<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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 0-21081
CARIBBEAN CIGAR COMPANY
(Exact name of registrant as specified in its charter)
FLORIDA 65-0613303
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8305 N.W. 27th STREET
SUITE 111
MIAMI, FLORIDA
(Address of principal executive offices)
33122
(Zip Code)
(305) 267-3911
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 6,746,575 shares as of August 18,
1998
Page 1 of 11
<PAGE> 2
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,263 $ 72,986
Accounts receivable, net of allowance for doubtful
accounts of $58,000 at June 30, 1998 and March 31, 1998 447,881 217,536
Insurance proceeds receivable -- 1,333,418
Inventories 2,807,575 2,938,963
Prepaid expenses and other current assets 429,381 318,000
Net assets held for sale 1,882,509 2,085,991
------------ ------------
Total current assets 5,568,609 6,966,894
Property and equipment, net 1,529,891 1,593,095
Other assets 99,083 107,422
------------ ------------
$ 7,197,583 $ 8,667,411
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,481,458 $ 2,078,114
Short-term borrowings 1,990,153 2,257,714
Accrued litigation and professional fees 222,612 307,500
Other accrued expenses and taxes payable 480,178 610,706
------------ ------------
Total current liabilities 4,174,401 5,254,034
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.001 value; 10,000,000
shares authorized; June 30, 1998
issued and outstanding - 6,502,452; March
31, 1998 - issued and
outstanding - 6,176,602 6,502 6,177
Additional paid-in capital 11,970,128 11,780,315
Accumulated deficit (8,953,448) (8,373,115)
------------ ------------
Stockholders' equity 3,023,182 3,413,377
------------ ------------
$ 7,197,583 $ 8,667,411
============ ============
</TABLE>
The accompanying notes are an integral part hereof.
Page 2 of 11
<PAGE> 3
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 649,090 $ 2,287,569
Cost of sales 438,655 1,186,909
----------- -----------
Gross profit 210,435 1,100,660
----------- -----------
Operating expenses:
Selling expenses 203,215 694,533
General and administrative expenses 212,821 1,040,719
----------- -----------
416,046 1,735,252
----------- -----------
Loss from continuing operations before interest
(income) expense (205,611) (634,592)
Interest (income) expense 273,110 (11,291)
----------- -----------
Loss from continuing operations (478,721) (623,301)
Income (loss) from discontinued operations (101,612) 16,212
----------- -----------
Net loss $ (580,333) $ (607,089)
=========== ===========
Basic and diluted loss from continuing operations
per common share $ (.08) $ (.12)
Basic and diluted income (loss) from discontinued
operations per common share (.01) --
----------- -----------
Basic and diluted net loss per common share $ (.09) $ (.12)
=========== ===========
Basic and diluted weighted average number of common shares 6,339,527 5,128,852
=========== ===========
</TABLE>
The accompanying notes are an integral part hereof.
Page 3 of 11
<PAGE> 4
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended June 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Continuing Operations:
Cash flows from operating activities:
Net loss from continuing operations $ (478,721) $ (623,301)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 82,368 101,133
Write-off of leasehold improvements -- 122,483
Common stock issued for services -- 24,198
Interest expense recorded for common stock
issued in connection with notes payable 190,138 --
Increase in accounts receivable (230,345) (103,408)
Decrease in insurance receivable 1,333,418 --
Decrease (increase) in inventory 281,327 (277,707)
Increase in prepaid expenses (261,320) (820,900)
Decrease (increase) in other assets 8,339 (13,419)
Increase (decrease) in accounts payable (596,656) 241,925
Increase (decrease) in accrued expenses (215,416) 176,274
----------- -----------
Net cash provided by (used in) operating activities 113,132 (1,172,722)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (19,164) (536,309)
Trademark costs -- (1,180)
----------- -----------
Net cash used in investing activities (19,164) (537,489)
----------- -----------
Cash flows from financing activities:
Decrease in short-term borrowings (467,561) --
Advances from officers and directors -- 249,700
Proceeds from convertible debt 150,000 --
Advances to/from related parties -- 36,805
----------- -----------
Net cash provided by (used in) financing activities (267,561) 286,505
----------- -----------
Net decrease in cash from continuing operations (173,593) (1,423,706)
----------- -----------
Discontinued Operations:
Net income (loss) from discontinued operations (101,612) 16,212
Net change in assets held for sale 203,482 (1,414,602)
----------- -----------
Net increase (decrease) in cash from discontinued operations 101,870 (1,398,390)
----------- -----------
Net decrease in cash (71,723) (2,822,096)
Cash and cash equivalents at beginning of period 72,986 2,896,620
----------- -----------
Cash and cash equivalents at end of period $ 1,263 $ 74,524
=========== ===========
Supplemental information:
Cash paid for interest $ 72,618 $ --
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
</TABLE>
The accompanying notes are an integral part hereof.
Page 4 of 11
<PAGE> 5
CARIBBEAN CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1998 and 1997, and the results of its operations and cash
flows for the three months ended June 30, 1998 and 1997. Such consolidated
financial statements have been condensed in accordance with the applicable
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed financial statements be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended March 31, 1998 included in its Annual Report filed on
Form 10-KSB, file no. 0-21081, which was filed on July 14, 1998. The results of
operations for the period ended June 30, 1998 are not necessarily indicative of
operating results for the full year.
Note 1. Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires companies with
complex capital structures that have publicly held common stock or common
stock equivalents to present both basic and diluted earnings per share
("EPS") on the face of the income statement. Basic EPS is calculated as
income available to common stockholders divided by the weighted average
number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and
the treasury stock method for options and warrants as previously prescribed
by Accounting Principles Board Opinion No. 15, "Earnings Per Share." The
effect of shares issuable under the Company's stock plans and shares
issuable upon exercise of warrants are excluded from the calculation of
diluted EPS since the effect is antidilutive. The adoption of SFAS 128,
which also required the restatement of previously reported EPS, did not
have a material impact on the Company's reported EPS for any periods
presented.
Note 2. Discontinued Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. The Company anticipates that the division will be disposed
of by August 1998, however, there can be no assurance that any sale can be
successfully completed. Accordingly, the retail division has been accounted
for as discontinued operations for the three months ended June 30, 1998 and
1997. The net assets of the discontinued operations consist primarily of
inventories and property and equipment.
