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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO ______
Commission File No. 0-21081
Caribbean Cigar Company
(Exact name of Small Business Issuer as Specified in its Charter)
Florida 65-0613303
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8305 NW 27th Street, Suite 111
Miami, Florida 33122
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 267-3911
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
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<S> <C>
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, par value $.001 per share Nasdaq SmallCap Market
Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market
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Indicate by a 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 such shorter period that the Company 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 a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained herein, and will not be contained to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The Registrant's revenues for the fiscal year ended March 31, 1998 were
$5,786,029.
The aggregate market value of the Registrant's voting stock held by
non-affiliates, based upon the closing sales price for the common stock of $0.25
per share as reported by the Nasdaq SmallCap Market on July 10, 1998 was
approximately $992,071. The shares of Common Stock held by each officer and
director and by each person known to the Company to own 5% or more of the
outstanding Common Stock have been excluded and such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
June 26, 1998 was 6,470,183.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement relating to the 1998 Annual
Meeting of Stockholders (to be filed pursuant to Regulation 14A within 120 days
after the close of the fiscal year covered by this report on Form 10-KSB) are
incorporated by reference into Part III of this Form 10-KSB to the extent stated
herein.
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PART I
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-KSB 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-KSB, such as "expects," "believes," "estimates" and "anticipates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements.
ITEM 1. BUSINESS.
INTRODUCTION
Caribbean Cigar Company and its subsidiaries (the "Company") are a vertically
integrated manufacturer and distributor of premium cigars and cigar-related
products. The Company manufactures and distributes a variety of brand name
cigars in many segments of the premium cigar market, including large and small
premium and flavored cigars. The Company's brands include: Signature Collection,
Calle Ocho, Free Cuba, Celestino Vega, Havana Classico, Domino Park, Rum Runner,
West Indies Vanilla, and Island Amaretto. These cigars are manufactured and/or
produced in the Dominican Republic. The Company currently operates five Florida
retail stores in Key Largo, Miami, Key West, Coconut Grove, and Fort Lauderdale.
In April 1997, the Company purchased the assets of American Western Cigar Co.
("AWC").
PRODUCT LINES
The Company offers premium and flavored cigars in different sizes at varying
retail prices.
Premium Brands
Cigars classified as "premium" are generally hand-made and have a retail price
above $1.00 per cigar. Generally, premium cigars are made with natural leaf
tobacco wrapper, binder and long filler. Higher grades of tobacco are generally
used in premium cigars with tobacco blends varying from brand to brand depending
on the desired characteristics. Premium cigars are made by wrapping natural leaf
binder tobacco around the long filler tobacco to create a bunch that is placed
into a mold to create the shape of the cigar. The natural leaf wrapper tobacco
is hand-rolled around each bunch creating a handmade premium cigar. Cigars,
including premium cigars, are also classified as "large" cigars - those weighing
over 3 pounds per 1,000 cigars and "small cigars" - those weighing under 3
pounds per 1,000 cigars.
The Company has developed and markets a full line of premium cigars, which
include the Company's cigars sold under the brand names of Signature Collection,
Calle Ocho and Havana Classico. Each of these cigars is offered in a variety of
sizes and generally sell at retail prices ranging from $5.50 to $7.50, depending
on the size. Each brand of premium cigars is a blend of premium selected
tobaccos. Such tobaccos are combined according to brand-specified formulas to
create the cigar. Signature Collection, the Company's first cigar, was
introduced in September 1995. The Havana Classico was introduced in December
1995, and Calle Ocho was introduced in April 1996.
In addition, the Company offers several premium cigars for more moderate prices.
These cigars include: Free Cuba, Celestino Vega and Domino Park. Each of these
cigars is offered in a variety of sizes and generally sell at retail prices
ranging from $2.65 to $5.95.
Flavored Brands
In addition to premium brands, the Company also offers three flavored cigars -
Rum Runner, a rum-flavored cigar, West Indies Vanilla, a vanilla-flavored cigar,
and Island Amaretto, an amaretto-flavored cigar. The flavorings in these cigars
are
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extracts, which are purchased by the Company. These cigars use premium tobacco.
However, the tobacco is short-filler which is generated from the manufacture of
the premium cigar brands. Each of the flavored cigars is offered in three sizes
and generally sell at retail prices between $2.25 to $2.95.
Cigar-Related Products
In addition to cigars, the Company has commenced the wholesale distribution of
cigar-related products used in connection with cigar manufacturing and smoking.
The Company's wholly-owned subsidiary, Precision Mold, Inc. ("Precision Mold")
manufactures a hard plastic mold used in connection with the cigar manufacturing
process that replaces the traditional wooden mold. Simple 70 is a liquefied
product developed by the Company to stabilize the humidity levels in humidors.
The Perfect V is a cigar cutter developed by the Company. The Company is in the
process of applying for trademark registrations of its Simple 70 and Perfect V
products.
THE MARKET
Industry reports show that worldwide cigar sales increased in 1994 for the first
time since 1973. However, even with this increase, there has still been a
significant decrease of actual cigar sales since 1970, considering that in 1973
cigar sales amounted to 11.2 billion cigars while in 1994, cigar sales were
approximately 3.7 billion cigars. In 1996, cigar sales were estimated by the
Cigar Association of America, Inc. (the "Cigar Association") to have increased
to 4.4 billion cigars.
The Cigar Association's estimates also show an increase in the sales of premium
cigars. In 1995, sales increased approximately 30% from 1994, and in 1996, sales
increased approximately 67% from 1995. According to industry statistics, in
1996, sales of premium cigars represented approximately 274.0 million cigars or
6.4% of the United States cigar market. No assurance can be given that sales of
cigars will grow in future years or that the Company will benefit from any such
growth.
SALES AND MARKETING
Distribution
The Company sells its premium cigars to tobacco stores and tobacco departments
of retail stores that sell a range of premium cigars and tobacco products. The
Company's marketing staff advertises in the trade press and monitors customer
response to the Company's cigars. The Company intends to continue to (a) direct
sales of cigars to premium tobacco stores both within and outside the United
States through the use of commission salespersons and independent distributors,
(b) market premium cigars manufactured by both the Company and others, and (c)
introduce additional lines of premium cigars and market such cigars as well as
the Company's flavored cigars through additional distribution channels.
Retail
The Company's five retail stores are located in South Florida resort areas and
are designed to attract the attention of both the tourist and the premium cigar
smoker. The Company's first store was opened in Key Largo in October 1994 by Mr.
Kevin Doyle, the Company's Executive Vice President, under the name Caribbean
Cigar Factory. In 1996, the Company opened retail stores located in the South
Beach section of Miami, Key West and Coconut Grove. In 1997, the Company opened
a retail store located in Fort Lauderdale. In addition to the Company's cigars,
the retail stores sell other manufacturers' premium cigars and related products
such as humidors, cigar cases and lighters. Retail sales are comprised of
Company manufactured brands (representing approximately 35.1% of sales), cigars
manufactured by others (representing approximately 32.6% of sales) and
accessories (representing approximately 32.3% of sales). The Company currently
plans to divest its retail operations. See Item 6, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Advertising and Promotions
The Company supports both the wholesale and retail distribution of its cigars
through advertising in numerous publications, including Cigar Aficionado,
Tobacconist, Smokeshop and Smoke magazines, along with general circulation
publications oriented to persons who the Company believes would smoke premium
cigars. To this end, the Company uses marketing techniques that have been
identified as contributing to the increased interest in premium cigars,
including, but not limited to, the sponsorship of cigar evenings at hotels,
restaurants and clubs throughout the United States. The Company has expanded
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its advertising and marketing through promotions distributed at point of sale
and through direct mail. The Company also participates in trade shows throughout
the United States. The Company uses a full-service advertising agency to develop
campaigns for all its cigar brands.
PRODUCTION AND MANUFACTURING
The Company's premium cigar brands are hand rolled at the Company's
manufacturing facilities in the Dominican Republic. The manufacturing process
for premium cigars includes the selection, purchase and aging of the tobacco and
the hand rolling of the cigars. The tobacco is selected by the Company based
upon the flavor and quality of the tobacco. The availability and quality of
tobacco varies from season to season as a result of such factors as weather
conditions and the demand for the tobacco. As a result of the difference in
taste between different lots, the Company is continuously reformulating the
tobaccos in its premium cigars in order to maintain a consistent taste. The
Company's flavored cigars are manufactured from short-filler tobacco using a
proprietary flavoring process. The cigars are made by using short-filler tobacco
generated from the manufacture of the premium cigar brands. This short-filler
tobacco is then combined and flavored. Once the flavored cigars are produced,
they are sold through the Company's wholesale, retail and mail order channels.
