50
per thousand cigars.

Based on scheduled  increases  to the federal  excise tax on  cigarettes,  which
result in  proportionate  tax  increases to the federal  excise tax on all other
tobacco  products,  the tax on large  cigars is scheduled to be raised to 20.71%
and capped at $48.75 per thousand large cigars on January 1, 2002.

The Clinton administration recently proposed additional increases in the federal
excise tax on cigarettes  which, if enacted as proposed,  would  proportionately
increase the tax on large cigars by  approximately  an additional 64.1% over the
already  scheduled  increases.  In  addition,  the  administration  has proposed
accelerating  the effective  date of the  scheduled  January 1, 2002 increase to
become  effective  October 1, 2000.  The Company  believes that the enactment of
significantly increased excise taxes could have a material adverse effect on the
business of the Company.  The Company is unable to predict the likelihood of the
passage or the  enactment of future  increases  in tobacco  excise taxes as they
relate to cigars.

<PAGE>

Tobacco products also are subject to certain state and local taxes. As evidenced
by the passage of the  Proposition 10 referendum in  California,  an act used to
fund early childhood  development  programs,  children's  health and development
concerns  at  the  state  level  exert  pressure  to  increase   tobacco  taxes.
Proposition  10,  which became  effective on January 1, 1999,  raised the tax on
cigars in California from 26.17% of the manufacturer's selling price to 61.53%.

The number of states that impose  excise taxes on cigars is currently 44. Of the
states  without  tobacco  taxes, a proposal to add such taxes is pending in West
Virginia.  State  cigar  excise  taxes are not  subject  to caps  similar to the
federal  excise tax. From time to time,  the imposition of state and local taxes
has had some impact on sales regionally. The enactment of new state excise taxes
and the  increase in existing  state  excise taxes are likely to have an adverse
effect on regional sales as cigar consumption generally declines.

Item 2.  Properties

The Company's executive and administrative  offices are located in Whippany, New
Jersey in a 33,000 square foot building  owned by the Company.  Included at this
location is an 8,200 square foot upscale  cigar store of which 1,200 square feet
are allocated to the El Rey del Mundo Cigar Bar acquired by the Company in 1998.
The Company owns a 70,000 square foot  discount  outlet store and a 6,000 square
foot specialty cigar store located on nine acres in Selma,  North Carolina.  The
Company also owns a 144,000 square foot facility in  Burlington,  North Carolina
of which  42,000  square  feet are used as a discount  outlet  store and 102,000
square  feet are used as a  warehouse,  mail  order  distribution  facility  and
wholesale cash and carry outlet.

The Company leases the following retail properties:

Location                                Square Footage     Lease Expiration Date
1 Wall Street Court, New York, NY            8,000              June 22, 2007
Rt. 17N, Paramus, NJ                         7,545              July 31, 2004
Newtowne Plaza, Statesville, NC             53,800              December 31,2004
Northwestern Highway, Southfield, MI         3,000              Month to Month
1050 Connecticut Avenue, Washington, DC      1,510              July 12, 2009
562 Fifth Avenue, New York, NY               5,076              March, 31, 2011


Item 3.  Legal Proceedings

         The Company is not presently  involved in any legal proceedings  which,
if  determined  adversely  to the Company,  would have a material  effect on the
Company.

<PAGE>

Item 4.  Submission of Matters to a Vote of Security Holders

No matters were  submitted  during the fourth quarter of the fiscal year covered
by this  report to a vote of  security  holders,  through  the  solicitation  of
proxies or otherwise.

                                     Part II

Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

Since June 26, 1997,  the  Company's  Common Stock has been quoted on the Nasdaq
National Market under the symbol "JRJR." The following table sets forth the high
and low sales price of the Common  Stock on the Nasdaq  National  Market for the
period  commencing  with the listing of the Common Stock on the Nasdaq  National
Market through December 31, 1999.

                                    1998                             1999
        Quarter                High        Low                   High       Low
        First                $29.25      $19.25             $23.25        $7.25
        Second               $24.25      $17.75             $12.81        $7.44
        Third                $22.75      $10.25             $12.75        $9.25
        Fourth               $23.25       $9.44             $10.63        $7.56

The Company's policy is to retain all available earnings for the development and
growth of its business;  accordingly,  it has not declared or paid any dividends
on its Common Stock since the completion of its initial public  offering in June
1997 and does not intend to pay any cash  dividends.  See "Item 7.  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
--Liquidity and Capital Resources." Declaration or payment of dividends, if any,
in the future,  will be at the  discretion  of the Board of  Directors  and will
depend  upon  the  Company's  then  current  financial  condition,   results  of
operations, capital requirements and other factors deemed relevant by the Board.

The  approximate  number of record  holders of the common  stock as of March 29,
2000 was 1,665.

<PAGE>

Item 6.  SELECTED FINANCIAL DATA

         The following selected financial data set forth below should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations  and the  accompanying  Financial  Statements  and related
notes thereto.
<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                      1995       1996       1997       1998       1999
                                      (dollars in thousands, except per share amounts)
Statement of Income Data:
<S>                                   <C>        <C>        <C>        <C>        <C>
Net sales                             $ 152,695  $ 191,982  $ 240,348  $ 286,512  $ 317,001
Cost of goods sold                      130,645    158,007    190,886    233,717    261,706
Gross profit                             22,050     33,975     49,462     52,795     55,295
Selling, general, and administrative
     expenses                            18,768     20,954     24,715     28,767     33,574
Income from operations                    2,789     12,347     23,842     22,451     19,566
Interest (expense) income net              (627)      (582)        14       (239)       127
Other income (expenses)                     150        560        260        716        169
Income before income taxes                2,312     12,325     24,116     22,928     19,862
Provision (benefit) for income taxes        (74)       144      4,781      9,194      7,981
Net income                              $ 2,386   $ 12,181   $ 19,335   $ 13,734   $ 11,881
Earnings per share - basic                    -          -          -       1.08       0.96
Earnings per share - diluted                  -          -          -       1.08       0.96
Weighted average shares outstanding -
     basic                                    -          -          -     12,719     12,333
Weighted average shares outstanding -
     diluted                                  -          -          -     12,771     12,333
Pro forma earnings per share -
     basic (1)                                -     $ 0.73     $ 1.30          -          -
Pro forma earnings per share -
     diluted (1)                              -     $ 0.73     $ 1.29          -          -
Pro forma common shares
     outstanding - basic (1)                  -      9,812     11,281          -          -
Pro forma common shares
     outstanding - diluted (1)                -      9,812     11,374          -          -

Balance Sheet Data:
Working capital                         $ 8,914   $ 18,522   $ 55,213   $ 50,647   $ 42,573
Total assets                             32,670     42,682     91,262    104,672    101,501
Total long-term debt, including
     current portion                      7,129      8,279     20,833     12,900      4,967
Total Stockholders' equity               12,090     23,476     61,176     73,670     79,306
</TABLE>

(1) See Note 1 to Notes to Financial Statements-Pro Forma Earnings per share.

<PAGE>

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operation

This report contains  certain  "forward-looking  statements."  Those  statements
appear in a number of places in this report and include statements regarding the
intent,  belief or current  expectations  of the Company,  its directors and its
officers with respect to, among other things; (i) trends affecting the Company's
financial  condition or results of operations;  (ii) the Company's  business and
growth strategies; (iii) the use of the proceeds to the Company from the Initial
Public  Offering;  (iv) the Company's  ability to identify and address Year 2000
issues; and (v) the declaration and payment of dividends.  Prospective investors
are cautioned  that any such  forward-looking  statements  are not guarantees of
future  performance and involve risks and  uncertainties and that actual results
may differ materially from those projected in the forward-looking  statements as
a result of various factors.

General.

The  Company is one of the largest  distributors  and  retailers  of tobacco and
tobacco related  products in North America.  The Company operates in a large and
highly fragmented industry  characterized by multiple and relatively undeveloped
channels of  distribution.  With its 29-year history in the cigar industry,  the
Company has  established  itself as an important  participant in the movement of
tobacco products from  manufacturers to the customers.  Manufacturers  value the
Company's  ability  to  perform  distribution,   credit,  customer  support  and
marketing  functions,  which  would  otherwise  be  the  responsibility  of  the
manufacturer.  Customers  value  the  Company's  extensive  variety  of  tobacco
products  and rapid order  fulfillment  and benefit  from  advantageous  pricing
derived   through  the  Company's   volume  buying  as  a  direct  importer  and
distributor.  The Company's net sales have grown from $240.3 million in the year
ended December 31, 1997 to $286.5 million and $317.0 million, in the years ended
December 31, 1998 and December 31, 1999, respectively.

The Company markets it products through two principal  channels of distribution:
retail,  consisting of the Company's  premium  cigar direct mail  business,  six
specialty cigar stores, three large discount outlet stores and the internet, and
wholesale  consisting of the wholesale  cigar mail order  business and wholesale
cash and carry  cigarette  stores located within the Company's  discount  outlet
stores.  The following  table sets forth the  Company's  sales at the retail and
wholesale level by dollar amount and as a percentage of net sales.

<PAGE>
<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                        1997            1998             1999
                                   $        %        $       %        $       %
                                                   ($ in millions)
Retail operations:
<S>                             <C>     <C>      <C>     <C>      <C>     <C>
     Direct mail cigars.........$52.9   22.0 %   $62.1   21.7 %   $56.3   17.8 %
     Cigar stores...............  23.0    9.6      25.6    9.0      32.6   10.3
     Discount outlet stores.....  63.6   26.5      68.0   23.7      67.9   21.4
     Internet...................    -      -         -      -        3.7    1.2
       Total retail sales....... 139.5   58.1     155.7   54.4     160.5   50.7

Wholesale operations:
     Direct mail cigars.........  46.0   19.1      56.9   19.8      57.5   18.1
     Cash-and-carry cigarettes*.. 54.8   22.8      73.9   25.8      99.0   31.2
       Total wholesale sales.....100.8   41.9     130.8   45.6     156.5   49.3
Total net sales.................$240.3  100.0 %  $286.5  100.0 %  $317.0 100.0 %
--------------------
*Also includes tobacco and other tobacco related products
</TABLE>

The Company has built its reputation with consumers as a retailer and wholesaler
of a wide selection of premium  cigars.  To leverage its premium cigar business,
the Company  offers a variety of other  tobacco  products to the buying  public,
including  mass-market  cigars,  smokeless and pipe tobacco and  tobacco-related
accessories. The Company is also a major distributor and retailer of cigarettes.
In addition,  the Company sells  fragrances  and general  merchandise  primarily
through its North  Carolina  discount  outlet stores.  The following  table sets
forth the  Company's  sales per  product  category  by  dollar  amount  and as a
percentage of net sales.