Summarized results of the retail division are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 372,254 $ 744,117
Income (loss) from discontinued operations (101,612) 16,212
Income (loss) per common share (0.01) --
</TABLE>
Net assets of the retail division, which are classified as held for sale in
the accompanying balance sheets, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Inventories $ 1,504,077 $ 2,143,604
Property and equipment 342,608 813,216
Other assets 41,211 41,631
Current liabilities (5,387) (9,790)
----------- -----------
Net assets of retail division $ 1,882,509 $ 2,988,661
=========== ===========
</TABLE>
Page 5 of 11
<PAGE> 6
Note 3. Debt
Finova Credit Facility - On August 28, 1997, the Company entered into a
credit facility with Finova Capital Corporation ("Finova Credit Facility").
Under the terms of the Finova Credit Facility, the Company can borrow up to
a maximum of $3,000,000 subject to limitations based upon eligible accounts
receivable and inventory. The Finova Credit Facility expires in two years
and bears interest at prime plus 2.5% per annum. As of June 30, 1998, the
Company had borrowed approximately $1,385,000 under the facility. At June
30, 1998, the Company is not in compliance with certain of the covenants
under the facility. The Finova Credit Facility is secured by a first lien
on all assets of the Company now owned or hereafter acquired. The Company
is required to maintain a $1,000,000 life insurance policy of the life of
Mr. Kevin Doyle payable to Finova Capital Corporation in the event of Mr.
Doyle's death.
In June 1998, the Company received notice from Finova of its intent to
declare a default under the Finova line of credit. The Company and Finova
entered into a forbearance agreement on July 10, 1998 (the "Forbearance
Agreement"). Under the terms of the Forbearance Agreement, Finova has
agreed to advance the Company up to $1.5 million. In exchange for such
forbearance, the Company has agreed to pay Finova in full by September 8,
1998. In the event that the Company fails to pay the line of credit in full
by such date, Finova has indicated its intent to exercise available
remedies under the line of credit including foreclosure of its security
interests in the Company. Because of the Company's continuing cash flow
deficit and the declaration of default under the line of credit, the
Company must obtain a new line of credit facility or substitute debt or
equity in order to repay the line of credit and meet its anticipated
working capital requirements. Furthermore, Finova holds a security interest
in the Company's receivables and inventories, and could claim the Company's
accounts receivable and its inventories for the purpose of liquidating such
assets and apply the proceeds thereof toward repayment of the Company's
obligations under the line of credit. In such event, the Company would not
be able to continue its operations, and would be forced to seek protection
from its creditors or let Finova proceed to claim and liquidate the assets
of the Company. In such event, creditors other than Finova, and the
Company's shareholders, would receive no value for their rights and claims
against the Company, and would realize a total loss on their investments in
the Company. On August 18, 1998, the Company entered into an agreement with
Finova (see Note 7).
Subordinated Notes - The Company has borrowed a total of $785,000 under a
series of 9% subordinated promissory notes due 60 days from the date of
funding. In connection the borrowing, the Company agreed to issue shares of
the Company's common stock in an amount based upon the length of time the
loans remain outstanding. For the three months ended June 30, 1998, an
additional 325,850 shares of common stock have been issued in connection
with these notes, which resulted in interest expense of approximately
$190,000 being recorded. Approximately $410,000 remains outstanding as of
June 30, 1998, which the Company is in default.
Other - In June 1998, the Company borrowed an additional $150,000 which is
convertible into 375,000 shares of common stock of the Company.
Note 4. Litigation
The Company is involved in various legal proceedings, including pending
litigation. From November 1997 to January 1998, eight class action lawsuits
were filed in federal court against the Company, its then chief executive
officer and its former chief financial officer alleging violations of the
federal securities laws between August 14, 1997 and November 14, 1997. In
March 1998 the court dismissed seven of the complaints and required the
plaintiffs of the dismissed complaints to file by amending the remaining
complaint. Once the amended complaint (Roger Garrity, William Brotski,
Gregory C. Zaremba, James G. Smith, CIV - Louis Allard, Lynda M. Bradley,
Kathleen E. Dalton and Allen Cohen v. Caribbean Cigar Company, Kevin Doyle,
and Thomas R. Dilk) was filed, the Company had 30 days to answer. The
Company has answered the complaint. Due to the preliminary stage of these
matters, the Company has not determined whether it has any liability
exposure, although it has recorded a $200,000 reserve for defense costs.
The Company believes that it has valid defenses to all litigation pending
against it, and all cases against the Company are, and will be vigorously
defended. Management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome of all
pending litigation. The ultimate outcome of any or all pending litigation
could have a material adverse effect on the Company's operating results,
cash flows or financial position.
Page 6 of 11
<PAGE> 7
Note 5. Income Taxes
There is no provision or benefit for income taxes in either period, as any
deferred tax assets generated by the losses are offset in their entirety by
valuation allowances. There are no significant deferred tax liabilities.
Note 6. New Accounting Standards
Effective April 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These new standards
will not have an effect on the Company, as (i) the Company currently has no
items of other comprehensive income, therefore the Statement of
Comprehensive Income will not be presented, and (ii) since the Company's
continuing operations are in a single reportable segment, the provisions of
SFAS No. 131 are not applicable to its continuing business. See Note 2 for
the disclosures related to discontinued operations.
Note 7. Subsequent Events
On July 28, 1998, the Company entered into an agreement with Mr. Ron
Jenkins (the "Jenkins Agreement"). Under the terms of the Jenkins
Agreement, Mr. Jenkins, president of SJI Wholesale, Inc. ("SJI"), (i) will
facilitate the consummation of an agreement between the Company and SJI
whereby the Company would grant SJI the exclusive right to market the
Company's products in the United States; (ii) will attempt to arrange for
the purchase of cigars manufactured for SJI by the Company; (iii) will
arrange for SJI to purchase certain of the inventory of the Company for
$500,000; (iv) will transfer $25,000 to the Company to cover expenses; and
(v) will assist the Company in either restructuring or repaying its debt
obligations with Finova.
In consideration for the services to be performed by Mr. Jenkins, pursuant
to the Jenkins Agreement, the Company agreed to issue Mr. Jenkins 1,000,000
shares of preferred stock of the Company (the "Preferred Stock"). In
connection with the Jenkins Agreement, the Company's Board of Directors
authorized the issuance of a new class of preferred securities with certain
designations and preferences. Such designations and preferences include;
(i) each share of preferred stock shall have super voting rights of four
votes per share subject to Nasdaq SmallCap approval, (ii) each share of the
Preferred Stock is convertible into four shares of common stock of the
Company at a conversion price of $.80 per share of the Preferred Stock, and
(iii) the Preferred Stock must be converted within 48 months from the date
of issuance or Mr. Jenkins must immediately return the unconverted portion
of the Preferred Stock to the Company. The Company also appointed Mr.