In January 1997, the Company opened an 18,000 square foot cigar factory in the
Pisano Free Zone, Santiago, Dominican Republic. This factory employs
approximately 80 cigar makers.
RAW MATERIALS
The Company uses tobaccos from the Dominican Republic, Nicaragua, Ecuador,
Indonesia, the United States and Mexico. The Company does not believe that it is
dependent upon any single source for tobacco. Each buying season, the Company
analyzes and evaluates the tobacco producing markets worldwide. The Company
seeks to use, to the extent available, aged leaf that can be blended and matched
to the taste profile of the Company's cigars. The Company has no long-term
commitments to purchase tobacco from any single source.
The cigar industry recently has experienced shortages in certain types of
natural wrapper and filler due to the increase in demand for tobacco for premium
cigars. To help limit the threat of such shortages, the Company operates a
processing facility and has financed the growing of tobacco in the Dominican
Republic. The Company believes that it has enough tobacco to meet the Company's
needs over the next year. The Company anticipates that it will continue to be
able to involve a sufficient number of farmers in the Company's crop financing
program to meet its future raw tobacco requirements. Although the shortages have
not materially impacted cigar production, no assurances can be made that future
shortages will not have an adverse effect on the Company.
The Company purchases cigar boxes from independent box manufacturers located in
the Dominican Republic.
SUBSIDIARIES
In May 1996, Caribbean Cigar Company organized a wholly-owned subsidiary in the
Cayman Islands under the name Caribbean Cigar Company (Cayman) Limited (the
"Cayman Subsidiary") to conduct its offshore manufacturing operations. In
January 1997, Caribbean Cigar Company organized a wholly-owned subsidiary,
Precision Mold, Inc. to conduct its cigar mold manufacturing and distribution
business. In February 1997, a wholly-owned subsidiary was organized under the
name Caribbean AWC Corporation in order to facilitate the acquisition of AWC.
COMPETITION
The tobacco industry in general, including the cigar industry, is dominated by a
small number of companies that 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 Swisher
International Group, Inc., Consolidated Cigar Holdings, Inc. and General Cigar
Company, Inc. 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 and the taste
profile of the cigar. The process of producing premium cigars is not patented,
but is based on the expertise 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
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and the quality of the rolling. Since cigars are a natural product, the taste
profile of cigars is not uniform and is subject to change. No assurance can be
given as to the market for the Company's cigars in the future or the ability of
the Company to market its cigars successfully.
GOVERNMENT REGULATION; TOBACCO INDUSTRY LITIGATION
The tobacco industry, particularly with respect to cigarettes, has been subject
to regulation by Federal, state and local governments, and recent trends have
been toward increased regulation. Such regulations include labeling
requirements, limitations on advertising and prohibition of sales to minors,
laws restricting smoking in public places including offices, office buildings,
restaurants and other eating establishments. Because the tobacco for the
Company's cigars is hand rolled, the Company's factory may become subject to
increased regulation under federal and state health and safety regulations. In
addition, cigars have been subject to excise taxation at the federal, state and
local level, and such taxation may increase in the future. Tobacco products are
especially likely to be subject to increases in excise taxation because of the
potentially detrimental effects of tobacco on the health of both smokers and
others who inhale secondary smoke. No assurance can be given that future
regulations, litigation and tax policies will not have a material adverse effect
upon the ability of cigar companies, including the Company, to generate revenue
and profits.
Health Regulations
Cigar manufacturers, like other producers of tobacco products, are subject to
regulation in the U.S. at the federal, state and local levels. Together with
changing public attitudes toward smoking, a constant expansion of smoking
regulations since the early 1970s has been a major cause for the decline in
tobacco consumption. Moreover, the trend is toward increasing regulation of the
tobacco industry.
In recent years, a variety of bills relating to tobacco issues have been
introduced in the United States Congress, including bills that would have (i)
prohibited the advertising and promotion of all tobacco products and/or
restricted or eliminated the deductibility of such advertising expenses; (ii)
increased labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; (iii) modified
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; and (iv) shifted
regulatory control of tobacco products and advertisements from the Federal Trade
Commission to the U.S. Food and Drug Administration (the "FDA"). In addition, in
recent years, there have been proposals to increase tobacco excise taxes. In
some cases, hearings were held, but only one of these proposals was enacted,
requiring that states, in order to receive full funding for federal substance
abuse block grants, establish a maximum age of 18 years for the sale of tobacco
products along with an appropriate enforcement program. The law requires that
states report on their enforcement efforts. Future enactment of the other bills
may have an adverse effect on the sales or operations of the Company.
In February 1994, the FDA, in a letter to an anti-smoking group, claimed that it
may be possible for the FDA to regulate cigarettes under the drug provisions of
the Food, Drug, and Cosmetic Act (the "FDC Act"). The FDA's claim is based upon
allegations that manufacturers may intend that their products contain nicotine
to satisfy an alleged addiction on the part of some of their customers. The
letter indicated that regulation of cigarettes under the FDC Act could
ultimately result in the removal from the market of products containing nicotine
at levels that cause or satisfy addiction. In March 1994, the FDA began
investigating whether cigarettes should be regulated as a drug. In July 1995,
the FDA announced that it had concluded for the first time that nicotine is a
drug that should be regulated and proposed to regulate smokeless tobacco and
cigarettes. The FDA recently adopted final regulations relating to the
marketing, promotion and advertisement of smokeless tobacco and cigarettes.
Although the FDA's definition of cigarettes originally included little cigars,
these cigars were excluded from the final regulations. These regulations are
currently being challenged in the United States District Court for the Eastern
District of North Carolina and the United States District Court for the Southern
District of New York. While the Company is unable to predict the effect of these
regulations on its business, these and other regulations promulgated by the FDA
in the future could have a material adverse effect on the operations of the
Company. While the FDA has defined cigarettes in such a way as to include little
cigars, the ruling does not affect large cigars. However, once the FDA has
successfully exerted authority over any one tobacco product, the practical
impact would be felt by manufacturers of any tobacco product. If the FDA is
successful, this may have long-term repercussions on the large cigar industry.
On August 28, 1996, the FDA published a final rule on tobacco in the Federal
Register. Specifically, the rule makes the sale of cigarettes and smokeless
tobacco to children and adolescents, i.e., anyone younger than 18 years of age,
a federal violation. In addition, the rule requires manufacturers, distributors
and retailers to comply with certain conditions regarding
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the sale, distribution and promotion of tobacco products. It prohibits all free
samples and limits retail sales in most circumstances to face-to-face
transactions. As a result, vending machines and self-service displays are
prohibited, except in facilities where the retailer or operator ensures that no
person younger than 18 is present or is permitted to enter at any time. The rule
limits advertising, generally, to a black-and-white, text-only format, which the
FDA believes will ensure that advertising is not used to create demand for these
products among young people and thus undermine the restrictions on access.
Billboards and other outdoor advertising are prohibited within 1,000 feet of
schools and public playgrounds. The sale and distribution of non-tobacco items,
such as hats and tee shirts that carry cigarette logos, are prohibited, and
sponsorship of sporting and other events is limited to the corporate name only.
While the FDA originally exempted cigars from these restrictions, as the
regulation evolves, it could have a material adverse effect on the Company's
business.
In addition, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Such places
where the majority of states have prohibited smoking include: any public
building designated as non-smoking, elevators, public transportation,
educational facilities, health care facilities, restaurants and workplaces.
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. In a few states, legislation has been introduced,
but has not passed, which would require all little cigars sold in those states
to be "fire-safe" so that the little cigars would extinguish themselves if not
continuously smoked. Passage of this type of legislation and any other related
legislation could have a materially adverse effect on the Company's cigar
business because of the technological difficulties in complying with such
legislation. There is currently an effort by the federal Consumer Product Safety
Commission to establish such standards for cigarettes. While the enabling
legislation, as originally proposed, included little cigars, reference to little
cigars was subsequently deleted due to the lack of information on fires caused
by these products.
Although federal law has required health warnings on cigarettes since 1965,
there is no federal law requiring that cigars or pipe tobacco carry such
warnings. However, California requires "clear and reasonable" warnings 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, Proposition 65, can result in a civil penalty
not to exceed $2,500 per day for each violation. Although similar legislation
has been introduced in other states, to date, no action has been taken.