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                       1997             1998            1999
                              $        %        $         %           $       %
                                                      ($ in millions)
<S>                      <C>      <C>       <C>      <C>         <C>      <C>
Cigars/Tobacco*..........$135.2   56.3 %    $153.1   53.4 %      $149.9   47.3 %
Cigarettes...............  83.3   34.6       108.6   37.9         137.1   43.2
Fragrances...............   7.5    3.1         7.6    2.7           8.0    2.5
Other merchandise........  14.3    6.0        17.2    6.0          22.0    7.0
     Total net sales.....$240.3  100.0 %    $286.5  100.0 %      $317.0  100.0 %
--------------------
* Excludes Cigarettes
</TABLE>

<PAGE>

Results of Operations

The  following  discussion  should  be read in  conjunction  with the  Financial
Statements and related notes thereto appearing  elsewhere herein.  The following
table  sets  forth,  as  a  percentage  of  net  sales,  certain  items  in  the
Consolidated Statements of Income for the periods presented.

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                         1997          1998          1999
Revenues:
<S>                                      <C>           <C>           <C>
     Retail sales......................  58.1 %        54.4 %        50.7 %
     Wholesale sales...................  41.9          45.6          49.3
     Net Sales......................... 100.0         100.0         100.0
Cost of goods sold.....................  79.0          81.6          82.6
Gross profit...........................  20.6          18.4          17.4
Selling, general and
     administrative expenses...........  10.3          10.0          10.6
Depreciation and amortization..........   0.4           0.6           0.6
Income from operations.................   9.9           7.8           6.2
Other income (expense):
     Interest (expense), net...........  (0.5)          0.1           0.1
     Other.............................   0.6           0.3           0.0
Income before income taxes.............  10.0           8.0           6.3
Provision for income taxes.............   2.0           3.2           2.5
Net income.............................   8.0 %         4.8 %         3.8 %
</TABLE>

Year Ended December 31, 1999 compared to Year Ended December 31, 1998

Net  sales  were  $317.0   million  and  $286.5   million  for  1999  and  1998,
respectively, an increase of $30.5 million or 10.6%. Retail sales increased 3.1%
to $160.5  million for 1999 from $155.7 for 1998.  The  increase in retail sales
was due  primarily  to a $7.0  million or 27.3%  increase in retail cigar stores
sales from 1998 and $3.7  million of  internet  sales which did not exist in the
prior year.  These  increases were  partially  offset by a 9.4% decrease in mail
order sales.  Wholesale  sales  increased  19.7% to $156.5 million for 1999 from
$130.8 million in 1998.  The increase in wholesale  sales was due primarily to a
$25.1 million, or 34.0% increase in cash-and-carry cigarette sales.

Gross  profit  was  $55.3   million  and  $52.8   million  for  1999  and  1998,
respectively,  an increase of $2.5 million or 4.7%. The increase in gross profit
was due to the increase in sales  volume.  As a percentage  of net sales,  gross
profit decreased to 17.4% for 1999 from 18.4% for 1998, primarily due to greater
sales of lower margin  cigarettes and an unanticipated  slackening in the demand
for premium cigars.

Selling,  general and  administrative  ("SG&A")  expenses were $33.6 million and
$28.8  million for 1999 and 1998,  respectively,  an increase of $4.8 million or
16.7%. The increase in SG&A expense was related to increased  staffing and other
costs associated with the new discount outlet store and warehouse in Burlington,
North Carolina, which commenced operations in the fourth quarter of 1998 and the
expansion of two discount  outlet stores in North  Carolina.  As a percentage of
net sales, SG&A expenses increased to 10.6% for 1999 from 10.0% for 1998.

<PAGE>

Depreciation  expense  was $2.2  million  and $1.6  million  for 1999 and  1998,
respectively,  an increase of $0.6 million primarily due to the opening of three
new stores,  Wall Street,  New York in May 1998,  Burlington,  North Carolina in
October  1998  and the  opening  of our new  Fifth  Avenue  store in New York in
December 1999,  plus the remodeling of our  Statesville  and Selma  locations in
1999

Income from  operations  was $19.6  million and $22.5 million for 1999 and 1998,
respectively, a decrease of $2.9 million or 12.9%. As a percentage of net sales,
income from operations  decreased to 6.2% for 1999 from 7.8% for 1998, primarily
due to a reduction in gross margins and higher S,G&A costs.

Interest  expense  was  $0.8  million  and  $1.3  million  for  1999  and  1998,
respectively.  The  decrease in interest  expense was due to a reduction  in the
distribution note payable to stockholders. Other income, primarily interest, was
$1.1 million and $1.8 million for 1999 and 1998,  respectively.  The decrease in
other income was  primarily due to a reduction in gains from sales of marketable
securities.

Income  before  income  taxes was $19.9  million and $22.9  million for 1999 and
1998,  respectively,  a decrease of $3.0  million or 13.3%.  The  provision  for
income taxes in 1999 was $8.0 million, as compared to $9.2 million in 1998.

As a result of the  foregoing,  the Company  had net income of $11.9  million in
1999, compared to $13.7 million in 1998, a decrease of 13.1% or $1.8 million.

Year Ended December 31, 1998 compared to Year Ended December 31, 1997

Net  sales  were  $286.5   million  and  $240.3   million  for  1998  and  1997,
respectively,  an increase of $46.2  million or 19.2%.  Retail  sales  increased
11.6% to $155.7  million for 1998 from $139.5 for 1997.  The  increase in retail
sales was due  primarily  to a $9.2  million,  or 17.4%  increase in direct mail
cigar sales; a $2.6 million,  or 11.3% increase in cigar store sales; and a $4.4
million or 6.9%  increase  in  discount  outlet  store  sales.  Wholesale  sales
increased  29.8% to $130.8  million  for 1998 from $100.8  million in 1997.  The
increase in  wholesale  sales was due  primarily  to a $10.9  million,  or 23.7%
increase  in  direct  mail  sales  and a $19.1  million,  or 34.9%  increase  in
cash-and-carry  cigarette sales. The overall increase in net sales was primarily
attributable to volume increases in the Company's retail and wholesale  products
sales, and in particular the sale of premium cigars and related products.

Gross  profit  was  $52.8   million  and  $49.5   million  for  1998  and  1997,
respectively,  an increase of $3.3 million or 6.7%. The increase in gross profit
was due to the increase in sales  volume.  As a percentage  of net sales,  gross
profit decreased to 18.4% for 1998 from 20.6% for 1997, primarily due to greater
sales of lower margin cigarettes and unanticipated  slackening in the demand for
premium cigars.

<PAGE>

Selling,  general and  administrative  ("SG&A")  expenses were $28.8 million and
$24.7  million for 1998 and 1997,  respectively,  an increase of $4.1 million or
16.6%,  primarily  due to increased  staffing  costs  related to the opening and
relocation of the Company's warehouse operations from Statesville to Burlington,
North Carolina.  SG&A for 1997 included one-time signing bonuses of $1.5 million
in  connection  with  the  execution  of  long  term  service  agreements.  As a
percentage of net sales,  SG&A  expenses  decreased to 10.0% for 1998 from 10.3%
for 1997,  due  primarily  to net sales  increasing  at a greater rate than SG&A
expenses.

Depreciation  expense  was $1.6  million  and $0.9  million  for 1998 and  1997,
respectively,  an increase of $0.7 million primarily due to the opening of three
new stores,  Paramus, New Jersey in July 1997, Wall Street, New York in May 1998
and Burlington, North Carolina in October 1998.

Income from  operations  was $22.5  million and $23.8 million for 1998 and 1997,
respectively,  a decrease of $1.3 million.  As a percentage of net sales, income
from operations  decreased to 7.8% for 1998 from 9.9% for 1997, primarily due to
increased sales of lower margin cigarettes and increasingly  competitive  prices
on premium cigars.

Interest expense was $1.3 million for 1998, the same as in 1997. This expense is
attributable to the interest paid on the notes ("the distribution  notes", which
amounts  represent  cumulative  undistributed  S  Corporation  earnings  of  its
subsidiaries  through June 30, 1997 on which income  taxes had  previously  been
paid by the  existing  stockholders)  issued  to the  former  principals  of the
Company's   subsidiaries  prior  to  their  acquisition  by  the  Company  in  a
reorganization  transaction in June 1997. Other income was $1.8 million and $1.5
million for 1998 and 1997, respectively.  The increase in 1998 was primarily due
to a gain of $0.4 million on the sale of short-term investments.

The  provision  for income taxes in 1998 was $9.2  million,  as compared to $4.8
million  in  1997.  Prior  to  the  offering,   the  Predecessor  Entities  were
corporations that elected to be taxes as S Corporation  pursuant to the Internal
Revenue  Code.  For the period of January 1, 1997 to June 26, 1997, no provision
was made for federal and certain  state and local income  taxes.  In  connection
with the offering,  the Company became  subject to federal and additional  state
income taxes.

As a result of the  foregoing,  the Company  had net income of $13.7  million in
1998, compared to $19.3 million in 1997, a decrease of 29.0% or $5.6 million.

Liquidity and Capital Resources

Prior to the offering,  the Company  historically  financed its business through
internally  generated  funds,  bank debt and loans from certain of its principal
stockholders.  Subsequent to the offering, the Company has financed its business
from the initial  public  offering  proceeds  and through  internally  generated
funds. The Company's net cash provided by operating activities was $22.4 million

<PAGE>

for 1999  principally  representing  net income for the year ended  December 31,
1999 and a decrease  in  inventory  of $9.0  million  offset by an  increase  of
accounts  payable  and  accrued  expenses  of $0.9  million.  Net  cash  used in
investing activities during such period was $11.9 million primarily representing
an  increase  of  property  and  equipment  of $18.8  million.  Net cash used in
financing activities was $14.2 million for 1999, representing a reduction in the
distribution  notes  outstanding  by $7.9  million and the  purchase of treasury
stock in the amount of $6.3 million.