Jenkins Chief Operating Officer, Executive Vice President and a Director of
the Company. In addition, J.D. Jenkins was appointed Chief Executive
Officer, President and a Director of the Company. In connection with the
Jenkins Agreement, Mr. Kevin Doyle resigned as Executive Vice President and
a Director of the Company.
On August 18, 1998, the Company entered into an agreement with Finova (the
"Agreement"). Under the terms of the Agreement, Finova has agreed to accept
the amount of $1,000,000 as satisfaction (the "Satisfaction Amount") of the
Company's obligations to Finova. The Company has agreed to make weekly
installments of $16,000 including interest at one point over prime. In
addition, the Company has agreed to direct one of its customers to send
Finova $105,600 (the "Receivable") which the customer currently owes to the
Company. The Receivable would immediately reduce the Satisfaction Amount to
$894,400 if the Company were successful in arranging for its customer to
send the Receivable to Finova. In the event of default under the Agreement,
the Company shall be obligated to Finova for the balance owed as of the
date of the event of default plus approximately $350,000. Mr. Ron Jenkins,
the Company's executive vice president and chief operating officer has
personally guaranteed the Company's obligations under the Agreement up to
$1,000,000.
On August 5, 1998, the Company received notice from the Nasdaq Stock
Market, Inc. notifying the Company it was subject to delisting from the
Nasdaq SmallCap Market due to insufficient net tangible assets and the
minimum bid price requirements. The Company is contemplating a reverse
stock split that the Company believes will assist in raising the bid price
of the Company's common stock and thereby achieve compliance with the
applicable standard. Notwithstanding Nasdaq's comments regarding the
Company's net tangible assets, the Company believes it in compliance with
such requirement.
Page 7 of 11
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The forward-looking statements contained
in this Form 10-QSB are subject to certain risks and uncertainties. Actual
results could differ materially from current expectations. Among the factors
that could affect the Company's actual results and could cause results to differ
from those contained in the forward-looking statements contained herein is the
Company's ability to implement its business strategy successfully, which will
depend on business, financial, and other factors beyond the Company's control,
including, among others, prevailing changes in consumer preferences, access to
sufficient quantities of raw materials, availability of trained laborers and
changes in tobacco products regulation. There can be no assurance that the
Company will continue to be successful in implementing its business strategy.
Other factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. Words used in this Form
10-QSB, such as "expects," "believes," "estimates" and "anticipates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements.
The following should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Form 10-QSB.
Comparison of Results of Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. The Company anticipates that the division will be disposed of
by August 1998, however, there can be no assurance that the division will be
disposed of by that date. Accordingly, the retail division has been accounted
for as discontinued operations for the three months ended June 30, 1998 and
1997.
The following table presents, for the periods indicated, certain items in the
historical consolidated statements of operations as a percentage of sales.
<TABLE>
<CAPTION>
Three Months
Ended June 30,
--------------------
1998 1997
------ ------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 67.6 51.9
------ ------
Gross profit (loss) 33.4 48.1
------ ------
Operating expenses:
Selling expenses 31.3 30.4
General and administrative expenses 32.8 45.5
------ ------
64.1 75.9
------ ------
Operating income (loss) (31.7) (27.7)
Interest (income) expense 42.1 (.5)
------ ------
Income (loss) from continuing operations (73.8) (27.2)
Income (loss) from discontinued operations (15.7) .7
------ ------
Net loss (89.4)% (26.5)%
====== ======
</TABLE>
Three Months Ended June 30, 1998 and 1997
Sales for the three months ended June 30, 1998 were approximately $649,000, a
decrease of approximately $1,638,000 or 71.6% from sales for the three months
ended June 30, 1997 of approximately $2,288,000. This decrease is primarily
attributed to increased competition, including expanded supply from larger,
well-known cigar manufacturers. In addition, due
Page 8 of 11
<PAGE> 9
to supply problems, the Company did not record any sales of its flavored cigars
until late June 1998. Production of flavored cigars began in June 1998 at the
Company's Jaibon, Dominican Republic facility.
Cost of sales for the three months ended June 30, 1998 were approximately
$439,000, or approximately 67.6% of sales, as compared to cost of sales for the
three months ended June 30, 1997 of approximately $1,187,000, or approximately
51.9% of sales. The increase as a percentage of sales is primarily attributable
to discounting of some cigar products and the general decline in premium cigar
sales.
Selling expenses includes salaries and wages, marketing and advertising
expenses, shipping costs and other miscellaneous expenses. Selling expenses for
the three months ended June 30, 1998 were approximately $203,000, or
approximately 31.3% of sales, as compared to selling expenses for the three
months ended June 30, 1997 of approximately $695,000, or approximately 30.4% of
sales. The decrease consists primarily of decreases in expenditures for
advertising and promotional expenses, sales and marketing salaries, and shipping
costs.
General and administrative expenses include administrative salaries,
professional fees, travel and entertainment, insurance and other expenses.
General and administrative expenses for the three months ended June 30, 1998
were approximately $213,000, or approximately 32.8% of sales, as compared to
general and administrative expenses for the three months ended June 30, 1997 of
approximately $1,041,000, or approximately 45.5% of sales. This decrease is
primarily attributable to decreased expenditures for professional fees,
administrative salaries, and travel. In addition, for the three months ended
June 30, 1997, the Company recorded a loss on abandonment of its Miami factory.
Interest expense for the three months ended June 30, 1998 was approximately
$273,000, or approximately 42.1% of sales, as compared to interest income for
the three months ended June 30, 1997 of approximately ($11,000), or
approximately (.5%) of sales. The interest expense for the three months ended
June 30, 1998 is due to the Company's credit facility and subordinated notes
payable. The interest income for the three months ended June 30, 1997 was due to
the investment of funds from the Company's initial public offering in August
1996.
Income (loss) from discontinued operations includes the results of the Company's
retail division.
As a result of the forgoing factors, the Company sustained a loss of
approximately $580,000, or $.09 per share for the three months ended June 30,
1998, as compared to a loss of approximately $607,000 or $0.12 per share for the
three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of approximately $1,394,000.
Since its inception, the Company has sustained losses of approximately
$9,000,000. The Company's operations and growth has been funded by loans from
investors, the sale of common stock (including an initial public offering of its
common stock in August 1996) and a credit facility from a lending institution.
These funds have been used for working capital, capital expenditures,
information systems development and other corporate purposes.
The Company has an ample supply of tobacco for the production of cigars as well
as the maintenance of a sufficient supply of non-tobacco retail products for its
stores. The Company has no commitments for purchases.
In June 1998, the Company received notice from Finova Capital Corporation
("Finova") of its intent to declare a default under the Finova line of credit.