Massachusetts recently enacted legislation requiring manufacturers of
cigarettes, chewing tobacco and snuff to provide the state annually with a list
of the additives (in descending order of weight) and the nicotine yield ratings
of each brand they produce, which information will, subject to certain
conditions be made publicly available. In addition, various legislative
proposals have been introduced in Massachusetts that would extend such reporting
requirement to cigar manufacturers and that would require health warnings on
cigars. Similar legislation has been introduced in other states.
During 1988, 26 manufacturers of tobacco products, including the largest
mass-marketers of cigars, entered into a settlement of legal proceedings filed
against them pursuant to Proposition 65. Under the terms of the settlement, the
defendants agreed to label retail packages or containers of cigars, pipe
tobaccos and other smoking tobaccos other than cigarettes manufactured or
imported for sale in California with the following specified warning label:
"This Product Contains/Produces Chemicals Known To The State of California To
Cause Cancer, and Birth Defects or Other Reproductive Harm." Although the
settlement of the Proposition 65 litigation by its terms only impacts
California, it is not practical for national cigar manufacturers to confine
their warning labels to cigars earmarked for sale in California. Consequently,
since 1988, most cigars sold in the United States carry cancer warning labels.
In January 1993, the U.S. Environmental Protection Agency (the "EPA") published
a report with respect to the respiratory health effects of passive smoking,
which concluded that widespread exposure to environmental tobacco smoke presents
a serious and substantial public health impact. In June 1993, Philip Morris
Companies, Inc. and five other representatives of the tobacco manufacturing and
distribution industries filed suit against the EPA seeking a declaration that
the EPA does not have the statutory authority to regulate environmental tobacco
smoke, and that, in view of the available scientific evidence and the EPA's
failure to follow its own guidelines in making the determination, the EPA's
final risk assessment was arbitrary and capricious. The EPA report and the
outcome of this litigation may lead to further legislation designed to protect
nonsmokers. There can be no assurance that regulation related to passive smoking
will not be adopted or that such regulation or related litigation would not have
a material adverse effect on the Company's results of operations or financial
condition.
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OSHA Regulations
The federal Occupational Safety and Health Administration (OSHA) has proposed an
indoor air quality regulation covering the workplace that seeks to eliminate
nonsmoker exposure to environmental tobacco smoke. Under the proposed
regulation, smoking must be banned entirely from the workplace or restricted to
designated areas of the workplace that meet certain criteria. The proposed
regulation covers all indoor workplaces under OSHA jurisdiction, including, for
example, private residences used as workplaces, hotels and motels, private
offices, restaurants, bars and vehicles used as workplaces. The tobacco industry
is challenging the proposed OSHA regulation on legal, scientific and practical
grounds. It also contends that the proposed regulation ignores reasonable
alternatives. There is no guarantee, however, that this challenge will be
successful. Although the Company does not believe that the proposed OSHA
regulation would have a material adverse effect on the cigar industry or the
Company, there are no assurances that such regulation would not adversely impact
the Company.
Litigation
In the past, the cigar industry has not experienced material health-related
litigation, and, to date, the Company has not been the subject of any material
health-related litigation. However, the cigarette and smokeless tobacco
industries have experienced and are experiencing significant litigation
involving tobacco and health issues, initiated by government entities and
private citizens.
Several states have sued tobacco companies seeking to recover the monetary
benefits paid under Medicaid to treat residents allegedly suffering from
tobacco-related illnesses. Florida and Massachusetts have enacted statutes
permitting suit against the tobacco companies to recoup such Medicaid costs, and
recently, one defendant has entered into a settlement with such plaintiff
states, which provides that the settling defendant will, among other things, pay
a portion of its profits in the future to the plaintiff. Under the Florida
statute, many of the tobacco companies' traditional defenses, such as assumption
of risk, are vitiated. The statute also permits the state to establish causation
(that smoking causes cancer, heart disease and other ailments) through the use
of purely statistical evidence. The tobacco companies have filed suit vigorously
challenging the Florida law as unconstitutional.
Historically, litigation against the tobacco industry has been brought by
individual cigarette smokers. For example, in Cippollone v. Liggett Group, Inc.,
the United States Supreme Court held that certain federal legislation applicable
specifically to cigarette manufacturers preempts claims based on failure to warn
consumers about the health hazards of smoking, but does not preempt claims based
on express warranty, misrepresentation and fraud, or conspiracy. Although the
Company believes that the effect of the Cippollone decision, which involved
cigarette smoking, will not have a material adverse effect on the operations of
the Company, there can be no assurance of what the ultimate effect, if any, of
the Cippollone decision or the pending cigarette industry litigation, or
cigarette and tobacco regulation, will be on the cigar industry or the Company.
Although there are numerous differences between the cigar and cigarette
industries, the outcome of pending and future cigarette litigation may encourage
various parties to bring suits on various grounds against cigar industry
participants. While it is impossible to quantify what effect, if any, any such
litigation may have on the Company, the Company can give no assurance that such
litigation would not have a material adverse effect on the operations of the
Company.
Current tobacco litigation generally falls within one of three categories: class
actions, individual actions and actions brought by individual states or
localities, unions and others, to recover health care 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. Health care cost reimbursement
actions brought by state Attorneys General in Mississippi, Florida, Texas and
Minnesota were settled for significant amounts in the billions of dollars. Five
tobacco companies on June 20, 1997, entered into a proposed resolution that
contains provisions that, if enacted by Congress, would significantly impact
tobacco litigation. The proposed resolution provided for the payment of $368.5
billion dollars over the first 25 years and would, in effect, limit litigation
to individual actions for compensatory damages. The proposed resolution relates
to cigarettes and smokeless tobacco and it is unclear what effect, if any, it
will have on the cigar industry. A recent $516 billion proposed bill was
defeated in the Senate. News wire services recently have reported that major
cigarette manufacturers have engaged in settlement discussions with state
agencies on terms that would not require federal approval. The outcome of these
discussions and the effect on the cigar industry of any settlement effected
with one or more states also is unclear.
The recent increase in the sales of cigars and the publicity such increase has
received may have the effect of increasing the probability of legal claims. Also
a recent study published in the journal Science reported that a chemical found
in tobacco
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smoke has been found to cause genetic damage in lung cells that is identical to
damage observed in many malignant tumors of the lung and, thereby, directly
links lung cancer to smoking. In addition, the National Cancer Institute is
expected to issue in the near future a comprehensive report on the alleged
health effects of cigar smoking. Such studies and reports could affect pending
and future tobacco regulation or litigation.
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 been filed in a number of states. To date, a number of pending class
actions against major cigarette manufacturers have been certified. One class
action that had been pending in Florida was settled in 1997 for several hundred
million dollars. The class was composed of flight attendants allegedly injured
through exposure to secondhand smoke.
There can be no assurance that there will not be an increase in health-related
litigation involving tobacco and health issues against the cigarette industry or
similar litigation in the future against cigar manufacturers. The costs to the
Company of defending prolonged litigation and any settlement or successful
prosecution of any material health-related litigation against manufacturers of
cigars, cigarettes or smokeless tobacco or suppliers to the tobacco industry
could have a material adverse effect on the Company's business.
Excise Taxes
Effective January 1, 1991, the federal excise tax rate on large cigars was
increased to 10.625%, capped at $25.00 per thousand cigars, and again increased
to 12.75%, capped at $30.00 per thousand cigars, effective January 1, 1993.
However, the base on which the federal excise tax is calculated was lowered
effective January 1, 1991 to the manufacturer's selling price, net of the
federal excise tax and certain other exclusions. The federal excise tax on
little cigars increased from $0.75 per thousand cigars to $0.9375 per thousand
cigars effective January 1, 1991. The excise tax on little cigars increased to
$1.125 per thousand cigars effective January 1, 1993. The Company does not
believe that the current level of excise taxes have had a material adverse
effect on the Company's business, but there are no assurances that any potential
increases will not have a material adverse effect on the Company's business.
In the past, there have been various proposals by the federal government to fund
legislative initiatives through increases in federal excise taxes on tobacco
products. In 1993, the Clinton Administration proposed a significant increase in
excise taxes on cigars, pipe tobacco, cigarettes and other tobacco products to
fund its proposed health care reform program. Most recently, the Clinton
Administration, as part of its health care reform program, has proposed a new
bill that would amend the Internal Revenue Code of 1986 to increase the excise
taxes on tobacco products. While the Company believes that the volume of cigars
and smokeless tobacco sold may be effected if such a bill is enacted as
originally proposed, the actual effect cannot be determined at this time.
Cigars and pipe tobacco are also subject to certain state and local taxes.