Net proceeds of  approximately  $53.3 million from the Company's  initial public
offering were used for the following  purposes through December 31, 1999: (i) to
repay  outstanding  indebtedness  of $7.3  million,  (ii) $6.0  million  for the
relocation  and  design  of  specialty  stores,  (iii)  $10.5  million  for  the
construction  and  development  of a new  discount  outlet  store and  warehouse
distribution  center, (iv) the quarterly principal payment of distribution notes
of $7.9  million  through  June 30,  1998,  (v) $1.5  million for the payment of
signing  bonuses to an officer and to MC Management in connection with long-term
service  agreements,  (vi)  $3.0  million  for  the  upgrade  of  the  Company's
information  systems,  (vii) interest  payments of $1.4 million through June 30,
1998 on the  Distribution  Notes,  (viii) $14.9 million for working  capital and
general corporate  purposes and (ix) $0.8 million to expand retail selling space
at existing discount outlet stores.

As of December  31,  1999,  the Company  had  working  capital of $42.6  million
compared to $50.6 million at December 31, 1998.  Working  capital as of December
31, 1999 is comprised  primarily of cash and cash  equivalents  of $9.1 million,
short-term  marketable  securities of $6.6 million,  accounts receivable of $4.4
million,  $40.0  million of  inventory  and $4.6  million  of prepaid  and other
current assets offset by $17.2 million of accounts  payable and accrued expenses
and $5.0 million of the current portion of the distribution notes.

The Company has available a short term,  unsecured  line of credit in the amount
of $20.0  million  through May 31, 2000 with  interest at either the bank's base
rate minus 50 basis points or an increment over LIBOR, at the Company's  option.
There  were no  amounts  outstanding  under the  Company's  line of credit as of
December  31,  1999.  The  Company  anticipates  renewing  this  line of  credit
agreement in May 2000.

At  December  31, 1999 the Company  had  outstanding  Distribution  Notes in the
amount of $4.0 million which were issued to the former principal stockholders of
the Company's  subsidiaries prior to their acquisition by the Company on June 6,
1997. These notes represented estimated undistributed accumulative S Corporation
earnings through June 26, 1997, the date of the initial public  offering.  These
notes bear interest at the rate of 7.0% per annum and are payable on a quarterly
basis until June 1, 2000. In addition, the Company has outstanding  Distribution
Notes  totaling  $1.0  million  bearing  interest  at the rate of 7.0% per annum
payable on June 1, 2000.

The repurchase of up to $10.0 million of the Company's common stock was approved
by the Board of  Directors  subject  to market  conditions.  For the year  ended

<PAGE>

December 31, 1999, the Company  repurchased  668,500  shares of its  outstanding
common shares at an average price of $9.41 raising the total shares  repurchased
to 783,000 at an average cost of $9.66 as of December 31, 1999.

Capital  expenditures,  primarily for computers,  discount outlet store,  office
furniture,  and  leasehold  improvements  were $8.8 million and $10.7 million in
1999 and 1998, respectively. Included in capital expenditures were the purchase,
improvement  and furnishing of the Burlington,  North Carolina  facility in 1998
and the  improvements  and  furnishings  at our  Selma  and  Statesville,  North
Carolina  locations plus the opening of our new Fifth Avenue,  New York store in
New York City in 1999.

The  Company  anticipates  that it will be able  to  satisfy  its  ongoing  cash
requirements  for  the  foreseeable  future,  primarily  with  cash  flows  from
operations,  and cash and  short-term  marketable  securities,  supplemented  as
necessary by borrowings under its existing line of credit.

Year 2000

In prior years,  the Company  discussed  the nature and progress of its plans to
become Year 2000 ready.  During 1999, the Company  completed its remediation and
testing of systems.  As a result of those planning and  implementation  efforts,
the  Company   experienced  no  significant   disruptions  in  mission  critical
information technology and non-information technology systems and believes those
systems successfully  responded to the Year 2000 date change. The Company is not
aware of any material problems resulting from Year 2000 issues,  either with its
products,  its internal systems,  or the products and services of third parties.
The Company will continue to monitor its mission critical computer  applications
and those of its suppliers and vendors  throughout  the Year 2000 to ensure that
any latent Year 2000 matters that may arise are addressed promptly.

Recently Issued Accounting Pronouncements

In June 1998,  the FASB issued SFAS No. 133  ("Statement  133"),  Accounting for
Derivative Instruments and Hedging Activities.  This Statement requires that all
derivatives  be recorded in the  balance  sheet as either an asset or  liability
measured at its fair value and that  changes in the  derivative's  fair value be
recognized  currently in earnings unless specific hedge accounting  criteria are
met.  The  Company  will be  required  to adopt  Statement  133,  as  amended by
Statement No. 137,  which defers the effective  date, as of January 1, 2001. The
provisions of this  statement  shall not be applied  retroactively  to financial
statements of prior  periods.  The Company is in the process of evaluating  this
statement  and has not yet  determined  the  future  impact on its  consolidated
financial statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

The Company invests its available cash in U.S. Treasury  Obligations,  Corporate

<PAGE>

Bonds and commercial paper.  Although the rate of interest paid on U.S. Treasury
Obligations,  Corporate Bonds and commercial paper may fluctuate over time based
on changes in the general level of U.S.  interest  rates,  the Company  believes
that its exposure to market risk fluctuation for these marketable  securities is
not material.

The Company purchases its tobacco products from third party  manufacturers,  and
therefore,  does not believe that it has  exposure to commodity  price risk with
respect to its tobacco inventories.

Item 8.  Financial Statements and Supplementary Data

See  pages  F-1  through  F-25  annexed  hereto.  The  schedule  required  under
Regulation S-X is included herein on page S-1

Item 9.  Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

Not applicable

Item 10.  Directors and Executive Officers of the Registrant

Information  with respect to the  Directors and Officers of the Company which is
called for by this Item 10 is  incorporated  by reference to the information set
forth under the heading "Election of Directors" in the Company's Proxy Statement
relating  to its 1999 Annual  Meeting of  Stockholders  to be filed  pursuant to
Regulation 14A (the "Company's 1999 Proxy Statement").

Item 11.  Executive Compensation

Information  called  for by this Item 11 is  incorporated  by  reference  to the
information  set  forth  under  the  heading  "Executive  Compensation"  in  the
Company's 1999 Proxy Statement.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

Information  called  for by this Item 12 is  incorporated  by  reference  to the
information  set  forth  under  the  headings  "Security  Ownership  of  Certain
Beneficial Owners" and "Security  Ownership of Management" in the Company's 1999
Proxy Statement.

<PAGE>

Item 13.  Certain Relationships and Related Transactions

Information  called  for by this Item 13 is  incorporated  by  reference  to the
information  set forth under the headings  "Election of Directors,"  "Employment
Arrangements,"  and  "Certain  Relationships  and Related  Transactions"  in the
Company's 1999 Proxy Statement.

                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  The following documents are filed as part of this report:
1. Financial Statements: See "Index to Financial Statements"
2. Financial Statement Schedule: See "Index to Financial Statements"
3. Exhibits: See "Exhibit Index"

(b) Reports on Form 8-K:  None.

<PAGE>
                                     F-1
                               800-JR CIGAR, Inc.

                          Index to Financial Statements

                        and Financial Statement Schedule

Reports of Independent Auditors..............................................F-2

Financial Statements

Consolidated Balance Sheets as of December 31, 1998 and 1999.................F-3
Consolidated Statements of Income for the Years Ended
   December 31, 1997, 1998 and 1999..........................................F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
   December 31, 1997, 1998 and 1999..........................................F-5
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1997, 1998 and 1999..........................................F-6
Notes to Consolidated Financial Statements...................................F-7

Financial Statement Schedule

Schedule II--Valuation and Qualifying Accounts...............................S-1


All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.

<PAGE>

                                      F-2

                         Report of Independent Auditors

To the Board of Directors 800-JR CIGAR, Inc.

We have audited the  accompanying  consolidated  balance sheets of 800-JR CIGAR,
Inc. as of December 31, 1998 and 1999 and the related consolidated statements of
income,  stockholders'  equity and cash flows for the years then ended.  We have
also audited the combined  statements of income,  stockholders'  equity and cash
flows of 800-JR  CIGAR,  Inc. for the year ended  December 31, 1997.  Our audits
also  included  the  financial  statement  schedule  listed in the index at Item
14(a).  These financial  statements and schedule are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audits  provide a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the consolidated financial position of 800-JR CIGAR, Inc.
as of December 31, 1998 and 1999, and the consolidated results of its operations
and its cash  flows  for the years  then  ended,  and the  combined  results  of
operations and cash flows of 800-JR CIGAR,  Inc. for the year ended December 31,
1997 in conformity with accounting  principles  generally accepted in the United
States.  Also, in our opinion,  the related financial statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly, in all material respects, the information set forth therein.

                                                     /s/ERNST & YOUNG LLP

MetroPark, New Jersey
March 2, 2000

<PAGE>

                                       F-3
<TABLE>
<CAPTION>

                       800-JR CIGAR, Inc. and Subsidiaries

                           Consolidated Balance Sheets

              (Dollars in thousands, except share and per share amounts)

                                                                                            December 31
                                                                                      1998              1999
                                                                                ------------------------------------

Assets
Current assets:
<S>                                                                                 <C>              <C>
   Cash and cash equivalents                                                        $   12,759       $    9,107
   Marketable securities - current                                                       5,719            6,568
   Accounts receivable, net of allowance for doubtful accounts of $145 and $87
    at December 31, 1998 and 1999, respectively                                          2,568            4,436
   Merchandise inventory                                                                49,056           40,043
   Prepaid expenses and other current assets                                             4,712            3,757
   Loans receivable - affiliates and other associated entities                             685              806
   Deferred tax assets                                                                   1,183               51
                                                                                ------------------------------------
Total current assets                                                                    76,682           64,768

Property, equipment and improvements, at cost, net of
 accumulated depreciation and amortization                                              27,614           34,241
Other assets                                                                               376              379
Marketable securities - non-current                                                          -            2,113
                                                                                ------------------------------------
Total assets                                                                          $104,672         $101,501
                                                                                ====================================

Liabilities and stockholders' equity Current liabilities:

   Current portion of distribution notes payable to stockholders                    $    7,933       $    4,967
   Accounts payable                                                                     16,238           13,919
   Accrued expenses                                                                      1,864            3,309
                                                                                ------------------------------------
Total current liabilities                                                               26,035           22,195

Distribution notes payable to stockholders, less current portion                         4,967                -
                                                                                ------------------------------------
Total liabilities                                                                       31,002           22,195