The Company and Finova entered into a forbearance agreement on July 10, 1998
(the "Forbearance Agreement"). Under the terms of the Forbearance Agreement,
Finova has agreed to advance the Company up to $1.5 million. In exchange for
such forbearance, the Company has agreed to pay Finova in full by September 8,
1998. In the event that the Company fails to pay the line of credit in full by
such date, Finova has indicated its intent to exercise available remedies under
the line of credit including foreclosure of its security interests in the
Company. Because of the Company's continuing cash flow deficit and the
declaration of default under the line of credit, the Company must obtain a new
line of credit facility or substitute debt or equity in order to repay the line
of credit and meet its anticipated working capital requirements. Furthermore,
Finova holds a security interest in the Company's receivables and inventories,
and could claim the Company's accounts receivable and its inventories for the
purpose of liquidating such assets and applying the proceeds toward repayment of
the Company's obligations under the line of credit. In such event, the Company
would not be able to continue its operations, and would be forced to seek
protection from its creditors or permit Finova to proceed to claim and
Page 9 of 11
<PAGE> 10
liquidate the assets of the Company. If this were to occur, none of the
Company's shareholders and no creditor other than Finova would receive any value
for their rights and claims against the Company, and would realize a total loss
on their investments in the Company.
RISK FACTORS
Recently Organized Business; History of Losses
The Company was organized in October 1994 and has incurred a loss of $580,000,
or $.09 per share, on revenues of $649,000 for the three months ended June 30,
1998; a loss of $7.7 million, or $1.46 per share, on revenues of $5.8 million
for the fiscal year ended March 31, 1998; a loss of $116,000, or $.03 per share,
on revenues of $7.3 million for the fiscal year ended March 31, 1997; a loss of
$522,000, or $.16 per share, on revenues of $277,000 for the fiscal year ended
March 31, 1996; and a loss of $12,000, or $.00 per share, on revenues of $88,000
for the period from October 3, 1994 (inception) to March 31, 1995. The ability
of the Company to operate profitably is dependent upon its ability to increase
its manufacturing and distribution channels and a continuation of an increase in
the market for premium cigars (as to which no assurance can be made). In
addition, its costs may be increased as a result of government regulations,
which may affect the ability of the Company to operate profitably. The Company
is also subject to business risks associated with a developing business
enterprises. No assurance can be given as to the ability of the Company to
operate profitably.
Existing Default on Line of Credit; Potential Claim and Liquidation of Company's
Assets; Need of Additional Investment Capital
In June 1998, the Company received notice from Finova of its intent to declare a
default under the Finova line of credit. The Company and Finova entered into a
forbearance agreement on July 10, 1998 (the "Forbearance Agreement"). Under the
terms of the Forbearance Agreement, Finova has agreed to advance the Company up
to $1.5million. In exchange for such forbearance, the Company has agreed to pay
Finova in full by September 8, 1998. In the event that the Company fails to pay
the line of credit in full by such date, Finova has indicated its intent to
exercise available remedies under the line of credit including foreclosure of
its security interests in the Company. Because of the Company's continuing cash
flow deficit and the declaration of default under the line of credit, the
Company must obtain a new line of credit facility or substitute debt or equity
in order to repay the line of credit and meet its anticipated working capital
requirements. Furthermore, Finova holds a security interest in the Company's
receivables and inventories, and could claim the Company's accounts receivable
and its inventories for the purpose of liquidating such assets and apply the
proceeds thereof toward repayment of the Company's obligations under the line of
credit. In such event, the Company would not be able to continue its operations,
and would be forced to seek protection from its creditors or let Finova proceed
to claim and liquidate the assets of the Company. In such event, creditors other
than Finova, and the Company's shareholders, would receive no value for their
rights and claims against the Company, and would realize a total loss on their
investments in the Company.
Competition
The tobacco industry in general, including the cigar industry, is dominated by a
small number of companies which are well known to the public. The Company
believes that, as a manufacturer of premium cigars, it competes with a smaller
number of domestic and foreign companies that specialize in premium cigars and
certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Company, General Cigar Holdings, Inc., a division of Culbro
Corporation and Swisher International Group, Inc. Each of these companies has
substantially greater capital resources, manufacturing, sales and marketing
experience, substantially longer and more extensive relationships with growers
and long standing brand recognition and market acceptance than the Company.
However, the market for premium cigars constitutes a small portion of the cigar
market. The Company believes that smokers of premium cigars purchase cigars
based on the perceived quality of the tobacco. The process of producing premium
cigars is not patented, but is based on the know-how and experience of master
craftsmen who can identify and purchase the tobacco and roll the tobacco into
premium cigars. The principal characteristics that differentiate one premium
cigar from another are the quality of the tobacco in the cigar, the quality of
the tobacco used as a cigar wrapper, the blend of tobacco and the quality of the
rolling. No assurance can be given as to the ability of the Company to compete
successfully in any market in which it conducts, or may conduct, operations.
Page 10 of 11
<PAGE> 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the discussion of litigation in (a) Note 9 to the Fiscal 1998 Annual
Financial Statements and (b) Note 4 to the Notes to Condensed Consolidated
Financial Statements of the Company for the fiscal quarter ended June 30,
1998, which are included elsewhere in this Quarterly Report on Form 10-QSB.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
See Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources and
Note 3 to the Notes to Condensed Consolidated Financial Statements of the
Company for the fiscal quarter ended June 30, 1998, which are included
elsewhere in this Quarterly Report on Form 10-QSB for a discussion on the
forbearance agreement entered into with Finova Capital Corporation and a
discussion on certain other subordinated notes which the Company is in
default.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibits
27.1 - Financial Data Schedule
99.1 - Forbearance Agreement
99.2 - Agreement
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 2, 1998 with respect
to the appointment of Ahearn, Jasco + Company, P.A. as its independent
certified public accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 1997
CARIBBEAN CIGAR COMPANY
/S/ EDWARD C. WILLIAMS
-----------------------
Edward C. Williams
Chief Financial Officer
Page 11 of 11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF CARIBBEAN CIGAR COMPANY FOR THE THREE MONTHS PERIOD
ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,263
<SECURITIES> 0
<RECEIVABLES> 447,881
<ALLOWANCES> 58,000
<INVENTORY> 2,807,575
<CURRENT-ASSETS> 5,568,609
<PP&E> 1,529,891
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,197,583
<CURRENT-LIABILITIES> 4,174,401
<BONDS> 0
0
0
<COMMON> 6,502
<OTHER-SE> 3,016,680
<TOTAL-LIABILITY-AND-EQUITY> 7,197,583
<SALES> 649,090
<TOTAL-REVENUES> 649,090
<CGS> 438,655
<TOTAL-COSTS> 416,046
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 273,110
<INCOME-PRETAX> (478,721)
<INCOME-TAX> 0
<INCOME-CONTINUING> (478,721)
<DISCONTINUED> (101,612)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (580,333)
<EPS-PRIMARY> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
FORBEARANCE AGREEMENT
THIS AGREEMENT, dated as of the 10th day of July, 1998, by and
between FINOVA CAPITAL CORPORATION, having a place of business located at 111
West 40th Street, New York, New York 10018 ("FINOVA") and Caribbean Cigar
Company, Precision Mold, Inc., Caribbean AWC Corporation, Caribbean Cigar
Company (Cayman) Limited, having its principal place of business at 8305 N.W.