Deficit concerns at the state level continue to exert pressure to increase
tobacco taxes. Since 1964, the number of states that tax cigars has risen from
six to forty-two. Since 1988, the following eleven states have enacted excise
taxes on cigars, where no prior tax had been in effect: California, Connecticut,
New Jersey, New York, North Carolina, Ohio, Rhode Island, Illinois, Missouri,
Michigan and South Dakota. State excise taxes generally range from 2% to 75% of
the wholesale purchase price. In addition, the following seven states have
increased existing taxes on large cigars since 1988: Arkansas, Idaho, Iowa,
Maine, New York, North Dakota and Washington. The following five states tax
little cigars at the same rates as cigarettes: California, Connecticut, Iowa,
Oregon and Tennessee. Except for Tennessee, all of these states have increased
their cigarette taxes since 1988. The governor of Florida is currently
considering a proposal to impose an excise tax on cigars in the near future.
State cigar excise taxes are not subject to caps similar to the federal cigar
excise tax, therefore, although the Company does not believe that state excise
taxes have a material adverse effect on the Company's business, there are no
assurances that increases in such state excise taxes or new state excise taxes
will not in the future have a material adverse effect on the Company's business.
7
<PAGE> 9
Immigration Laws
The Company, like all employers in the United States, is obligated, pursuant to
the Immigration Reform and Control Act of 1986 (the "IRCA"), to verify that its
employees are authorized to work in the United States. The Company believes that
its employees are authorized to work in the United States, although the Company
may have in the past unknowingly violated some of the technical verification
requirements under the IRCA. The Company has taken affirmative steps to insure
that it is in compliance with its obligations under the IRCA and does not
believe that immigration regulations or the Company's actions with respect to
such regulations should have a material adverse effect on the business of the
Company, although there are no assurances that they will not in the future.
INTELLECTUAL PROPERTY RIGHTS
The Company has filed applications with the United States Patent and Trademark
Office for trademarks on its brands of premium cigars, its brands of flavored
cigars and certain other cigars, as well as other names the Company is using or
considering for new brands. The Company has received a trademark registration on
the marks "Signature Collection," "SC," "Calle Ocho," "Celestino Vega," "Rum
Runner," "Domino Park" and "Morro Castle." No assurance can be given that the
Company will receive trademarks for any of its other brands or products. The
Company has no patents on its cigars or manufacturing process.
EMPLOYEES
As of March 31, 1998, the Company employed 177 persons, of those 20 were
executive and administrative, 35 were sales and marketing and 122 were
manufacturing. Of such 177 persons, 172 are full-time and 5 persons are
part-time. None of the Company's employees are represented by a labor union and
the Company believes that employee relations are good.
8
<PAGE> 10
ITEM 2. DESCRIPTION OF PROPERTY.
As of March 31, 1998, the principal properties owned or leased by the Company
for use in its business included:
<TABLE>
<CAPTION>
Approximate
Owned or Floor Space Average Base Termination
Location Principal Use Leased (Square Feet) Rent (1) of Lease
------------------- --------------- ---------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Jaibon, Dominican Factory Own 30,000 -- --
Republic
Santiago, Dominican Factory Lease 18,430 $ 59,013 6/01
Republic
Miami, Florida Sublease Lease 5,062 $ 40,432 4/02
Miami, Florida Sublease Lease 3,738 $ 29,857 4/02
Miami, Florida Sublease Lease 1,068 $ 8,500 4/02
Miami, Florida Sublease Lease 2,390 $ 19,909 4/02
Miami, Florida Sublease Lease 4,000 $ 21,000 8/99
Miami, Florida Corporate
Headquarters and
Distribution Lease 32,000 $ 226,889 7/02
Center
Miami Beach, Florida Retail Store Lease 430 $ 38,614 11/98
Key Largo, Florida Retail Store Lease 1,000 $ 11,390 10/98
Key West, Florida Retail Store Lease 1,600 $ 48,000 2/01
Ft. Lauderdale, Florida Retail Store Lease 842 $ 31,996 9/06
Coconut Grove,
Florida Retail Store Lease 960 $ 63,104 11/01
</TABLE>
- ----------------------
(1) Represents approximations based on the term of the lease.
The Company believes that its existing manufacturing facilities and distribution
center are adequate for the current level of the Company's operations.
Furthermore, the Company believes that the facilities are well maintained, in
substantial compliance with environmental laws and regulations and adequately
covered by insurance. The Company also believes that the leased spaces which
house its manufacturing and distribution facilities are not unique and could be
replaced, if necessary, at the end of the terms of the existing leases.
ITEM 3. LEGAL PROCEEDINGS.
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 thirty (30) days to answer. The Company has answered the
9
<PAGE> 11
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 all pending litigation could have a material
adverse effect on the Company's operating results, cash flows or financial
position. The Company carries general liability insurance but has no health
hazard policy, which, to the best of the Company's knowledge, is consistent with
industry practice. There can be no assurance, however, that the Company will not
experience material health-related litigation in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of the year ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock and Warrants are traded on the Nasdaq SmallCap Market
under the symbols CIGR and CIGRW respectively, and on the Boston Stock Exchange
under the symbols HAV and HAVW, respectively.
The high and low closing sales prices on the Nasdaq SmallCap Market for the
Company's Common Stock and Common Stock Purchase Warrants for each quarter since
the Company's initial public offering on July 30, 1996 are as follows:
<TABLE>
Common Stock Warrants
----------------- ------------------
High Low High Low
------ ----- ------ ----
<S> <C> <C> <C> <C>
Fiscal Period:
1996
- ----
Second Quarter (from August 1, 1996) 14.375 10.125 6.000 4.000
Third Quarter 11.500 10.750 5.875 4.875
Fourth Quarter 12.750 7.250 6.125 2.375
1997
- ----
First Quarter 8.750 4.375 4.000 1.500
Second Quarter 5.000 4.219 2.250 1.000
Third Quarter 4.938 0.813 1.500 0.125
Fourth Quarter 1.469 0.594 .250 .063
1998
- ----
First Quarter 1.125 .063 .156 .031
Second Quarter (through July 13, 1998) .313 .188 .031 .031
</TABLE>
The closing sale prices quoted by the Nasdaq SmallCap Market for the Common
Stock and the Warrants on June 30, 1998 were $0.188 and $0.031, respectively.
All quotations provided herein reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
As of June 30, 1998, there were ___ record holders of the Common Stock based
upon transfer agent reports.
In March, 1998, the Company issued ______ shares of Common Stock for $__ per
share in a private placement.
The Company has paid no dividends on its Common Stock since its inception, and
does not expect to pay any dividends for the foreseeable future. The Company's
existing credit facility prohibits the Company from making dividends,
distributions or other payments with respect to its capital stock.
10
<PAGE> 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following should be read in conjunction with the Consolidated Financial
Statements of the Company included elsewhere in this Form 10-KSB.
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. Accordingly, the retail division has been accounted for as
discontinued operations for the years ended March 31, 1998, 1997 and 1996.
The following table presents, for the periods indicated, certain items in the
historical consolidated statements of operations as a percentage of sales.
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------------------------
1998 1997 1996
------ ----- ----
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 98.6 65.5 113.4
------ ------- ------
Gross profit (loss) 1.4 34.5 (13.4)
------ ------- ------
Operating expenses:
Selling expenses 32.9 18.6 86.6
General and administrative expenses 75.4 21.8 122.3
------ ------- ------
108.3 40.4 208.9
------ ------- ------
Operating income (loss) (106.9) (5.9) (222.3)
Interest (income) expense 10.6 (2.8) 9.8
------ ------- ------
Income (loss) from continuing operations (117.5) (3.1) (232.1)
Income (loss) from discontinued operations (15.7) 1.5 43.6
------- ------- ------
Net loss (133.2)% (1.6)% (188.5)%
====== ======= ======
</TABLE>
Fiscal 1998 Compared With Fiscal 1997
Sales in Fiscal 1998 were approximately $5,786,000, a decrease of approximately
$1,466,000 or 20.2% from sales in Fiscal 1997 of approximately $7,252,000. This
decrease is primarily attributed to increased competition, including expanded
supply from larger, well-known cigar manufacturers. In addition, due to supply
problems, the Company did not record any sales of its flavored cigars between
December 1997 and March 1998. Production of flavored cigars began in June 1998
at the Company's Jaibon, Dominican Republic facility.