Commitments and contingencies

Stockholders' equity:
   Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares
    issued and outstanding
   Common stock, $.01 par value,  40,000,000 shares  authorized,  12,752,000 and
    12,756,000 issued at December 31, 1998 and 1999, respectively, 12,637,500

    and 11,973,000 outstanding at December 31, 1998 and 1999, respectively                 128              128
   Additional paid-in capital                                                           52,751           52,795
   Retained earnings                                                                    22,066           33,947
                                                                                ------------------------------------
                                                                                        74,945           86,870
   Less 114,500 and 783,000 shares of treasury stock, at cost, at December 31,          (1,275)          (7,564)
    1998 and 1999, respectively
                                                                                ------------------------------------
Total stockholders' equity                                                              73,670           79,306
                                                                                ------------------------------------
Total liabilities and stockholders' equity                                            $104,672         $101,501
                                                                                ====================================
See accompanying notes.
</TABLE>

<PAGE>

                                     F-4
<TABLE>
<CAPTION>

                       800-JR CIGAR, Inc. and Subsidiaries

                        Consolidated Statements of Income

                   (Dollars in thousands, except per share amounts)

                                                                             Year ended December 31
                                                                     1997             1998              1999
                                                              ------------------------------------------------------
<S>                                                                  <C>               <C>              <C>
Net sales                                                            $240,348          $286,512         $317,001
Cost of goods sold                                                    190,886           233,717          261,706
                                                              ------------------------------------------------------
Gross profit                                                           49,462            52,795           55,295

Operating expenses:
   Selling                                                              5,192             6,271            7,187
   General and administrative                                          19,523            22,496           26,387
   Depreciation and amortization                                          905             1,577            2,155
                                                              ------------------------------------------------------
Income from operations                                                 23,842            22,451           19,566

Other income (expense):
   Interest expense                                                    (1,269)           (1,295)            (771)
   Interest income                                                      1,283             1,056              898
   Rental income                                                          202               166              161
   Other, net                                                              58               550                8
                                                              ------------------------------------------------------
Income before income taxes                                             24,116            22,928           19,862

Provision for income taxes                                              4,781             9,194            7,981
                                                              ------------------------------------------------------
Net income                                                         $   19,335        $   13,734        $  11,881
                                                              ======================================================

Per share data:
   Earnings per share - basic                                                        $    1.08       $     0.96
                                                                                                 ===================
                                                                                                 ===================
   Earnings per share - diluted                                                      $    1.08       $     0.96
                                                                                                 ===================
                                                                                                 ===================
Weighted-average shares outstanding - basic                                              12,719           12,333
                                                                                                 ===================
                                                                                                 ===================
Weighted-average shares outstanding - diluted                                            12,771           12,333
                                                                                                 ===================

Pro forma - unaudited

Historical income before provision for income taxes                $   24,116
Pro forma adjustments other than income taxes                             977
                                                              -------------------
Pro forma income before income taxes                                   25,093

Pro forma provision for income taxes                                   10,255
                                                              -------------------
                                                              -------------------
Pro forma net income                                               $   14,838
                                                              ===================

Pro forma earnings per share - basic                               $    1.30
                                                              ===================
                                                              ===================
Pro forma earnings per share - diluted                             $    1.29
                                                              ===================
Pro forma common shares outstanding - basic                            11,281
                                                              ===================
                                                              ===================
Pro forma common shares outstanding - diluted                          11,374
                                                              ===================


See accompanying notes.
</TABLE>

<PAGE>

                                   F-5
<TABLE>
<CAPTION>

                      800-JR CIGAR, Inc. and Subsidiaries

                 Consolidated Statements of Stockholders' Equity

                             (Dollars in thousands)

                                  Common
                                 Stock of                         Additional
                                Predecessor    Common Stock         Paid-in    Retained     Treasury
                                           ----------------------
                                 Entities    Shares       Amount    Capital     Earnings       Stock      Total
                              ------------------------------------------------------------------------------------
<S>                                 <C>       <C>         <C>      <C>            <C>       <C>         <C>
Balance at January 1, 1997          $ 21              -   $    -   $       28     $ 23,845  $   (418)   $ 23,476
   Net income                                                                       19,335                19,335
   Reorganization                    (21)     9,300,000       93         (547)          57       418           -
   Issuance of common stock                   3,450,000       35       53,235                             53,270
   Issuance of distribution notes                                                  (23,800)              (23,800)
   Issuance of additional
    distribution notes                                                              (1,000)               (1,000)
   Distribution to stockholders                                                    (10,105)              (10,105)
                              ------------------------------------------------------------------------------------
Balance at December 31, 1997           -     12,750,000      128       52,716        8,332         -      61,176
   Net income                                                                       13,734                13,734
   Issuance of common stock                       2,000                    35                                 35
   Purchase of treasury stock                                                                 (1,275)     (1,275)
                              ------------------------------------------------------------------------------------
Balance at December 31, 1998           -     12,752,000      128       52,751       22,066    (1,275)     73,670
   Net income                                                                       11,881                11,881
   Issuance of common stock                       4,000                    44                                 44
   Purchase of treasury stock                                                                 (6,289)     (6,289)
                             ------------------------------------------------------------------------------------
Balance at December 31, 1999       $   -     12,756,000     $128      $52,795   $   33,947   $(7,564)  $  79,306
                              ====================================================================================

See accompanying notes.
</TABLE>

<PAGE>

                                    F-6
<TABLE>
<CAPTION>

                      800-JR CIGAR, Inc. and Subsidiaries

                      Consolidated Statements of Cash Flows

                             (Dollars in thousands)

                                                                               Year ended December 31
                                                                             1997       1998       1999
                                                                          ----------------------------------
Cash flows from operating activities
<S>                                                                         <C>        <C>        <C>
Net income                                                                  $19,335    $ 13,734   $ 11,881
Adjustments to reconcile net income to net cash provided by operating
  activities:
    Depreciation and amortization                                               905       1,577      2,155
    Provision for uncollectible accounts                                         55         209         70
    Deferred income taxes                                                    (1,073)        (85)     1,132
    Gain on sale of marketable securities                                         -        (399)         -
    Loss on sale of fixed assets                                                  -           -         49
    Changes in operating assets and liabilities:
     Accounts receivable                                                       (665)       (464)    (1,938)
     Merchandise inventory                                                  (15,163)    (14,277)     9,013
     Prepaid expenses and other current assets                               (1,455)     (2,557)       955
     Other assets                                                               (78)       (133)        (3)
     Accounts payable and accrued expenses                                   (1,585)      8,849       (874)
                                                                          ----------------------------------
Net cash provided by operating activities                                       276       6,454     22,440

Cash flows from investing activities
Purchase of marketable securities                                           (14,981)    (25,158)   (10,417)
Proceeds from maturity and sale of marketable securities                          -      34,819      7,455
Purchase of property and equipment                                           (8,547)    (10,673)    (8,831)
Loans (extended to) repaid by affiliates and other associated entities          467         (82)      (121)
Loans extended to stockholders                                                 (445)          -          -
                                                                          ----------------------------------
Net cash used in investing activities                                       (23,506)     (1,094)   (11,914)

Cash flows from financing activities
Proceeds from issuance of Common Stock                                       54,545          35         44
Expenses paid in connection with Common Stock offering                       (1,275)          -          -
Payments of distribution notes                                               (3,967)     (7,933)    (7,933)
Payments of long-term debt                                                   (8,279)          -          -
Payments of capital lease obligations                                           (89)          -          -
Purchase of treasury stock                                                        -      (1,275)    (6,289)
Distribution to stockholders                                                 (7,189)          -          -
                                                                          ----------------------------------
Net cash provided by (used in) financing activities                          33,746      (9,173)   (14,178)
                                                                          ----------------------------------

Net increase (decrease) in cash and cash equivalents                         10,516      (3,813)    (3,652)
Cash and cash equivalents, beginning of year                                  6,056      16,572     12,759
                                                                                                ------------
                                                                          -----------------------
Cash and cash equivalents, end of year                                     $ 16,572    $ 12,759   $  9,107
                                                                          ==================================

Supplemental disclosure of cash flow data
Income taxes paid                                                         $   6,053    $ 11,021   $  4,919
                                                                          =======================
                                                                          ==================================
Interest paid                                                             $   1,177    $  1,180   $    730
                                                                          ==================================

Supplemental disclosure of noncash investing and financing activities
Non-cash distribution to stockholders                                         2,916           -          -
Distribution notes issued to stockholders                                    24,800           -          -

See accompanying notes.
</TABLE>

<PAGE>

                                    F-7
                      800-JR CIGAR, Inc. and Subsidiaries

                   Notes to Consolidated Financial Statements

                               (Dollars in thousands, except per share amounts)

                                December 31, 1999

1.  Basis of Presentation

Business

800-JR  CIGAR,  Inc.  and  subsidiaries  ("800-JR  CIGAR" or the  "Company")  is
primarily  engaged in the  retail/wholesale  distribution of tobacco and tobacco
related products throughout the United States.

The  Company's  business is impacted  by the  general  seasonal  trends that are
characteristic  of the retail industry,  and it generally  experiences lower net
revenues  and net income in the first half of each fiscal  year  compared to the
second half of the fiscal year.

Initial Public Offering

Effective June 26, 1997,  the Company sold 3,450,000  shares of its common stock
at a price of $17 per share in an initial public offering (the "Offering").  Net
proceeds  of  the  Offering,   after   deducting   underwriting   discounts  and
commissions,  and  professional  fees  aggregated  $53,270.  The proceeds of the
Offering  were  used  for  the  following  purposes:  (i) to  repay  outstanding
indebtedness  of $7,300,  (ii) $6,000 for the relocation and design of specialty
stores, (iii) $10,500 for a new discount outlet store and warehouse distribution
center,  (iv) the quarterly  principal  payment of distribution  notes of $7,900
through  June 30, 1999,  (v) payment of signing  bonuses to an officer and to MC
Management (see Note 8) in connection with long-term  service  agreements,  (vi)
$3,000 for the upgrade of the  Company's  information  systems,  (vii)  interest
payments of $1,400 through June 30, 1998 on the Distribution Notes (see Note 5),
(viii) $14,900 for working capital and general corporate purposes, and (ix) $770
for the expansion of existing outlet stores.

Basis of Presentation

800-JR CIGAR was  incorporated  in Delaware in March 1997.  Concurrent  with the
completion of 800-JR CIGAR's Offering,  the former principals of the predecessor
group of companies  contributed to 800-JR CIGAR all of the outstanding  stock in
the entities listed below that comprise the predecessor  group of companies,  in
exchange   for   9,300,000   shares  of  common   stock  of  800-JR  CIGAR  (the
"Reorganization").