27th Street, Miami, Florida 33122 (collectively, the "Borrower").
WHEREAS, the Borrower and FINOVA entered into that certain Security
Agreement, dated August 28, 1997 (the "Security Agreement"); and
WHEREAS, pursuant to the Security Agreement, FINOVA agreed to provide
the Borrower with certain financing; and
WHEREAS, the Borrower remains obligated to FINOVA for the monies
borrowed under the Security Agreement and otherwise; and
WHEREAS, FINOVA continues to grant advances, loans and extensions of
credit to or for the benefit of the Borrower; and
WHEREAS, certain defaults exist under the Security Agreement; and
WHEREAS, as of June 30, 1998, the Borrower was obligated to FINOVA in
the approximate amount of $1.4 million, together with interest thereon at the
interest rate set forth in the Security Agreement plus FINOVA's costs and
expenses, including but not limited to legal fees, costs and disbursements and
any and all additional advances made by FINOVA, including advances made to
protect FINOVA's collateral (collectively, "Obligations"); and
WHEREAS, on or about February 26, 1998 and July 8, 1998, FINOVA sent
written default letters to the Borrower via certified mail, return receipt
requested and regular mail (collectively "Default Letters") which Default
Letters advised the Borrower of its defaults under the Security Agreement; and
WHEREAS, the Borrower has requested that FINOVA forbear in commencing
any action against the Borrower under or pursuant to the Security Agreement for
the Obligations owing to FINOVA under the Security Agreement and FINOVA is
willing to forbear pursuant to the terms and conditions contained in this
Agreement; and
NOW, THEREFORE, for good and valuable consideration; the receipt and
sufficiency of which are hereby acknowledged the parties agree as follows:
1. All of the above recitals are hereby incorporated by reference
and made a part of this Agreement.
2. The Borrower hereby acknowledges that it is indebted to FINOVA
under the Security Agreement in the amount of the Obligations and the Security
Agreement is in default, which defaults remain uncured and unwaived by this
Agreement.
3. Borrower agrees to retain the services of a broker acceptable to
FINOVA to assist Borrower in facilitating a sale of its assets and/or in
obtaining an investor willing to infuse sufficient additional capital into the
Borrower's business. Borrower has elected to retain the services of
<PAGE> 2
Equity Partners as its broker, which broker is acceptable to FINOVA. FINOVA
agrees to make advances (in addition to all other advances to be made under
this Agreement or the Security Agreement) to cover the costs of such broker.
4. Borrower consents and agrees to FINOVA conducting an audit of
the Borrower's inventory. The Borrower agrees to fully cooperate with FINOVA to
effect said audit.
5. Borrower hereby agrees to fully satisfy its obligations to
FINOVA by a full and complete payoff of all amounts owing to FINOVA on or
before 60 days from the date of this Agreement. In the event FINOVA has not
been fully paid in immediately available funds, by the 61st day after the date
of this Agreement, Borrower consents to any liquidation of the collateral by
FINOVA or any third party on FINOVA's behalf. In order to effect such
liquidation Borrower is herewith delivering the Peaceful Possession Letter, a
copy of which is attached hereto as Exhibit A.
6. FINOVA agrees to continue, in its reasonable discretion, to make
loans and advances to the Borrower pursuant to the advance rates set forth in
the Security Agreement, as well as, in FINOVA's discretion, make overadvances
up to the amount of $115,000 (the "Overadvance") above the advance rates set
forth in the Security Agreement, provided that: (1) Borrower complies with the
terms and conditions of this Agreement; (2) no additional Event of Default (as
such term is defined in the Security Agreement) under this Agreement or under
the Security Agreement arises; (3) the Obligations do not exceed $1,500,000;
(4) as of this date there is no material change (from counts previously
reported to FINOVA) in the count of finished goods inventory located at the
Borrower's warehouse ("Eligible Inventory"). Notwithstanding anything to the
contrary contained herein, in the event that as a result of an audit of the
Borrower's Eligible Inventory FINOVA determines the value of the Eligible
Inventory (as it exists on the date hereof) to be less than $2.27 million, the
amount of the Overadvance shall be recomputed accordingly, but shall not result
in FINOVA demanding a "paydown" of the Obligations (unless there has been a
material change in the counts as aforesaid).
7. Edward C. Williams, Acting President and CFO, shall execute and
deliver a Validity and Support Guaranty, a copy of which is attached hereto as
Exhibit B.
8. The Forbearance Period shall mean the period from the date of
this Agreement until the "Termination Date", which Termination Date shall be
the earlier of: (a) receipt of payment in full by FINOVA; (b) immediately upon
an Event of Default under this Agreement (as such term is hereafter defined) or
(c) sixty one (61) days after the date of this Agreement.
9. During the Forbearance Period, FINOVA agrees to forbear in
commencing any action upon the Security Agreement for the obligations owing to
FINOVA under the Security Agreement provided an Event of Default under this
Agreement has not occurred (as such term is hereafter defined) under the
Security Agreement or under this Agreement.
10. An Event of Default under this Agreement shall mean the
following: (a) the failure of the Borrower to observe, or timely comply with,
or perform any covenant or term contained in this Agreement or the Security
Agreement except for the defaults existing as of the date of this Agreement;
(b) the failure of The Borrower to pay FINOVA any sum when due under this
Agreement; (c) the occurrence of a material adverse change subsequent to the
date of this Agreement with respect to The Borrower's finances or property, it
being specifically understood and agreed that FINOVA may make such
determination in its reasonable discretion; (d) any financial statements,
affidavits of financial condition or other financial information delivered or
provided by The Borrower in connection with this Agreement or the Security
Agreement is or shall be false or misleading in any material respect; (e) any
warranty or representation made or deemed made by The Borrower in this
Agreement or the Security
<PAGE> 3
Agreement is or shall be untrue in any material respect; or (f) The Borrower:
(i) becomes a debtor for any bankruptcy proceeding; or (ii) admits in writing
its inability to pay its debts as they mature.