Cost of sales in Fiscal 1998 were approximately $5,706,000, or approximately
98.6% of sales, as compared to cost of sales in Fiscal 1997 of approximately
$4,748,000, or approximately 65.5% of sales. The increase is primarily
attributable to write-offs of inventory due to obsolescence, shrinkage and prior
costing practices, 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 in
Fiscal 1998 were approximately $1,902,000, or approximately 32.9% of sales, as
compared to selling expenses in Fiscal 1997 of approximately $1,353,000, or
approximately 18.6% of sales. This increase is due to the increase in marketing
efforts to promote the Company's products. The increase consists primarily of
increases 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 in Fiscal 1998 were approximately
$4,363,000, or approximately 75.4% of sales, as compared to general and
administrative expenses in Fiscal 1997 of approximately $1,581,000, or
11
<PAGE> 13
approximately 21.8% of sales. This increase is primarily attributable to
increased expenditures for professional fees, administrative salaries, and
travel. In addition, the Company has recorded significant charges for bad debts,
loss on abandonment of its Miami factory and a charge related to the securities
litigation currently being brought against the Company to reflect the retention
amount under the Company's Directors and Officers insurance policy.
Interest expense in Fiscal 1998 was approximately $612,000, or approximately
10.6% of sales, as compared to interest income in Fiscal 1997 of approximately
($203,000), or approximately (2.8%) of sales. The interest expense in Fiscal
1998 is due to the Company's credit facility and subordinated notes payable. The
interest income in Fiscal 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. The loss for Fiscal 1998 includes the provision for the
anticipated charges from the disposal of the division of $700,000.
As a result of the forgoing factors, the Company sustained a loss of
approximately $7,707,000, or $1.46 per share for Fiscal 1998, as compared to a
loss of approximately $116,000 or $0.03 per share in Fiscal 1997.
Fiscal 1997 Compared With Fiscal 1996
Sales in Fiscal 1997 were approximately $7,252,000, an increase of approximately
$6,975,000 from sales in Fiscal 1996 of approximately $277,000. This increase is
attributed to the expansion of its cigar manufacturing business and the
wholesale distribution of products manufactured by the Company and others for
sale to retailers of tobacco and related products.
Cost of sales in Fiscal 1997 were approximately $4,748,000, or approximately
65.5% of sales, as compared to cost of sales in Fiscal 1996 of approximately
$314,000, or approximately 113.4% of sales. The dollar increase is primarily due
to the expansion of its cigar manufacturing business and the wholesale
distribution of products manufactured by the Company and others for sale to
retailers of tobacco and related products
Selling expenses includes salaries and wages, marketing and advertising
expenses, freight costs and other miscellaneous expenses. Selling expenses in
Fiscal 1997 were approximately $1,353,000, or approximately 18.6% of sales, as
compared to selling expenses in Fiscal 1996 of approximately $240,000, or
approximately 86.6% of sales. This dollar increase is due to the expanded
operations of the Company and increase in marketing efforts to promote the
Company's products. The increase in expenditures consists primarily of sales and
marketing salaries, advertising and promotional expenses, and other related
selling expenses.
General and administrative expenses include administrative salaries,
professional fees, travel and entertainment, insurance and other expenses.
General and administrative expenses in Fiscal 1997 were approximately
$1,581,000, or approximately 21.8% of sales, as compared to general and
administrative expenses in Fiscal 1996 of approximately $338,000, or 122.3% of
sales. This dollar increase reflects the expanded nature of the Company's
business, including increased expenditures for administrative salaries and
related costs, professional fees, rents and other general and administrative
costs.
Interest income in Fiscal 1997 was approximately ($203,000), or approximately
(2.8%) of sales as compared to interest expense in Fiscal 1996 was approximately
$27,000, or approximately 9.8% of sales. The interest income in Fiscal 1997 was
due to the investment of funds from the Company's initial public offering in
August 1996.
As a result of the forgoing factors, the Company sustained losses of
approximately $115,500, or $.03 per share for fiscal 1998, as compared to a loss
of approximately $522,000 or $.16 per share in fiscal 1996.
Fiscal 1996 Compared With Fiscal 1995
The Company was founded in October 1994. During the six months from inception to
March 31, 1995, the Company's sole business was the operation of one retail
store in Key Largo, Florida. This was operated as a sole proprietorship by Mr.
Kevin Doyle, and sold cigars manufactured by others. During the last half of the
fiscal year ended March 31, 1996, the Company expanded its retail operations,
commenced manufacturing cigars and established distribution channels to premium
tobacco stores. Since the manufacturing of cigars began in Fiscal 1996, the
results of operations for Fiscal 1996 are not comparable to Fiscal 1995.
12
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had working capital of approximately $1,713,000.
Since its inception, the Company has sustained losses of approximately
$8,400,000. The Company's operations and growth has been funded by loans from
investors in October 1995 of $250,000, the sale of common stock during the
period December 1995 through May 1996 with gross proceeds of approximately
$2,385,000, and the completion of an initial public offering of its common stock
in August 1996 which netted the Company approximately $8,700,000 after expenses.
These funds have been used for working capital, capital expenditures,
information systems development and other corporate purposes.
In April 1996, the Company entered into an agreement for the future purchase of
tobacco at an estimated cost of $450,000. The Company has received the majority
of this tobacco and has entered into a long-term growing and processing program
in the Dominican Republic and has advanced approximately $1,500,000 to date for
this program.
In addition, 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 other commitments for purchases other than those previously
outlined. Subsequent to March 31, 1997, the Company utilized a significant
portion of its cash in order to purchase tobacco inventory as well as inventory
to meet its anticipated non-tobacco retail product requirements. Principally, as
a result of such purchases, the Company's cash position has decreased
significantly since March 31, 1997.
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 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
$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.
13
<PAGE> 15
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.
Taxation and Regulation; Excise Taxes
Cigars have long been subject to federal, state and local excise taxes and it
is frequently suggested that additional excise taxes be levied on such products
to support various legislative programs. The federal excise tax on large cigars,
such as those manufactured and distributed by the Company, is currently 12.75%
of the manufacturer's selling price net of the excise tax and certain other
exclusions, with a maximum tax of $30 per 1,000 cigars. The Company is unable to
predict whether significant increases in such taxes will be enacted in the
future. Such increases were proposed by the Clinton Administration in 1993 to
fund that administration's health care reform initiatives, but were not enacted
by Congress. Imposition of significant increases in excise taxes could have a
material adverse impact on the large cigar industry in general and the Company
in particular.
Regulation
Cigar manufacturers, like other producers of tobacco products, are subject to
regulation at the federal, state and local levels. Since the early 1970's the
trend has been for increasing regulation, which when coupled with changing
public attitudes toward smoking, has had the effect of reducing overall
consumption of tobacco products in the United States. Federal law has required
warning labels on cigarettes since 1965, though no such warnings have been
required for cigars. Recent federal law enacted by Congress has required states
applying for certain federal grants for substance abuse programs to adopt a
minimum age of 18 for purchase of tobacco products and to establish elaborate
enforcement programs to support this requirement. Legislation proposed but not
enacted by Congress has sought to impose (1) bans on advertising of tobacco
products or on the deductibility of such advertising expenses for federal tax
purposes, (2) additional labeling, warnings or listings of additives, (3)
preemption of state law to impose civil liabilities on manufacturers and
distributors of tobacco products, (4) reimbursement to the federal government
for health care costs incurred in connection with tobacco-related conditions and
(5) regulation of tobacco products by the Food and Drug Administration as a
possibly addictive "drug." Moreover, the Environmental Protection Agency has
concluded that widespread exposure to so-called "secondary smoke" may present a
serious and substantial public health concern. The impact of this finding and
the EPA's authority to regulate "secondary smoke" are the subject of ongoing
litigation. Many states and local governments have passed statutes or ordinances
severely limiting the types of establishments (such as restaurants and office
buildings), and the areas within such establishments, in which persons may
smoke. The Company cannot predict the outcome of these legislative and
regulatory initiatives or of litigation in the future. The Company believes that
the trend toward increased regulation will continue, which may materially and
adversely effect the tobacco products industry in general and the Company in
particular.
Litigation
In the past, the cigar industry has not experienced material health-related
litigation, and, to date, the Company has not been the subject of any material
health-related litigation. However, the cigarette and smokeless tobacco
industries have experienced and are experiencing significant litigation
involving tobacco and health issues, initiated by government entities and
private citizens. Several states have sued tobacco companies seeking to recover
the monetary benefits paid under
14
<PAGE> 16
Medicaid to treat residents allegedly suffering from tobacco-related illnesses.