<PAGE>

                                      F-8
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

The accompanying financial statements include the combined results of operations
for the period from January 1, 1997 to June 26, 1997 of J.R. Tobacco of America,
Inc., J.N.R. Grocery Corp., J&R Tobacco (New Jersey) Corp., J.R. Tobacco Company
of Michigan, Inc., cigars by Santa Clara, N.A., Inc., J.R. Tobacco Outlet, Inc.,
J.R.-46th Street,  Inc., J.R. Tobacco NC, Inc., and J.R.  Statesville, Inc.
(together,  the "Company" or the "Predecessor  Entities").  The Predecessor
Entities are corporations that had elected to be taxed as S Corporations
pursuant to the Internal Revenue Code and certain state and local tax
regulations through June 26, 1997.

After the Reorganization, the Predecessor Entities became subsidiaries of 800-JR
CIGAR.  Because 800-JR CIGAR and the  Predecessor  Entities were commonly owned,
the  Reorganization  has been  accounted for in a manner similar to a pooling of
interests and,  accordingly,  the historical  carrying  values of the assets and
liabilities of the Predecessor Entities were not affected by the Reorganization.
800-JR CIGAR conducted no business prior to the Reorganization and, accordingly,
it was not included in the results of operations of the Predecessor Entities.

For the period from June 27, 1997 through  December 31, 1997,  the  accompanying
consolidated  financial  statements  include the results of operations of 800-JR
CIGAR, as well as all companies that were included in the Predecessor Entities.

All significant intercompany balances and transactions have been eliminated.

The principal  stockholders of the  Predecessor  Entities were Lewis Rothman and
LaVonda Rothman, each of whom owned 50% of the Predecessor Entities,  except for
J.R.  Statesville,  Inc.,  which was owned 26% by Lewis Rothman,  26% by LaVonda
Rothman and 12% by each of the Shane Rothman Trust,  the Luke Rothman Trust, the
Marni Rothman Trust and the Samantha  Rothman Trust.  As  consideration  for the
contribution  of their  interests  in the  Predecessor  Entities,  each of Lewis
Rothman,  LaVonda Rothman,  the Shane Rothman Trust, the Luke Rothman Trust, the
Marni  Rothman  Trust  and  the  Samantha  Rothman  Trust  received   4,387,920,
4,387,920,  131,040,  131,040,  131,040  and  131,040  shares of  common  stock,
respectively, of 800-JR CIGAR, Inc., for an aggregate 9,300,000 shares.

<PAGE>

                                     F-9
                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                     (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

Statement of Income Presentation

The  statement  of income of the  Company for the year ended  December  31, 1997
reflects the results of  operations of the  Predecessor  Entities for the period
January 1, 1997  through  June 26, 1997 and the results of the Company from June
27, 1997 (the date of the  consummation  of the Offering)  through  December 31,
1997.

Selected  statement  of income data for the year ended  December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
                                        January 1     June 27 to     Year ended
                                         to June       December       December
                                        26, 1997       31, 1997       31, 1997
                                     -------------------------------------------
                                     (Predecessor)   (Company)    (Consolidated)
<S>                                        <C>            <C>           <C>
Net revenues                               $107,782       $132,566      $240,348
                                      ==========================================

Gross profit                              $  20,975      $  28,487     $  49,462
                                      ==========================================

Operating income                          $  10,481      $  13,361     $  23,842
Other (expense) income                         (118)           392           274
                                      ------------------------------------------
Income before provision for income taxes     10,363         13,753        24,116

Provision for income taxes                      361          4,420         4,781
                                      ------------------------------------------
Net income                                $  10,002    $     9,333     $  19,335
                                      ==========================================
</TABLE>

Pro Forma Adjustments (Unaudited)

The  unaudited  pro forma net income  for the period  ended  December  31,  1997
reflects the  Reorganization,  the Offering and the following  adjustments as if
they had  occurred on January 1: a) a decrease in  aggregate  compensation  from
$253 to $200 for 1997 for two of the Company's  executives pursuant to their new
employment  agreements;  b) an  increase  in  interest  expense of $798 for 1997
assuming  the  issuance of the  Distribution  Notes;  c) a reduction in interest
expense of $328 for 1997 assuming the  application of proceeds from the Offering
to repay all of the Company's indebtedness other than capital lease obligations;
d) a reduction in interest income of $106 for 1997 assuming the repayment to the
Company of loans  receivable  from  stockholders;  e) an  increase of $1,500 for
1997,  related to signing  bonuses  paid to an officer of the  Company and to MC
Management in connection with the execution of long-term service agreements; and
f) an increase of $5,474 for 1997 for income taxes based upon pro forma  pre-tax
income as if the Company had been subject to federal and additional state income
taxes.

<PAGE>

                                     F-10
                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                               (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

On  June 6,  1997,  the  Company  issued  Distribution  Notes  to the  principal
stockholders of the Predecessor Entities in the amount of $23,800,  representing
estimated  undistributed  cumulative S Corporation  earnings through the date of
the Offering which were taxable to those  stockholders.  The Distribution  Notes
are net of  loans  receivable  from  the  stockholders  of  $2,916,  which  were
outstanding prior to the Offering,  and additional  distributions of $7,189 made
prior to the  consummation  of the  Offering to enable the  stockholders  to pay
income taxes on their  allocable  portions of the 1996 and 1997  undistributed S
Corporation  estimated  earnings  through the date of the Offering.  These notes
bear  interest  at the rate of 7.0% per annum,  and are  payable on a  quarterly
basis over the three-year period following the Offering.

On June 6, 1997, the Predecessor  Entities also issued  additional  distribution
notes (the "Additional Notes") to the principal  stockholders of the Predecessor
Entities,  for a nominal  amount.  At December 31, 1997,  the initial  principal
amount  of the  additional  notes  was  increased  to $1  million,  the  maximum
allowable.  Such increase represents the amount by which the final S Corporation
earnings  of the  Predecessor  Entities  exceeded  the  principal  amount of the
Distribution  Notes (as discussed above). The Additional Notes mature on June 1,
2000 and bear interest at the rate of 7% per annum.

Pro Forma Earnings Per Share (Unaudited)

The 11,280,829 pro forma common shares  outstanding  used in the  calculation of
basic pro forma earnings per share for the year ended December 31, 1997 is based
on a  weighted-average  calculation  derived by using  12,750,000  common shares
outstanding  subsequent  to the  offering  and  9,811,658,  the pro forma common
shares outstanding prior to the Offering.

The 11,373,900 pro forma common shares  outstanding,  used in the calculation of
diluted pro forma  earnings per share,  for the year ended  December 31, 1997 is
based  on a  weighted  average  calculation  derived  by using  12,936,143,  the
weighted  average  common  shares  outstanding  subsequent  to the  Offering and
9,811,658,  the pro forma common shares  outstanding  prior to the Offering,  as
calculated  above. The net income used in the calculation of pro forma per share
information  for the year ended  December  31,  1997  consists  of the pro forma
income of  $14,838  reduced  by  interest  expense  on debt of $328  ($194 on an
after-tax basis).

<PAGE>

                                   F-11
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           (Dollars in thousands, except per share amounts)

1.  Basis of Presentation (continued)

Supplementary pro forma basic earnings per share for the year ended December 31,
1997  is  $.78.  The  common  shares  outstanding  used  in the  calculation  of
supplementary  basic pro forma earnings per share is based on a weighted average
calculation derived by using 12,750,000 common shares outstanding  subsequent to
the  offering  and  10,279,554,   the  supplementary  pro  forma  common  shares
outstanding, prior to the offering.

Supplementary  pro forma diluted  earnings per share for the year ended December
31, 1997 is $1.28 based on a weighted average of the 10,279,554 shares of common
stock  outstanding  for the  six-month  period  ended June 30 1997 (prior to the
Offering) and  12,936,143  shares  outstanding  for the  six-month  period ended
December 31, 1997 (subsequent to the Offering).

The net income  used in the  calculation  of  supplementary  pro forma basic and
diluted  earnings per share for the year ended  December  31,  1997,  is the pro
forma net income of $14,838.

2.  Summary of Significant Accounting Policies

Cash and Cash Equivalents

Cash  and  cash  equivalents   include  all  cash  balances  and  highly  liquid
investments with a maturity of three months or less when acquired.  The carrying
amount reported for cash equivalents approximates fair value.

Marketable Securities

Marketable securities consist of U.S. Treasury obligations,  corporate bonds and
commercial paper which have various  maturity dates.  All marketable  securities
have been  designated  by the  Company as  held-to-maturity.  Accordingly,  such
securities  are carried at amortized  cost.  At December 31, 1999,  the carrying
value of such  held-to-maturity  marketable  securities  approximated their fair
value. The contractual maturities of marketable securities,  regardless of their
balance sheet classification, follows:
                                                                    Cost
                                                              ------------------
Due within one year                                                 $6,568
Due after one year through five years                                  675
Due after five years through 10 years                                  120
Due after 10 years                                                   1,318
                                                              ------------------
                                                                     $8,681
                                                              ==================

<PAGE>

                                      F-12
                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                             (Dollars in thousands, except per share amounts)

2.  Summary of Significant Accounting Policies (continued)

Concentrations of Credit Risk

Certain financial instruments  potentially subject the Company to concentrations
of credit risk. These financial  instruments  consist primarily of cash and cash
equivalents,  marketable securities,  and trade accounts receivable. The Company
places its temporary cash  investments  and marketable  securities in government
obligations,  corporate  bonds  and  commercial  paper  of high  credit  quality
corporations to limit its credit  exposure.  Concentrations  of credit risk with
respect to trade  receivables  are limited due to the large  number of customers
comprising  the Company's  customer  base,  their  dispersion  across  different
geographic areas and generally short payment terms.

Merchandise Inventory

Merchandise  inventory  is  stated  at the  lower  of  cost  (determined  by the
first-in,   first-out  method)  or  market;   market  represents  the  lower  of
replacement  cost or  estimated  net  realizable  value.  Merchandise  inventory
consists of goods held for re-sale.

Property, Equipment and Improvements

Property,  equipment  and  improvements  are  stated at cost.  Depreciation  and
amortization  of assets,  is computed using the  straight-line  and  accelerated
methods over the lesser of the  estimated  useful  lives of the related  assets.
These lives range from 3 to 39 years.

Advertising

The  Company  expenses  the cost of  advertising  and  promotions  as  incurred.
Advertising  and promotion  costs amounted to $1,605,  $2,114 and $2,902 for the
years ended December 31, 1997, 1998 and 1999, respectively.