11. This Agreement shall be construed under and in accordance
with the laws of the State of New York.
12. This Agreement represents the entire Agreement between FINOVA
and The Borrower, all such other agreements (except the Security Agreement and
any guaranty) being merged with this Agreement and the Security Agreement and
any other guaranty remaining in full force and effect.
13. No executory agreement and no course of dealing between The
Borrower and FINOVA shall be effective to change or modify this Agreement in
whole or in part; nor shall any change, modification or waiver of any rights or
powers of FINOVA be valid or effective unless in writing or signed by an
authorized officer of FINOVA.
IN WITNESS WHEREOF, the undersigned hereby agree to the terms and
conditions set forth hereinabove.
FINOVA CAPITAL CORPORATION
By:
------------------------------------------
Raymond Eichler, Assistant Vice President
CARIBBEAN CIGAR COMPANY, PRECISION
MOLD, INC., CARIBBEAN AWC
CORPORATION, CARIBBEAN CIGAR
COMPANY (CAYMAN) LIMITED
By: Edward C. Williams
-----------------------------------------
Edward C. Williams, Acting President
STATE OF FLORIDA )
ss:
COUNTY OF DADE )
On the 10th day of July, 1998, before me personally came Edward C.
Williams, to me known, who, being by me duly sworn, did depose and say that he
resides at 2239 Goode Rd., Conyers, GA 30094, Georgia, that he is the Acting
President of Caribbean Cigar Company, Precision Mold, Inc., Caribbean AWC
Corporation, Caribbean Cigar Company (Cayman) Limited, the corporation described
in and which executed the foregoing instruments and that he signed his name
thereto by order of the board of directors of said corporation.
/s/ Iraida A. Lazo
-----------------------------
Notary Public
[SEAL]
<PAGE> 4
Exhibit A
Caribbean Cigar Company
Precision Mold, Inc.
Caribbean AWC Corporation
Caribbean Cigar Company (Cayman) Limited
8305 N.W. 27th Street
Miami, Florida 33122
September 9, 1998
FINOVA Capital Corporation
111 West 40th Street
New York, N.Y. 10018
RE: FINOVA Capital Corporation ("FINOVA") with
Caribbean Cigar Company, Precision Mold, Inc.,
Caribbean AWC Corporation and Caribbean Cigar
Company (Cayman) Limited (collectively the "Debtor")
Gentlemen:
The undersigned acknowledge that events of default exist under the
security agreements by and between FINOVA and the Debtor, and that the Debtor is
unable to cure such defaults. The undersigned believe that the maximum
realization on the collateral securing the Debtor's obligations to FINOVA (the
"Collateral") can best be obtained by an orderly liquidation of the Collateral.
The Collateral includes, but is not limited to, the Debtor's accounts
receivable, inventory, furniture, choses in action, trademarks and tradenames,
machinery and equipment. The Debtor, therefore, herewith agrees to turn over to
FINOVA possession of the Collateral. The Debtor requests that FINOVA provide the
Debtor with copies of statements of account reflecting the progress of the
liquidation which statements of account once accepted without protest by the
Debtor pursuant to the loan agreements shall be binding upon the undersigned.
The undersigned acknowledge that as of June 30, 1998 the Debtor was obligated to
FINOVA in the approximate amount of $1.4 million plus interest, fees and costs.
This will confirm that the undersigned consents in all respects to any
sale of the Collateral, or any of it, which the Debtor and/or FINOVA Capital
Corporation may effect. The undersigned waive their rights, if any, to
notification under the Uniform Commercial Code ss. 9-504(3)
<PAGE> 5
as adopted by the State of New York, the Bankruptcy Code or any other
applicable statute. In addition, the undersigned reaffirm and restate all of
the terms and conditions contained in each guaranty executed by them or any of
them and delivered to FINOVA and specifically waive all defenses (including but
not limited to the defense of commercial unreasonable disposition of
collateral), counterclaims and any right of setoff in any action which may be
brought under any guaranty or any participation agreement.
FINOVA is hereby granted a license to enter the Debtor's premises to
remove all collateral. FINOVA may use any means necessary to remove and gain
access to the collateral, including the use of a locksmith and/or any other
contractor.
Very truly yours,
CARIBBEAN CIGAR COMPANY
PRECISION MOLD, INC.
CARIBBEAN AWC CORPORATION
CARIBBEAN CIGAR COMPANY
(CAYMAN) LIMITED
By:
---------------------------------
Edward C. Williams, Acting President
<PAGE> 6
EXHIBIT B
July 10, 1998
FINOVA Capital Corporation
111 West 40th Street
New York, New York 10018
Gentlemen:
I, Edward C. Williams, do hereby certify that I am the Acting President
and CFO for Caribbean ("Borrower"). In order to induce FINOVA Capital
Corporation ("FINOVA"), its successors, endorsees or assigns to grant and
continue to grant such advances, loans or extensions of credit, directly or
indirectly to Borrower. I do hereby warrant, covenant and represent to FINOVA
as follows:
1. Each and every account receivable which shall be assigned to FINOVA by
Borrower and when created, will represent a bona fide existing obligation of a
customer of Borrower owing to it and arising out of the sale and completed
delivery of merchandise and/or services made by it to such customer, arising
out of and acquired in the ordinary course of the business of Borrower
conforming in all respects to an order received from the customer and which
merchandise and/or services, to the best of my knowledge, shall have been
accepted by said customer without defense, offset or counterclaim and without
dispute as to price, terms, quality or in any other respect unless I have given
FINOVA prior notice to the contrary. All remittances received by the Borrower
on account of receivables assigned to FINOVA will be held by the Borrower as
FINOVA's property and that the Borrower will immediately deliver, to FINOVA,
the identical checks, monies or other forms of payment received.
2. Each such assigned account receivable will be due and owing to Borrower
and the merchandise and/or services represented thereby shall have been the
sole and absolute property of Borrower and, when assigned, will be free and
clear of all liens and security interests other than FINOVA's. FINOVA will be
notified of any counter claims, disputes, returns, offsets, or potential
offsets to an account receivable immediately upon Borrower having knowledge of
same.
3. The correct maturities of each of said account receivable will have been
set forth thereon and to the best of my knowledge, proper entries will have
been made on the books of Borrower disclosing the assignment thereof to FINOVA.