Florida and Massachusetts have enacted statutes permitting suit against the
tobacco companies to recoup such Medicaid costs, and recently, one defendant has
entered into a settlement with such plaintiff states, which provides that the
settling defendant will, among other things, pay a portion of its profits in the
future to the plaintiff. Under the Florida statute, many of the tobacco
companies' traditional defenses, such as assumption of risk, are vitiated. The
statute also permits the state to establish causation (that smoking causes
cancer, heart disease and other ailments) through the use of purely statistical
evidence. The tobacco companies have filed suit vigorously challenging the
Florida law as unconstitutional. The recent increase in the sales of cigars and
the publicity such increase has received may have the effect of increasing the
probability of legal claims. Also a recent study published in the Journal
Science reported that a chemical found in tobacco smoke has been found to cause
genetic damage in lung cells that is identical to damage observed in many
malignant tumors of the lung and, thereby, directly links lung cancer to
smoking. In addition, the National Cancer Institute is expected to issue in the
near future a comprehensive report on the alleged health effects of cigar
smoking. Such studies and reports could affect pending and future tobacco
regulation or litigation. There can be no assurance that there will not be an
increase in health-related litigation involving tobacco and health issues
against the cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco or
suppliers to the tobacco industry could have a material adverse effect on the
Company's business.
Tobacco Industry Risks
During the past several decades the tobacco industry has been the subject of
advertising and public service campaigns against smoking in general.
Furthermore, litigation has been commenced in several jurisdictions seeking
damages from cigarette companies for damages resulting from cancer caused by
smoking. Although the Company is recently organized and all of its cigars have
been sold after the risks of smoking and the addictive nature of nicotine have
become generally known, no assurance can be given that the Company will not be
adversely affected by such factors.
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.
Dependence on Management; Master Craftsmen
The Company's business is largely dependent upon its executive vice president,
Mr. Kevin Doyle, and the ability of the Company to hire and retain quality
master cigar craftsmen. Mr. Doyle is responsible for both the blending and
manufacturing of the Company's cigars and the engagement of cigar craftsmen. The
Company has an employment agreement with Mr. Doyle. However, this agreement does
not prohibit Mr. Doyle from terminating his employment with the Company, and the
loss of service of Mr. Doyle or other key employees would have a material
adverse effect upon the Company's business and prospects. The ability of the
Company to increase its capacity is dependent upon its ability to hire and
retain trained hand rollers. The market for qualified personnel, particularly
hand rollers, is highly competitive, and the Company will compete with other
cigar companies in seeking to hire such employees, and no assurance can be given
as to the ability of the Company to employ or retain such persons. In connection
with the Finova Credit facility, the Company maintains $2.0 million in key-man
life insurance on Mr. Kevin Doyle.
15
<PAGE> 17
Employees
The Company currently employs approximately 172 full-time and 5 part-time
employees. Of these, approximately 35 are engaged in sales and marketing, 20 in
executive and administrative roles, and 122 in manufacturing. None of the
Company's employees are covered by any labor union. The Company believes its
relationships with its employees are generally good. The ability of the Company
to fulfill its goals will be highly dependent on its ability to recruit and
maintain a skilled work force of rollers. The Company recruits rollers on the
basis of favorable working conditions at the Company's new facilities and
competitive wages. The Company believes its requirements for skilled workers
will be met for the foreseeable future, but no assurances can be given in this
regard.
Trademarks
Trademarks and brand names are central to the business of marketing and
distributing premium cigars and are, accordingly, highly important to the
Company's business. The Company has received trademark registration in the
United States on the marks "Signature Collection," "SC," "Calle Ocho,"
"Celestino Vega," "Rum Runner," "Domino Park" and "Morro Castle. The Company
also relies on certain non-patentable trade secrets to produce the distinctive
flavors and aromas of its brands of cigars. There can be no assurance that the
Company will be able to prevent unauthorized use or disclosure of such
proprietary information or that other competitors will not be able to develop
substantially similar formulations.
Fluctuating Sales Growth Rates and Inventory Levels
In late 1996 and early 1997, the substantial growth in demand for cigars,
particularly in the U.S. market, caused several of the Company's largest
competitors to experience substantial growth in their order backlog and
difficulty in obtaining sufficient inventories of tobacco and sufficient skilled
rollers to meet market demand. As a reaction to those developments, most cigar
manufacturers increased their purchases of tobacco, hired additional rollers,
manufactured more cigars and moved these additional inventories into their
distribution channels. In late 1997 and into early 1998, the extraordinarily
rapid rate of industry-wide sales growth that had characterized the years from
1993 through mid-1997 began to diminish. As a result, the Company experienced
larger than normal levels of unsold inventory and a resulting strain on its
liquidity. The Company has not experienced shortages of tobacco and skilled
rollers and management believes (i) that its relationships with growers
(including the Company's practice of financing growers' production) ensure it a
sufficient supply of tobacco for the foreseeable future and (ii) the Company's
relationships with its workers are sufficiently good and the supply of skilled
workers is sufficiently large to ensure that it will continue to have a
sufficient staff of skilled rollers. There can, of course, be no assurance that
the Company will not experience such shortages.
Year 2000
Management has compiled a list of both internally and externally supplied
information systems that utilize imbedded date codes which could experience
operational difficulties in the year 2000. The Company uses third party
applications or suppliers for all high level systems and reporting. These
systems will either be upgraded and tested to be in compliance for the year 2000
or the Company will take necessary steps to replace the supplier. Management is
testing new systems for which it is responsible. It is the Company's objective
to be year 2000 compliance for all systems by the end of fiscal 1999, however,
no assurances can be given that such objective will be met.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required pursuant to this Item 7 are included in this
Form 10-KSB as a separate section commencing on page F-1 and are hereby
incorporated by reference into this Item 7.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
By letter dated December 17, 1997, Grant Thornton LLP ("GT") informed the
Company that it would not stand for re-election as the Company's firm of
independent certified public accountants. There has been no disagreement between
the Company and GT, nor, except as set forth below, has there occurred any
"reportable event" under item 304 of Regulation S-K.
16
<PAGE> 18
GT was the principal accountant (the "former accountant") for the Company's
annual report on form 10-KSB for its fiscal year ended March 31, 1997, and:
(1) on December 17, 1997 GT indicated that it would not stand for
re-election as the Company's principal accountant for the fiscal year
ended March 31, 1998;
(2) no report of GT for either of the past two years contained an adverse
opinion, or was qualified or modified as to uncertainty, audit scope,
or accounting principles;
(3) the Company's decision to seek a new auditor has been approved by its
Board of Directors;
(4) during the Company's two most recent fiscal years there were no
disagreements with the former accountant on any matter or auditing
scope or procedure, which disagreement(s), if not resolved to the
satisfaction of GT, would have caused it to make reference to the
subject matter of the disagreement(s) in connection with its report
(all within the meaning of Item 304(a)(1)(iv) of Regulation S-K); and
(5) except as described below, no "reportable event" as defined in clauses
(A) through (D) of Item 304(a)(1)(v) has occurred within the Company's
two most recent fiscal years, or in any subsequent interim period.
GT's letter dated June 6, 1997 (Re: Reportable Conditions and Other Advisory
Comments) noted certain internal control and structure matters that the former
accountant considered reportable conditions under standards established by the
American Institute of Certified Public Accountants. GT's letter dated June 6,
1997 expressly states that no disagreement had occurred.
Following receipt of GT's letter dated June 6, 1997, the Board of Directors
reviewed the letter, and authorized and directed the Company's Chief Financial
Officer to implement appropriate revised controls and other policies responsive
to the comments set forth in the letter. The Company believes the comments were
constructive and that revised policies and procedures substantially implement
the comments.
The Company has retained the accounting firm of Ahearn, Jasco + Company, P. A.
as its independent certified public accountants for the year ended March 31,
1998.
PART III
The Company will file with the Securities and Exchange Commission a definitive
Proxy Statement, pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, not later that 120 days after the end of its fiscal year.
Accordingly, certain information required by Part III has been omitted under
Item E of the General Instructions for Form 10-KSB. Only those sections of the
definitive Proxy Statement which specifically address the items set forth herein
are incorporated by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information set forth under the captions "Election of Directors" and
"Executive Officers" are to be included in the Company's definitive Proxy
Statement relating to the 1998 Annual Meeting of Stockholders (the "1998 Proxy
Statement") and to be filed pursuant to Regulation 14A within 120 days after the
close of the fiscal year covered by this report on Form 10-KSB, is incorporated
herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under the caption "Executive Compensation" to be
included in the Company's 1998 Proxy Statement is incorporated herein by
reference.