Income Taxes

Income  taxes are  accounted  for by the  liability  method in  accordance  with
Statement of Financial  Accounting  Standards ("SFAS") No. 109,  "Accounting for
Income Taxes".  Under this method,  deferred income taxes are recognized for the
tax consequences of "temporary  differences" by applying  enacted  statutory tax
rates applicable to future years to differences  between the financial  carrying
amounts and the tax bases of existing assets and liabilities.

Revenue Recognition

Sales are  recognized  upon  shipment  of  products  or, in the case of sales by
Company owned stores, when payment is received.

<PAGE>

                                      F-13
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                          (Dollars in thousands, except per share amounts)

2.  Summary of Significant Accounting Policies (continued)

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect certain  reported  amounts and  disclosures.  Actual results could differ
from those estimates.

Stock Options

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related  Interpretations
in accounting for its employee stock option plans because,  the alternative fair
value  accounting  provided for under SFAS No. 123,  "Accounting for Stock-Based
Compensation"  (SFAS 123), requires use of option valuation models that were not
developed for use in valuing  employee stock options.  Under APB 25, because the
exercise  price of the Company's  employee  stock options equals the fair market
value of the underlying  common stock on the date of the grant,  no compensation
expense is recognized.

Earnings per Share

Earnings per share are  calculated  in accordance  with SFAS  Statement No. 128,
"Earnings  per Share." Basic  earnings per share is computed by dividing  income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  The  calculation  of dilutive  earnings  per share
includes the effect of dilutive securities. Pro forma earnings per share amounts
have been presented and, where appropriate, restated to conform to the Statement
128 requirements.

Recently Issued Accounting Pronouncements

In June 1998,  the FASB issued SFAS No. 133  ("Statement  133"),  Accounting for
Derivative Instruments and Hedging Activities.  This Statement requires that all
derivatives  be recorded in the  balance  sheet as either an asset or  liability
measured at its fair value and that  changes in the  derivative's  fair value be
recognized  currently in earnings unless specific hedge accounting  criteria are
met.  The  Company  will be  required  to adopt  Statement  133,  as  amended by
Statement No. 137,  which defers the effective  date, as of January 1, 2001. The
provisions of this  statement  shall not be applied  retroactively  to financial
statements of prior  periods.  The Company is in the process of evaluating  this
statement  and has not yet  determined  the  future  impact on its  consolidated
financial statements.

<PAGE>

                                           F-14
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                       (Dollars in thousands, except per share amounts)

3.  Acquisition

On January 27, 1998,  the Company  purchased  for a nominal  amount Casa Blanca,
Inc. ("Casa Blanca"), the owner/operator of the El Rey del Mundo Smokers Bar and
Lounge within one of the Company's  retail outlets.  Casa Blanca was owned by an
officer/ director of the Company.

4.  Property, Equipment and Improvements

Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>

                                                            December 31
                                                       1998             1999
                                                --------------------------------
<S>                                                 <C>               <C>
Land                                                $    2,548        $    2,453
Building and improvements                               19,164            23,746
Machinery and equipment                                  4,005             5,105
Furniture and fixtures                                   2,534             2,897
Leasehold improvements                                   5,020             7,721
Automobiles                                                188               303
                                                --------------------------------
                                                        33,459            42,225
Less accumulated depreciation and amortization           5,845             7,984
                                                --------------------------------
                                                       $27,614           $34,241
                                                ================================
</TABLE>

5.  Long-Term Debt and Line of Credit

Long-term debt is comprised as follows:
<TABLE>
<CAPTION>

                                                            December 31
                                                       1998             1999
                                                --------------------------------

<S>                                                    <C>                <C>
Distribution Notes payable to stockholders,
     due in quarterly installments, with
     interest at 7.0% through June 1, 2000             $11,900            $3,967

Additional Distribution Notes payable to
     stockholders, due June 1, 2000, with
     interest at 7.0%                                    1,000             1,000
                                                 -------------------------------
                                                        12,900             4,967
Less current portion                                     7,933             4,967
                                                 -------------------------------
Long-term debt                                      $    4,967          $      -
                                                 ===============================
</TABLE>

<PAGE>

                                      F-15
                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                          (Dollars in thousands, except per share amounts)

5.  Long-Term Debt and Line of Credit (continued)

During  1999,  the Company  entered  into a $20,000  line of credit with a bank,
which expires on May 31, 2000.  Borrowings under this facility are unsecured and
bear  interest  at the  bank's  prime  rate less 0.5% or the  London  Inter-Bank
Offering Rate ("LIBOR") plus 1.5%.  There were no borrowings  outstanding  under
this line of credit at December 31, 1998 or 1999.

The fair value of the Company's  long-term debt  approximates its carrying value
as the interest rates are substantially  the same as are currently  available to
the Company for similar debt instruments.

6.  Income Taxes

The  Predecessor  Entities  were  corporations  that  elected  to be  taxed as S
Corporations  pursuant to the Internal  Revenue Code and certain state and local
tax regulations. Therefore, for the period January 1, 1997 to June 26, 1997 (the
period prior to the  Offering),  no provision has been made in the  accompanying
financial statements for federal and certain state and local income taxes, since
such taxes are the liability of the principals. In connection with the Offering,
the Company became subject to federal and additional state income taxes.

Concurrent with becoming  subject to federal and additional  state income taxes,
the Company recorded a deferred tax asset and a corresponding tax benefit in the
statement  of income in  accordance  with the  provisions  of SFAS No. 109.  The
deferred tax asset recorded on the date of the offering was $1,209.

The provision for income taxes consists of the following:
<TABLE>
<CAPTION>

                                            Year ended December 31
                                   1997             1998              1999
                          ------------------------------------------------------
Current income taxes:
<S>                            <C>                <C>               <C>
   Federal taxes               $ 4,186            $7,427            $5,342
   State and local taxes         1,668             1,852             1,507
Deferred income taxes           (1,073)              (85)            1,132
                          ------------------------------------------------------
                               $ 4,781            $9,194            $7,981
                          ======================================================
</TABLE>

<PAGE>

                                    F-16
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                               (Dollars in thousands, except per share amounts)

6.  Income Taxes (continued)

Deferred  income  taxes  reflect  the net tax effects of  temporary  differences
between the carrying  amounts of assets and liabilities for financial  reporting
and the amounts  used for income tax  purposes.  Significant  components  of the
Company's deferred tax asset as of December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>

                                                    Year ended December 31
                                                     1998             1999
                                             -----------------------------------
Deferred tax assets:
<S>                                              <C>                  <C>
   Allowance for doubtful accounts               $     59             $  34
   Inventory capitalization and reserves              520               466
   Amortization of signing bonuses                    389               230
   Other book accruals                                453               206
                                             -----------------------------------
Total deferred tax assets                           1,421               936

Deferred tax liability:
   Tax over book depreciation                          238               885
                                             -----------------------------------
Net deferred tax assets                             $1,183             $  51
                                            ====================================
</TABLE>

The pro forma  provision for income taxes  represents  the income tax provisions
that  would have been  reported  had the  Company  been  subject to federal  and
additional  state income taxes during the year ended  December 31, 1997. The pro
forma income tax provision has been prepared according to SFAS No. 109.

The pro forma income tax provision for the year ended December 31, 1997 consists
of the following (in thousands):

Current income taxes:
   Federal taxes                                                        $  8,624
   State and local taxes                                                   2,658
                                                              ------------------
                                                                          11,282

Deferred income tax benefit                                              (1,027)
                                                              ------------------
                                                                         $10,255
                                                              ==================

A reconciliation  setting forth the differences between the actual effective tax
rate for the years ended December 31, 1998 and 1999 and the pro forma  effective
tax rates for the

<PAGE>

                                     F-17
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                              (Dollars in thousands, except per share amounts)

6.  Income Taxes (continued)

years ended December 31, 1997 of the Company, and the U.S. federal statutory tax
rate for the years ended December 31,  1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>

                                                 1997        1998         1999
                                              ----------------------------------

<S>                                               <C>         <C>          <C>
Federal statutory rate                            34.4%       35.0%        35.0%
State and local taxes, net of federal
     tax benefits                                   6.5         5.1          5.2
                                              ----------------------------------
Effective tax rate                                40.9%       40.1%        40.2%
                                              ==================================
</TABLE>

7.  Employee Benefit Plans and Stock Option Plans

401(k) Plan

During 1997, the Company  adopted a defined  contribution  plan (401(k)) for all
eligible  employees.  The plan provides for  discretionary  contributions by the
Company based on the  performance of the Company.  Effective  November 1998, the
Company contributes an amount equal to 100% of the first 5% of salaries that the
employees contribute.  The Company made no contributions to the Plan in 1997 and
made contributions of $196 and $360 to the plan in 1998 and 1999, respectively.

1997 Employee Stock Purchase Plan

During  1997,  the Company  adopted,  and the  stockholders  approved,  the 1997
Employee  Stock  Purchase  Plan,  effective  on July 1, 1997.  This plan permits
eligible employees of the Company and its subsidiaries  (generally all full-time
employees who have  completed one year of service) to purchase  shares of Common
Stock at a  discount.  Employees  who elect to  participate  will  have  amounts
withheld through payroll deduction during six-month purchase periods. At the end
of each purchase period, accumulated payroll deductions will be used to purchase
stock at a price equal to 85% of the market price at the beginning of the period
or the end of the period,  whichever is lower.  Stock  purchased  under the plan
will be subject to a six-month holding period.  The Company has reserved 300,000
shares of Common Stock for issuance under this plan. During 1998 and 1999, 2,146
and  3,166  shares,  respectively,   were  issued  under  the  plan  and  remain
outstanding at December 31, 1999.

<PAGE>

                                    F-18
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                          (Dollars in thousands, except per share amounts)

7.  Employee Benefit Plans and Stock Option Plans (continued)

1997 Long-Term Incentive Plan

Prior to the  Offering,  the  Board of  Directors  ("Board")  and the  Company's
stockholders   approved  the  Company's  1997  Long-Term   Incentive  Plan  (the
"Incentive  Plan").  The purpose of the Incentive  Plan is to provide  executive
officers,  key employees,  and others with additional  incentives  enabling such
persons to increase their ownership interests in the Company. The maximum number
of shares of Common Stock that may be subject to  outstanding  awards may not be
greater than 800,000 shares. Awards may be settled in cash, shares, other awards
or other property, as determined by the Committee.