4. All goods, merchandise and warehouse receipts, if any, from time to time
consigned to or pledged with FINOVA by the Borrower shall be properly and
correctly designated as to description, quantity, quality and unit value in
each schedule, warehouse receipt and consignment relating to the same tendered
to FINOVA by the Borrower; and that the same shall actually be, at the time of
such tender, at the location described in such schedules and consignments. All
information furnished to FINOVA in the normal course by Borrower with respect
to its financial condition or other pertinent matters, will be true, correct
and complete in all material respects.
5. I hereby undertake to indemnify and save FINOVA free and harmless from any
damage or loss, which FINOVA may sustain as a result of any fraud, deceit or
criminal act on my part. I hereby represent and warrant to FINOVA that I shall
use my best efforts to insure that FINOVA shall not sustain any damage or loss
as a result of any fraud, deceit or criminal act on the part of any other
officer, employee or agent of Borrower.
<PAGE> 7
6. My liability hereunder shall be direct and unconditional and may be
enforced without requiring FINOVA first to resort to any other right, remedy or
security. It is not necessary for FINOVA to give me notice of any changes in the
financing agreement or any amendments thereof, or in any other of FINOVA's
financing arrangements with Borrower to all of which I now hereby grant my
consent. I hereby waive notice of acceptance hereof and of all notices of any
kind to which they may be entitled and further waive notice of and hereby
consents to any agreement or arrangements whatever with the Borrower or anyone
else including, without being limited to, agreements and arrangements for
payment, extension, subordination, composition, arrangement, compromise,
discharge or release of the whole or any part of any indebtedness or for the
change or surrender of any and all such goods, merchandise and warehouse
receipts, and same shall in no way impair my liability hereunder. I hereby waive
the benefits of any provision of the United States Bankruptcy Code and of any
similar or other legislation as now or hereafter enacted, amended or added to,
which may extend the time for payment of, or impair any of my obligations
hereunder.
7. My liability hereunder may not be modified, terminated or released orally,
but only by a written agreement signed by FINOVA.
8. This Agreement shall be binding upon my heirs, personal representatives,
successors and assigns and the benefits thereof shall extend to and include the
successors and assigns of FINOVA CAPITAL CORPORATION. My death shall not
release my estate from any liability accruing prior to my death. This Agreement
shall be subject to the laws of the State of New York.
9. In any litigation brought by FINOVA, Borrower waives personal service of
any summons, complaint or other process and agrees that service thereof may be
made by certified or registered mail directed to Borrower at borrower's address
set forth below and service so made shall be complete two (2) days after the
same shall have been posted. Within twenty (20) days after such mailing.
Borrower shall appear and answer such summons, complaint or other process,
failing which Borrower shall be deemed in default and judgment may be entered
by FINOVA against Borrower for the amount of the claim and for any other relief
requested therein.
Very truly yours,
----------------------------------------
Edward C. williams
Address:
SS No:
STATE OF FLORIDA)
ss.:
COUNTY OF DADE)
On this 10th day of July, in the year 1998, before me, the undersigned, a
Notary Public in and for said state, personally appeared Edward C. Williams,
personally known to me or proved to me on the basis of satisfactory evidence to
be the person whose name is subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
capacity(ies) and that by his/her/their signature(s) on the instrument, the
person(s) or the entity upon behalf of which the person(s) acted, executed the
instrument.
----------------------------------------
Notary Public
<PAGE> 1
EXHIBIT 99.2
AGREEMENT
THIS AGREEMENT, dated as of the 14th day of August, 1998, by and
between FINOVA CAPITAL CORPORATION, having a place of business located at 111
West 40th Street, New York, New York 10018 ("FINOVA") and Caribbean Cigar
Company, Precision Mold, Inc., Caribbean AWC Corporation, Caribbean Cigar
Company (Cayman) Limited, having a place of business located at 8305 N.W. 27th
Street, Miami, Florida 33122 (collectively, the "Borrower").
WHEREAS, the Borrower and FINOVA entered into that certain Security
Agreement, dated August 28, 1997 (the "Security Agreement"); and
WHEREAS, the Borrower and FINOVA entered into a Forbearance Agreement
dated July 10, 1998 (the "Original Forbearance"), which Original Forbearance is
incorporated herein by reference and modified only as expressly set forth
herein; and
WHEREAS, the Borrower remains obligated to FINOVA for the monies
borrowed under the Security Agreement and otherwise; and
WHEREAS, certain defaults exist under the Security Agreement and
Original Forebearance; and
WHEREAS, as of this date, the Borrower is obligated to FINOVA in the
approximate amount of $1,356,000, together with interest thereon at the interest
rate set forth in the Security Agreement plus FINOVA's costs and expenses,
including but not limited to legal fees, costs and disbursements and any and all
additional advances made by FINOVA, including advances made to protect FINOVA's
collateral (collectively "Obligations") which Obligations are owing by Borrower
to FINOVA without claim, deduction, defense or offset; and
WHEREAS, the Borrower and FINOVA have agreed that FINOVA shall make no
further advances to Borrower and have also agreed to terms by which Borrower
shall repay the Obligations to FINOVA; and
WHEREAS, the Borrower has requested that FINOVA forbear in commencing
any action against the Borrower under or pursuant to the Security Agreement or
the Original Forbearance for the Obligations owing to FINOVA and FINOVA is
willing to forbear pursuant to the terms and conditions contained in this
Agreement; and
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. All of the above recitals are hereby incorporated by reference
and made a part of this Agreement.
2. Ron Jenkins shall execute the Unconditional Personal Guaranty
of Collection, a copy of which is attached hereto as Exhibit A (the "Jenkins
Guaranty").
3. In consideration for the Jenkin's Guaranty, FINOVA agrees to
accept, in satisfaction of the Obligations, the amount of $1,000,000 ("Reduced
Amount") provided there is no default hereunder. Interest shall accrue on the
balance of the Reduced Amount
<PAGE> 2
("Interest") at one point above the prime rate charged by Citibank (as such
prime rate may be adjusted from time to time), with such Interest to be added to
and included in the Final Payment (as such term is hereafter defined). In the
event of any default in payment hereunder, Borrower shall immediately be
obligated to pay the full amount of the Obligations (not the Reduced Amount)
plus Interest on the Obligation, less any installment (as such term is hereafter
defined) actually received by FINOVA.
4. Borrower shall repay the Reduced Amount in weekly installments
in the amount of $16,000 (each an "Installment") commencing on Wednesday, August
19, 1998, and continuing on each Wednesday thereafter (each a "Payment Date")
through and including August 18, 1999, at which time the remaining balance of
the Reduced Amount shall be paid in full to FINOVA together with all interest
owing and/or accrued (the "Final Payment"). In the event any Payment Date shall
occur on any legal holidays wherein the banks in the State of Tennessee, Florida
or New York are closed, such Payment Date shall be the first business day
following such legal holiday.