17
<PAGE> 19
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Beneficial Owners and Management"
to be included in the Company's 1998 Proxy Statement is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under the caption "Certain Transactions" to be
included in the Company's 1998 Proxy Statement is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
Number Description
- ------ -----------
<S> <C>
1.1 Form of Underwriting Agreement(1)
2.1 Asset Purchase Agreement(2)
3.1 Restated Certificate of Incorporation, as amended(1)
3.2 By-Laws(1)
4.1 Specimen Common Stock Certificate(1)
4.2 Specimen Warrant Certificate(1)
10.1 Employment Agreement dated April 1, 1998, between the Company and Kevin Doyle *
10.2 Employment Agreement dated April 1, 1998, between the Company and Edward C. Williams *
10.3 1996 Long-Term Incentive Plan(1)
10.4 Form of Subordinated Promissory Note *
10.5 Forbearance Agreement dated July 10, 1998 between Finova Capital Corporation and the Company *
10.6 Form of Redeemable Common Stock Purchase Warrant (included in Exhibit 4.2 of the Company's
Registration Statement on Form S-B2, File No. 333-04415)(1)
10.7 Form of Underwriter's Warrant to purchase Warrants (included in Exhibit 4.1 of the Company's
Registration Statement on Form S-B2, File No. 333-04415)(1)
10.8 Form of M/A Agreement between the Company and the Underwriter(1)
10.9 Non-Employee Director Stock Option Plan(1)
10.10 Asset Purchase Agreement, dated as of April 1, 1997, by and among the Company, Caribbean AWC
Corporation, American Case & Luggage Co. d/b/a American Western Cigar Co., Lawrence D. Frutkin
and Alfred J. Berger, Jr.(2)
16.1 Letter dated December 17, 1997 from Grant Thornton LLP, to the Registrant (3)
16.2 Letter dated January 21, 1998 from Grant Thornton LLP, to the Securities and Exchange Commission (3)
16.3 Letter dated January 27, 1998 from Grant Thornton LLP, to the Securities and Exchange Commission (3)
21.1 List of all the Company's subsidiaries *
24.1 Powers of attorney (included on Signature Page) *
27.1 Financial Data Schedule *
</TABLE>
- -------------
(1) Previously filed under same exhibit number in the Company's
Registration Statement on Form S-B2, File No. 333-04415.
(2) Previously filed on Form 8-K dated April 18, 1997.
(3) Previously filed on Form 8-K dated January 21, 1998.
* Filed herewith.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated January 8, 1998 with
respect to a change in its independent certified public accountants.
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.
18
<PAGE> 20
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
CARIBBEAN CIGAR COMPANY
Date: July 14, 1998 By: /s/ Edward C. Williams
----------------------
Edward C. Williams, President
In accordance with the Securities Exchange Act of 1934, as amended,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated. Each person whose
signature appears below hereby authorizes Edward C. Williams and Kevin Doyle or
either of them acting in the absence of the others, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments to this report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Edward C. Williams Chairman of the Board, President July 14, 1998
- --------------------------- Chief Executive Officer and Director
Edward C. Williams (Principal Executive Officer)
/s/ Edward C. Williams Chief Financial Officer July 14, 1998
- --------------------------- and Director (Principal Financial
Edward C. Williams and Accounting Officer)
/s/ Kevin Doyle Executive Vice President and Director July 14, 1998
- ---------------------------
Kevin Doyle
/s/ Curtis Zimmerman Director July 14, 1998
- ---------------------------
Curtis Zimmerman
</TABLE>
19
<PAGE> 21
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORTS OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
CARIBBEAN CIGAR COMPANY
AND SUBSIDIARIES
March 31, 1998 and 1997
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Caribbean Cigar Company
We have audited the accompanying consolidated balance sheet of Caribbean Cigar
Company and Subsidiaries (the "Company") as of March 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Caribbean Cigar
Company and Subsidiaries as of March 31, 1998, and the results of their
operations and their cash flows for the year ended March 31, 1998, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred substantial losses from
operations since inception, and as discussed in Note 14, the Company has entered
into a forbearance agreement with its primary leader and has agreed to repay
this lender by September 8, 1998, however the Company does not currently
have the resources to complete this repayment. In addition, the Company is in
default on approximately $380,000 of notes payable. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ Ahearn, Jasco + Company, P. A.
Pompano Beach, Florida
July 2, 1998, except as to Note 14, for
which the date is July 10, 1998
F-1
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
Caribbean Cigar Company
We have audited the accompanying consolidated balance sheet of Caribbean Cigar
Company and Subsidiaries as of March 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended March 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial 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 Caribbean Cigar
Company as of March 31, 1997 and the consolidated results of their operations
and their consolidated cash flows for each of the two years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Miami, Florida
June 6, 1997
F-2
<PAGE> 24
Caribbean Cigar Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
March 31,
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 72,986 $ 2,896,620
Accounts receivable, net of allowance for doubtful
accounts of $58,000 in 1998 and $50,000 in 1997 217,536 1,080,952
Insurance proceeds receivable (note 4) 1,333,418 --
Due from related parties -- 58,314
Inventories (note 5) 2,938,963 3,782,738
Prepaid expenses and other current assets (note 7) 318,000 1,416,563
Net assets held for sale (note 2) 2,085,991 1,574,059
------------ ------------
Total current assets 6,966,894 10,809,246
Property and equipment, net (note 6) 1,593,095 1,382,089
Other assets 107,422 117,779
------------ ------------
$ 8,667,411 $ 12,309,114
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,078,114 $ 1,452,428
Short-term borrowings (note 8) 2,257,714 --
Accrued litigation and professional fees 307,500 --
Other accrued expenses and taxes payable 610,706 157,947
------------ ------------
Total current liabilities 5,254,034 1,610,375
------------ ------------
Commitments and contingencies (note 9) -- --
Stockholders' equity (notes 12 and 13):
Preferred stock, $.001 par value;
2,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.001 value; 10,000,000
shares authorized; March 31, 1998
issued and outstanding - 6,176,602;
March 31, 1997 - issued and
outstanding - 5,126,218 6,177 5,126
Additional paid-in capital 11,780,315 11,359,862
Accumulated deficit (8,373,115) (666,249)
------------ ------------
Stockholders' equity 3,413,377 10,698,739
------------ ------------
$ 8,667,411 $ 12,309,114
============ ============
</TABLE>
The accompanying notes are an integral part hereof.
F-3
<PAGE> 25
Caribbean Cigar Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 5,786,029 $ 7,251,528 $ 276,643
Cost of sales 5,706,011 4,747,804 313,775
----------- ----------- -----------
Gross profit (loss) 80,018 2,503,724 (37,132)
----------- ----------- -----------
Operating expenses:
Selling expenses 1,901,679 1,352,516 239,641
General and administrative expenses 4,362,954 1,580,619 338,208
----------- ----------- -----------
6,264,633 2,933,135 577,849
----------- ----------- -----------
Loss from continuing operations before interest
(income) expense (6,184,615) (429,411) (614,981)
Interest (income) expense 612,089 (202,556) 27,253
----------- ----------- -----------
Loss from continuing operations (6,796,704) (226,855) (642,234)
Discontinued operations (note 2):
Income (loss) from discontinued operations (210,162) 111,349 120,647
Loss on disposal of discontinued operations (700,000) -- --
----------- ----------- -----------
Total discontinued operations (910,162) 111,349 120,647
----------- ----------- -----------
Net loss $(7,706,866) $ (115,506) $ (521,587)
=========== =========== ===========
Basic and diluted loss from continuing operations
per common share $ (1.29) $ (0.05) $ (0.20)
Basic and diluted income (loss) from discontinued operations
per common share (0.17) 0.02 0.04
----------- ----------- -----------
Basic and diluted net loss per common share $ (1.46) $ (0.03) $ (0.16)
=========== =========== ===========
Basic and diluted weighted average number of common shares 5,260,761 4,570,082 3,254,135
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part hereof.