In connection with the Offering, Non-Qualified Stock Options to purchase a total
of 450,000  shares of Common Stock of the Company  were  granted to  executives,
employees of MC Management, other employees and consultants of the Company. Each
of these  options have an exercise  price per share equal to the initial  public
offering price. These options vest generally in three equal installments on each
of the first three  anniversaries of the Offering,  and generally will expire on
the earlier of 10 years after the date of grant or thirty days after termination
of  employment.  If  termination  is  for  cause,  all  options  will  terminate
immediately.

1997 Non-Employee Directors' Stock Plan

Prior to the Offering,  the Company  adopted and the  stockholders  approved the
1997 Non-Employee  Directors' Stock Plan (the "Directors' Plan"), which provides
for  (i) the  automatic  grant  to each  non-employee  director  serving  at the
commencement  of the Offering of an option to purchase  10,000 shares,  and (ii)
thereafter,  the automatic grant to each newly elected non-employee  director of
an option to purchase  10,000  shares upon such person's  initial  election as a
director;  provided, however, that the number of options which may be granted to
newly elected  non-employee  directors upon such person's initial election after
the commencement of the Offering may be altered by the Board. A total of 100,000
shares are reserved for issuance under the Directors' Plan.

Options  granted under the Directors' Plan will have an exercise price per share
equal to the fair  market  value of a share at the date of grant.  Options  will
expire 10 years from the date of grant. Options will vest and become exercisable
ratably,  20% per year,  following the date of grant of the options,  subject to
acceleration by the Board. The Directors' Plan permits non-employee directors to
elect to receive, in lieu of cash directors' fees,

<PAGE>

                                        F-19
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                           (Dollars in thousands, except per share amounts)

7.  Employee Benefit Plans and Stock Option Plans (continued)

nonforfeitable shares or nonforfeitable  credits representing  "deferred shares"
settleable at future dates, as elected by the director.

A summary of stock option  activity  relating to the Company's stock options are
as follows:
<TABLE>
<CAPTION>

                                         Long-Term               Non-Employee
                                      Incentive Plan            Directors Plan
                                ------------------------------------------------
                                   Weighted-                Weighted-
                                    Average     Number     Average     Number
                                Exercise Price    of    Exercise Price   of
                                                Shares                 Shares
                                ------------------------------------------------
<S>                               <C>            <C>         <C>         <C>
Outstanding at January 1, 1997    $      -             -  $      -            -
Granted                              17.00       450,000     17.00       20,000
Exercised                             -                -     25.38       10,000
Canceled                             17.00       (35,000)     -               -
                                ------------------------------------------------
Outstanding at January 1, 1998       17.00       415,000     19.79       30,000
   Granted                               -             -          -           -
   Exercised                             -             -          -           -
   Canceled                          17.00       (14,000)         -           -
                                ------------------------------------------------
Outstanding at January 1, 1999       17.00       401,000     19.79       30,000
   Granted                               -             -          -           -
   Exercised                             -             -          -           -
   Canceled                          17.00       (12,500)    17.00      (10,000)
                                ------------------------------------------------
Outstanding at December 31, 1999    $17.00       388,500    $21.19       20,000
                                ================================================
Options exercisable at
  December 31, 1999                 $17.00       259,000    $21.19        8,000
                                ================================================
</TABLE>

There were no options exercisable at December 31, 1997.

On January 4, 2000,  the Board  approved a change in the exercise price from the
original price to the quoted market price at the close of business on January 4,
2000 ($8.75 per share) for options  outstanding at that date under the Incentive
Plan and the Directors' Plan.

<PAGE>

                                        F-20
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                             (Dollars in thousands, except per share amounts)

7.  Employee Benefit Plans and Stock Option Plans (continued)

Stock options outstanding at December 31, 1999 are summarized as follows:

                                Weighted-Average

                                          Outstanding        Remaining
                                          Options at     Contractual Life

                                           December

        Range of Exercise Price            31, 1999
----------------------------------------------------------------------------

$17.00 per share                               398,500         8 years
$25.38 per share                                10,000         8 years
                                       ------------------
$17.00 to $25.38 per share                     408,500
                                       ==================

The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation".

SFAS 123 requires pro forma  information  regarding  net income and earnings per
share as if the Company has  accounted for its employee  stock  options  granted
under the fair value method of SFAS 123.  The fair value of these equity  awards
was estimated at the date of grant using a  Black-Scholes  option  pricing model
with  the  following  weighted  average  assumptions  used for  grants  in 1997:
risk-free interest rates of 5.73%;  expected  volatility of 73%; expected option
life of 7 years; and an expected dividend yield of 0%.

The weighted-average  grant fair value of options granted during 1997 was $12.30
per share. The total compensation  related to stock-based  compensation  awards,
net of related income tax benefits,  under SFAS 123 for 1998 and 1999 would have
been approximately $1,037 and $929, respectively.

For purposes of pro forma  disclosures,  the estimated  fair value of the equity
awards is amortized to expense over the options'  vesting period.  The Company's
pro forma  information,  for the year ended  December  31, 1998 and 1999,  is as
follows:
<TABLE>
<CAPTION>

                                                                 1998       1999
                                                         -----------------------

<S>                                                          <C>         <C>
Pro forma net income                                         $12,697     $10,952
Pro form  net income per share of common stock - basic         $1.00         .89
Pro forma net income per share of common stock - diluted        $.99         .89
</TABLE>

<PAGE>

                                       F-21
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                          (Dollars in thousands, except per share amounts)

8.  Related Party Transactions

From time to time,  prior to the  Offering,  the Company  made or received  cash
advances  from the  stockholders.  Such  advances bore interest at 9% and had no
established due dates. Net interest income amounted to $169 in 1997.

During 1998 and 1999, the Company  purchased  cigars from  affiliated  companies
aggregating  approximately  $8.2  million and $4.5  million,  respectively.  The
affiliated  entities are partially owned by an  officer/director  and by another
director of the Company.

The Company has a management  agreement with a management company which provides
certain administrative  services to the Company. The management company is owned
by a director of the  Company.  Management  fee  expense in 1997,  1998 and 1999
amounted to $4,132, $4,525 and $5,001, respectively. In addition, the management
company  paid rent to the Company in the amount of $146 in 1997,  1998 and 1999.
In  consideration  for entering into a long-term  agreement  with the management
company,  the  Company  paid a signing  bonus of $1  million  to the  management
company subsequent to the Offering.

9.  Commitments and Contingencies

Employment Agreements

Effective upon consummation of the Offering, the Company entered into three year
employment  agreements  with three  executives  of the Company.  The  agreements
provide for aggregate annual base salaries of $505, plus employment benefits and
bonuses,  which shall be determined at the discretion of the Board of Directors.
In connection with entering into an employment agreement,  one of the executives
received a signing bonus of $500.

Leases

The Company is obligated under various  noncancelable  lease  agreements for the
rental of premises classified as operating leases. Several of the leases contain
escalation clauses which provide for scheduled increases.

<PAGE>

                                       F-22
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                            (Dollars in thousands, except per share amounts)

9.  Commitments and Contingencies (continued)

Future minimum lease  payments for operating  leases as of December 31, 1999 are
as follows:
                                                                  Operating
                                                                    Leases
                                                             -------------------
2000                                                                $1,302
2001                                                                 1,323
2002                                                                 1,323
2003                                                                 1,339
2004                                                                 1,278
Thereafter                                                           4,667
                                                             -------------------
Total minimum lease payments                                       $11,232
                                                             ===================

Rental expense under  operating  leases  amounted to $922,  $1,024 and $1,134 in
1997, 1998 and 1999, respectively.

Litigation

The Company,  from time to time,  may be a defendant  in actions  arising in the
ordinary course of business. In the opinion of management,  such litigation will
not have a material  effect on the  Company's  combined  financial  condition or
results of operations.

Self-Insurance

Effective April 25, 1994, the Company  established  the Pyramid  Insurance Trust
Fund (the "Trust") to provide health and welfare benefits to eligible employees.
Contributions to the Trust by the Company shall be in amounts  sufficient to pay
all costs and expenses of the Trust, including,  but not limited to, the cost of
self-insured  benefit claim payments,  a reserve for self-insured benefit claims
and premiums for any fully insured benefit coverage. Contributions to the Trust,
all of which were charged to operations,  amounted to $642, $1,078 and $1,255 in
1997, 1998 and 1999, respectively.

<PAGE>

                                   F-23
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                      (Dollars in thousands, except per share amounts)

10.  Computation of Basic and Diluted Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per
share for 1999:
<TABLE>
<CAPTION>

                                                        1998             1999
                                               ---------------------------------
Numerator:
<S>                                                   <C>               <C>
   Net income                                         $13,734           $11,881
                                                ================================
Denominator:
   Denominator for basic earnings per share -
     weighted-average shares                           12,719            12,333
   Effect of dilutive securities - stock options           52                 -
                                                 -------------------------------
Denominator for diluted earnings per share - adjusted
   weighted-average shares and assumed conversion
                                                       12,771            12,333
                                                 ===============================
Basic earnings per share                                $1.08             $0.96
                                                 ===============================
Diluted earnings per share                             $1.08             $0.96
                                                 ===============================
</TABLE>

11.  Segment Reporting

The Company adopted SFAS No. 131,  "Disclosures  About Segments of an Enterprise
and Related  Information"  in 1998,  which  changes the way the Company  reports
information about its operating segments.

The  Company has two  segments,  determined  by type of customer  and made up of
retail and wholesale  operations.  The Company's  retail  division sells cigars,
tobacco  products,  cigarettes,  fragrances and other merchandise to the general
public through direct mail order,  cigar stores, and discount outlet stores. The
Company's   wholesale   division   sells  cigars  and  cigarettes  to  wholesale
distributors through the wholesale mail order and wholesale cigarette operations
located within the Company's  discount outlet stores.  The Company operates only
throughout the United States.

The reportable  segments are each managed separately because the Company markets
these segements of the business separately.  Although revenues of the retail and
wholesale  divisions are further monitored based upon marketing and distribution
channel, overall profitability is measured only at the retail/wholesale level.