5. Each Installment and the Final Payment shall be paid to FINOVA
via wire transfer, as follows:
ABA No. 021000021
Chase Manhattan Bank
1411 Broadway
New York, New York 10018
Account No. 129-0-60290
FINOVA Capital Corporation
111 West 40th Street
New York, New York 10018
Re: Caribbean Cigar Company
6. (a) During the Forbearance Period (as hereinafter defined),
FINOVA agrees to forbear in commencing any action upon the Security Agreement or
the Original Forbearance for the Obligations provided an Event of Default has
not occurred: (i) under this Agreement (as such term is hereafter defined); (ii)
under the Security Agreement; or (ii) under the Original Forbearance.
(b) The Forbearance Period shall mean the period from the date
hereof until the "Termination Date", which Termination Date shall be the earlier
of: (i) receipt by FINOVA of payment in full of the Reduced Amount (together
with all interest thereon); (ii) immediately upon an Event of Default under this
Agreement (as such term is hereafter defined); or (iii) August 18, 1999.
7. An Event of Default under this Agreement shall mean the
following: (a) the failure of the Borrower to observe, or timely comply with, or
perform any covenant or term contained in this Agreement or the Security
Agreement except for the defaults existing as of the date of this Agreement; (b)
the failure of the Borrower to timely pay FINOVA any Installment or the Final
Payment when due under this Agreement; (c) should any warranty or representation
made by the Borrower in this Agreement or the Security Agreement be untrue in
any material respect as of the date hereof; (d) should any financial statement
or report provided by Borrower or Guarantor in connection with this Agreement be
materially false or misleading; or (e) should the Borrower become a debtor in
any bankruptcy
<PAGE> 3
proceeding or admit in writing that it is unable to pay its debts as they
mature, it being specifically agreed that in the event of any such bankruptcy
proceeding, FINOVA shall not be required to deliver any release of its
collateral unless and until it is paid the entire proceeds from the sale of such
collateral.
8. Upon receipt of the Final Payment FINOVA shall execute and
deliver releases releasing Edward C. Williams, Kevin Doyle and Ron Jenkins from
any and all obligations such individuals have to FINOVA as such obligations
relate to the Borrower.
9. Notwithstanding anything to the contrary in this Agreement or
the Security Agreement or the Original Forbearance:
(a) Borrower shall on or before the fifth day of each
month, deliver to FINOVA monthly inventory and receivable aging reports as of
the last day of the immediately preceding month; and
(b) Borrower shall be free to directly collect its
accounts receivable and to hold same; provided however, that the receivable in
the amount of $105,600 owed to Borrower by Precision Cigar International ("PCI")
evidenced by Borrower's outstanding invoice no. 210770, shall be immediately
paid to FINOVA (as per letter attached) which amount FINOVA shall accept as
payment toward the Reduced Amount; and
(c) FINOVA shall take all actions necessary to allow
Borrower to sell all equipment or products of any kind located at 8305 N.W. 27th
Street, Miami, Florida 33122, for a sale price of $120,000 ("Equipment
Proceeds") with $60,000 of such Equipment Proceeds to be transferred to FINOVA,
if and when such sale is consummated, as payment toward the Reduced Amount; and
(d) FINOVA shall take all actions reasonably requested by
Borrower (and at Borrower's expense) to allow Borrower to sell, if Borrower is
able, all retail stores and assets related to such retail stores ("Retail
Sales") and upon such Retail Sales Borrower will be obligated to transfer to
FINOVA one half of the gross proceeds received from such sales, such payment to
be made upon receipt of the proceeds from such sale of Retail Stores as payment
toward the Reduced Amount with Borrower being entitled to retain the remaining
cash proceeds of any such Retail Sales.
(e) In the event the Borrower defaults (as defined in
paragraph 7 above) on its obligations to FINOVA hereunder, FINOVA shall be
entitled to recover from the Company, in addition to the Obligations and
Interest thereon, its costs and expenses (including its reasonable legal fees
and costs) incurred in connection with the negotiation and preparation of this
Agreement and its recovery of the Obligations.
10. FINOVA acknowledges that the Borrower may be filing a press
release which release will express the restructure of Borrower's Obligations
owing to FINOVA.
11. This Agreement shall be construed under and in accordance with
the laws of the State of New York.
12. This Agreement represents the entire Agreement between FINOVA
and Borrower with all such other agreements between the parties (except the
Security Agreement and any guaranty including the Jenkin's Guaranty) being
merged with this
<PAGE> 4
Agreement.
13. No executory agreement and no course of dealing between the
Borrower and FINOVA shall be effective to change or modify this Agreement in
whole or in part; nor shall any change, modification or waiver of any rights or
powers of FINOVA be valid or effective unless in writing and signed by an
authorized officer of FINOVA .
FINOVA CAPITAL CORPORATION
By: RAY EICHLER AVP
----------------------------------
Ray Eichler, Assistant Vice President
CARIBBEAN CIGAR COMPANY, PRECISION
MOLD, INC., CARIBBEAN AWC
CORPORATION, CARIBBEAN CIGAR
COMPANY (CAYMAN) LIMITED
By: RON JENKINS
----------------------------------
Ron Jenkins, Executive Vice President
and Chief Operating Officer
<PAGE> 5
EXHIBIT A
UNCONDITIONAL PERSONAL GUARANTY OF COLLECTION
IN CONSIDERATION, and for the purpose of seeking to induce FINOVA
CAPITAL CORPORATION ("FINOVA") to enter into that certain Agreement dated August
14, 1998 (the "Agreement"), between FINOVA and Caribbean Cigar Company,
Precision Mold, Inc., Caribbean AWC Corporation, Caribbean Cigar Company
(CAYMAN) Limited, (collectively "Caribbean"), Mr. Ron Jenkins (the"Guarantor"),
absolutely and irrevocably guarantees to FINOVA the full and prompt payment of
all amounts due pursuant to the Agreement (not to exceed $1,000,000), and does
hereby agree that if the amounts due pursuant to the Agreement are not timely
paid to FINOVA then upon the sending of notice by FINOVA the Guarantor will
immediately do so. Guarantor waives notice of acceptance, notice of Borrower's
default, notices of presentment, demand, dishonor, protest, and all other
notices whatsoever with respect to the payment of the Borrower's Obligations
guaranteed hereunder.
IN WITNESS WHEREOF, the Guarantor has affixed his hand and seal this
18th day of August, 1998, at Knoxville, Tennessee.
WITNESSES GUARANTOR:
J.D.JENKINS RON JENKINS