<PAGE>

                                           F-24
                       800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                             (Dollars in thousands, except per share amounts)

11.  Segment Reporting (continued)

The Company evaluates performance based on profit or loss from operations before
income taxes. The accounting policies of the reportable segments are the same as
those  described  in  the  summary  of  significant   accounting  policies.  The
accounting for the assets of each segment is the same as in consolidation.
<TABLE>
<CAPTION>

                                                        Year ended December 31

                                --------------------------------------------------------------------------
                                          1997                     1998                    1999
                                --------------------------------------------------------------------------
                                   Retail    Wholesale      Retail    Wholesale     Retail    Wholesale
                                --------------------------------------------------------------------------

<S>                                <C>         <C>          <C>         <C>         <C>         <C>
Net sales                          $139,500    $100,848     $155,639    $130,873    $160,456    $156,545
Segment profit                        9,331      16,002       10,539      12,938       5,258      16,264
Depreciation and amortization           445         410        1,062         351       1,560         422
Interest expense                        579         690          651         644         353         375
Total assets                         22,805      29,584       44,324      43,779      43,933      38,713
Capital expenditures                  8,351         196        9,962         711       5,933       2,801
</TABLE>

The segment  reporting  detailed  above  reconciles  to  consolidated  totals as
follows:
<TABLE>
<CAPTION>

                                                                    Year ended December 31
                                                            1997             1998              1999
                                                     ------------------------------------------------------
Profit and loss
<S>                                                         <C>              <C>              <C>
Total profit for reportable segments                        $25,333          $  23,477        $  21,522
Corporate segment (loss)                                     (1,217)              (549)          (1,658)
                                                     ------------------------------------------------------
Consolidated income before income taxes                     $24,116          $  22,928        $  19,864
                                                     ======================================================
Assets
Total assets for reportable segments                        $52,389          $  88,103        $  82,646
Corporate segment assets                                     38,873             16,569           18,855
                                                     ------------------------------------------------------
Consolidated assets                                         $91,262           $104,672         $101,501
                                                     ======================================================
Other significant items
Depreciation and amortization                             $     855         $    1,413       $    1,982
Corporate segment depreciation and amortization                  50                164              173
                                                     ------------------------------------------------------
Consolidated depreciation and amortization                $     905         $    1,577       $    2,155
                                                     ======================================================
Interest expense                                           $  1,269         $    1,295      $       728
Corporate interest expense                                        -                  -               43
                                                     ------------------------------------------------------
Consolidated interest expense                              $  1,269         $    1,295      $       771
                                                     ======================================================
Capital expenditures                                       $  8,547          $  10,673       $    8,734
Corporate capital expenditures                                    -                  -               97
                                                     ------------------------------------------------------
Consolidated capital expenditures                          $  8,547          $  10,673       $    8,831
                                                     ======================================================
</TABLE>

<PAGE>

                                   F-25
                      800-JR CIGAR, Inc. and Subsidiaries

             Notes to Consolidated Financial Statements (continued)

                             (Dollars in thousands, except per share amounts)

12.  Quarterly Results of Operations (Unaudited)

The following is a summary of the unaudited  quarterly results of operations for
1999 and 1998:
<TABLE>
<CAPTION>
                                                                       Quarter Ended
                                               ---------------------------------------------------------------
                                                 March 31     June 30       September 30      December 31
                                               ---------------------------------------------------------------
 1999
<S>                                                <C>         <C>             <C>               <C>
 Net sales                                         $72,821     $78,798         $79,871           $85,511
 Gross profit                                       12,827      13,279          13,893            15,296
 Net income                                          2,446       2,609           3,069             3,757
 Per share data:
    Earnings per share - basic                        .19         .21             .25               .31
    Earnings per share - diluted                      .19         .21             .25               .31
 Weighted-average number of
   common shares outstanding - basic                12,600      12,402          12,291            12,043
 Weighted-average number of common shares
    outstanding - diluted                           12,600      12,402          12,291            12,043


 1998
 Net sales                                         $62,196     $70,042         $73,177           $81,097
 Gross profit                                       12,564      13,682          14,903            11,646
 Net income                                          3,532       3,940           4,335             1,927
 Per share data:
    Earnings per share - basic                        .28         .31             .34               .15
    Earnings per share - diluted                      .27         .31             .34               .15
 Weighted-average number of
   common shares outstanding - basic                12,750      12,750          12,733            12,640
 Weighted-average number of common shares
    outstanding - diluted                           12,873      12,833          12,733            12,640
</TABLE>

<PAGE>

                                       S-1
<TABLE>
<CAPTION>

                       800-JR CIGAR, Inc. and Subsidiaries

                 Schedule II--Valuation and Qualifying Accounts

                                 (In thousands)

                                                                     Additions
                                                          --------------------------------
                                                              Charged        Charged
                                             Beginning      to Cost and      to Other       Deductions    Ending Balance
               Description                    Balance         Expense        Accounts          (A)
--------------------------------------------------------------------------------------------------------------------------
<S>                                              <C>           <C>         <C>                  <C>            <C>
Year ended December 31, 1999
Allowance for doubtful accounts                  $145          $  70       $       -            $128           $  87
                                          ================================================================================
Year ended December 31, 1998
Allowance for doubtful accounts                 $  78           $209       $       -            $142            $145
                                          ================================================================================
Year ended December 31, 1997
Allowance for doubtful accounts                  $118          $  55       $       -           $  95           $  78
                                          ================================================================================
</TABLE>


(A)      Represented write-offs of accounts, net of recoveries.

<PAGE>


                                  EXHIBIT LIST

Exhibit No.       Description of Document

 3.1    Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the
        Company's Registration Statement on Form S-1 (Registration No 333-23401)
        and hereby incorporated by reference.

 3.2    By-Laws of the Company. Filed as Exhibit 3.2 to the Company's
        Registration Statement on Form S-1 (Registration No. 333-23401) and
        hereby incorporated by reference.

 4.1    Form of Certificate for Common Stock of the Company. Filed as Exhibit
        4.1 to the Company's Registration Statement on Form S-1 (Registration
        No. 333-23401) and hereby incorporated by reference.

 10.1   The Company's 1997 Long-Term Incentive Plan. Filed as Exhibit 10.1 to
        the Company's Registration Statement on Form S-1 (Registration No.
        333-23401) and hereby incorporated by reference.

 10.2   The Company's 1997 Non-Employee Directors' Stock Plan. Filed as Exhibit
        10.2 to the Company's Registration Statement On Form S-1 (Registration
        No. 333-23401) and hereby incorporated by reference.

 10.3   The Company's Employee Stock Purchase Plan. Filed as Exhibit 10.3 to the
        Company's Registration Statement on Form S-1 (Registration No.
        333-23401) and hereby incorporated by reference.

 10.4   1997 Employee Bonus Pool Plan. Filed as Exhibit 10.4 to the Company's
        Registration Statement on Form S-1 (Registration No. 333-23401) and
        hereby incorporated by reference.

 10.5   Employment Agreement, dated March 13, 1997 between the Company and Lewis
        I. Rothman. Filed as Exhibit 10.5 to the Company's Registration
        Statement on Form S-1 (Registration No. 333-23401) and hereby
        incorporated by reference.

 10.6   Employment Agreement, dated March 13, 1997 between the Company and
        LaVonda M. Rothman. Filed as Exhibit 10.6 to the Company's Registration
        Statement on Form S-1 (Registration No. 333-23401) and hereby
        incorporated by reference.

 10.7   Employment Agreement, dated March 13, 1997 between the Company and Jane
        Vargas. Filed as Exhibit 10.7 to the Company's Registration Statement on
        Form S-1(Registration No 333-23401)and hereby incorporated by reference.

 10.8   Management Agreement, dated March 13, 1997 by and between MC Management
        and the Company. Filed as Exhibit 10.8 to the Company's Registration
        Statement on Form S-1 (Registration No. 333-23401) and hereby
        incorporated by reference.

 10.9   Form of Indemnification Agreement. Filed as Exhibit 10.9 to the
        Company's Registration Statement on Form S-1 (Registration No 333-23401)
        and hereby incorporated by reference.

 10.10  Agreement dated March 13, 1997 by and between Cigars by Santa Clara,
        N.A., Nicaraguan American Tobacco Company, ("Natco"). Filed as Exhibit
        10.12 to the Company's Registration Statement on Form S-1 (Registration
        No. 333-23401) and hereby incorporated by reference.

 10.11  Agreement dated March 13, 1997 by and between Natco and Nicaraguan-
        American Tobacco Sociedad Anomima, S.A. Filed as Exhibit 10.13 to the
        Company's Registration Statement on Form S-1 (Registration No 333-23401)
        and hereby incorporated by reference.

 10.12  Lease Agreement dated July 19, 1993 by and between J.R. Tobacco of
        America, Inc., and Interstate Development Co., Inc. as amended by First
        Amendment to Lease, dated November 2, 1993, by and between J.R. Tobacco
        of America, Inc. and Interstate Development Company. Filed as Exhibit
        10.15 to the Company's Registration Statement on Form S-1 (Registration
        No. 333-23401) and hereby incorporated by reference.

 10.13  Lease Agreement, dated March 1, 1996 by and between J.R. Outlet, Inc.
        and Casa Blanca, Inc. Filed as Exhibit 10.16 to the Company's
        Registration Statement on Form S-1 (Registration No. 333-23401) and
        hereby incorporated by reference.

 21.1   List of  Subsidiaries  of the Company.  Filed as Exhibit  21.1 to the
        Company's  Registration  Statement on Form S-1 (Registration No.
        333-23401) and hereby incorporated by reference.

 23.1   Consent of Ernst & Young LLP.

 27.0   Financial Data Schedule .

<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                               800-JR Cigar, Inc.

March 29, 2000               By:__/s/ Lew Rothman___________________________
                                 Lew Rothman, Chairman of the Board, President,
                                 Chief Executive Officer


March 29, 2000               By:__/s/ Michael E. Colleton_______________________
                                 Michael E. Colleton, Chief Financial Officer


March 29, 2000               By:__/s/ LaVonda Rothman________________________
                                 LaVonda Rothman, Secretary and Director


March 29, 2000               By:__/s/ Jane Vargas______________________________
                                 Jane Vargas, Vice President and Director

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

March 29, 2000               By:__/s/ Maureen Colleton_________________________
                                 Maureen Colleton, Director


March 29, 2000               By:__/s/ Bernie_Rosenblum_______________________
                                 Bernie Rosenblum, Director


March 29, 2000               By:__/s/ John Oliva______________________________
                                 John Oliva, Director


March 29, 2000               By:__/s/ John F. Barry Jr._________________________
                                 John F. Barry Jr., Director

<PAGE>

                        Consent of Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No.  333-58397)  pertaining to the 1997 Long-Term  Incentive  Plan, the 1997
Non-Employee  Directors' Stock Plan and the 1997 Employee Stock Purchase Plan of
800-JR  CIGAR,  Inc. of our report  dated March 2,  2000,  with  respect to the
consolidated financial statements and schedule of 800-JR CIGAR, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1999.

                                                            /S/ERNST & YOUNG LLP


MetroPark, New Jersey
March 24, 2000