F-4
<PAGE> 26
Caribbean Cigar Company and Subsidiaries
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
---------------------- Additional
Paid-In Accumulated Unearned
Shares Par Value Capital Deficit Compensation Total
--------- --------- ------- ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance as of March 31, 1996 3,408,369 $ 3,408 $ 1,852,945 $ (550,743) $(11,320) $1,294,290
Common stock issued
through private
placement, net (note 12) 181,329 181 639,969 -- -- 640,150
Common stock issued
upon the IPO, net (note 12) 1,523,750 1,524 8,709,514 -- -- 8,711,038
Common stock issued
for services 33,770 34 118,163 -- -- 118,197
Common stock forfeited
in connection with stock
option plan (21,000) (21) (5,479) -- -- (5,500)
Compensation for non-
employee stock options
(note 13) -- -- 44,750 -- -- 44,750
Deferred compensation
recognized (note 12) -- -- -- -- 11,320 11,320
Net loss -- -- -- (115,506) -- (115,506)
---------- ------- ------------ ----------- -------- ----------
Balance as of March 31,1997 5,126,218 5,126 11,359,862 (666,249) -- 10,698,739
Common stock issued
for services (note 12) 4,514 5 24,187 -- -- 24,192
Common stock issued
in connection with
notes payable (note 8) 1,045,870 1,046 396,266 -- -- 397,312
Net loss -- -- -- (7,706,866) -- (7,706,866)
---------- ------- ------------ ----------- -------- ----------
Balance as of March 31,1998 6,176,602 $ 6,177 $ 11,780,315 $(8,373,115) $ -- $3,413,377
========== ======= ============ =========== ======== ==========
</TABLE>
The accompanying notes are an integral part of this statement
F-5
<PAGE> 27
Caribbean Cigar Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
Continuing Operations:
Cash flows from operating activities:
Net loss from continuing operations $(6,796,704) $ (226,855) $ (642,234)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 398,111 208,143 11,196
Allowance for doubtful accounts 8,000 50,000 --
Write-off of leasehold improvements 122,483 -- --
Amortization of unearned compensation -- 11,320 --
Common stock issued for services 24,192 162,947 62,004
Interest expense recorded for common stock
issued in connection with notes payable 397,312 -- --
Decrease (increase) in accounts receivable 855,416 (1,139,393) (49,873)
Increase in insurance receivable (1,333,418) -- --
Decrease (increase) in inventory 2,033,821 (3,548,971) (233,767)
Increase in prepaid expenses (91,483) (1,391,670) (24,893)
Decrease (increase) in other assets 10,357 (94,579) (23,200)
Increase (decrease) in accounts payable 625,686 1,242,243 210,185
Increase (decrease) in accrued expenses 760,259 61,724 96,223
----------- ----------- -----------
Net cash used by operating activities (2,985,968) (4,665,091) (594,359)
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (731,600) (1,368,490) (214,000)
Trademark costs -- (1,180) (17,758)
----------- ----------- -----------
Net cash used by investing activities (731,600) (1,369,670) (231,758)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock -- 9,345,688 1,614,356
Increase in short-term borrowings 2,257,714 -- --
Advances from officers and directors 249,700 -- --
Repayments of advances from officers
and directors (249,700) -- --
Proceeds from convertible debt -- -- 250,000
Principal repayments of convertible debt -- -- (100,000)
Increase decrease in advances to/from related parties 58,314 (49,621) 24,151
----------- ----------- -----------
Net cash provided by financing activities 2,316,028 2,242,520 1,788,507
----------- ----------- -----------
Net (decrease) increase in cash due to continuing operations (1,401,540) 3,261,306 962,390
----------- ----------- -----------
Discontinued Operations:
Net income (loss) from discontinued
operations (910,162) 111,349 120,647
Reserve for discontinued operations 700,000 -- --
Net change in assets held for sale (1,211,932) (1,224,836) (334,486)
----------- ----------- -----------
Net (decrease) in cash due to discontinued operations (1,422,094) (1,113,487) (213,839)
----------- ----------- -----------
Net (decrease) increase in cash (2,823,634) 2,147,819 748,551
Cash at beginning of period 2,896,620 748,801 250
----------- ----------- -----------
Cash at end of period $ 72,986 $ 2,896,620 $ 748,801
=========== =========== ===========
Supplemental information:
Cash paid for interest $ 180,072 $ 3,600 $ 10,840
=========== =========== ===========
Cash paid for income taxes $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part hereof.
F-6
<PAGE> 28
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 1. Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of Caribbean
Cigar Company and its wholly owned subsidiaries, Caribbean Cigar
Company (Cayman) Limited, Caribbean AWC Corporation and Precision Mold,
Inc. (collectively, the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
The Company's financial statements for the year ended March 31, 1998
have been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments
in the normal course of business. The Company incurred a net loss from
continuing operations of $6,796,704 for the year ended March 31,1998,
and has an accumulated deficit of $8,373,115 at March 31, 1998.
Subsequent to year end, the Company has entered into a forbearance
agreement with its primary lender and has agreed to repay in full this
lender by September 8, 1998 (see Note 14). Management recognizes that
the Company must (i) generate additional resources to enable it to
continue operations, (ii) restructure its existing debt, or (iii)
obtain profitable operations or a combination thereof. The realization
of assets and satisfaction of liabilities in the normal course of
business is dependent upon the Company ultimately obtaining profitable
operations after successfully completing its debt restructuring.
However, no assurances can be given that the Company will be successful
in its efforts. Should the Company not be successful in obtaining
capital or achieving profitable operations, the accompanying financial
statements will be materially affected.
(b) Nature of Operations
The Company is a vertically integrated manufacturer and distributor of
high quality, hand rolled premium cigars operating in South Florida and
the Dominican Republic. At present, the Company also operates five
retail stores in South Florida, however, these stores are being
accounted for as discontinued operations.
The Company, and the cigar industry, in general, has recently
experienced shortages in certain types of natural wrapper and filler
due to the increase in demand for tobacco for premium cigars. Although
the shortages have not materially impacted cigar production, no
assurance can be made that any possible future shortages will not have
an adverse effect on the Company.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
Balances of cash and cash equivalents in financial institutions may at
times exceed the government insured limits.
(d) Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
The Company's customers are geographically dispersed but are
concentrated in the tobacco industry. No customer accounts for 10% or
more of the Company's sales.
(e) Inventories
Inventories consist of tobacco, hand rolled cigars, cigars purchased
from various other distributors as well as cigar accessories. Leaf
tobacco is carried at the lower of average cost or market. In
accordance with generally recognized industry practice, leaf tobacco
inventory is classified as current although portions of such inventory,
because of the duration of the aging process, ordinarily would not be
utilized within one year. Cigars and other inventories are generally
valued at the lower of cost (using the first-in, first-out method) or
market.
F-7
<PAGE> 29
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
(f) Property and Equipment
Property and equipment, which is recorded at cost, is depreciated using
straight-line and accelerated methods over the estimated useful life of
the assets. Leasehold improvements are amortized over the lesser of
their estimated useful life or the life of the lease. The range of
estimated lives for financial reporting purposes are as follows:
<TABLE>
<S> <C>
Leasehold improvements 2 to 10 years
Machinery and equipment 7 years
Furniture and fixtures 5 to 7 years
</TABLE>
(g) Deferred Pre-Opening Costs
Factory pre-opening costs consisted of salaries and other direct costs
incidental to the opening of the Company's Dominican Republic factory
and were deferred and amortized over a one year period following the
factory's opening date.
(h) Trademarks
Trademarks, which consist of costs accumulated in registering trade
names of cigars and other tobacco related products, are being amortized
on a straight-line basis over their useful lives. Trademark approval is
pending on several products.
(i) Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable and accrued liabilities are
stated at cost, which approximates fair value because of the short term
maturity of those items. The estimated fair value of the Company's
short term borrowings is the same as the recorded value because the
interest rates and terms approximate market conditions.
(j) Income Taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The effect of a change in tax
rates is recognized as income or expense in the period that includes
the enactment date.
The Company and its eligible subsidiaries file consolidated U. S.
federal income tax returns. Non-U. S. subsidiaries, which are
consolidated for financial reporting, are not eligible to be included
in consolidated U. S. federal income tax returns, and therefore
separate provisions for income taxes have been determined for these
entities. Except for return of capital and selected dividends, the
Company intends to reinvest the unremitted earnings of its non-U. S.
subsidiaries and postpone their remittance indefinitely. Accordingly,
no provision for U. S. income taxes for non-U. S. subsidiaries was
required for any year presented.
(k)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
F-8
<PAGE> 30
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
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.
(l) Stock Based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). SFAS 123 encourages, but does not require, companies to
record compensation plans at fair value. The Company has chosen, in
accordance with provision of SFAS 123, to apply Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued Employees" ("APB
25") for its stock plans. Under APB 25, if the exercise price of the
Company's stock options is less than the market price of the underlying
stock on the date of grant, the Company must recognize compensation
expense.
(m) Advertising Costs
Advertising costs are expensed as incurred. Advertising cost for the
years ended March 31, 1998, 1997 and 1996 were $955,000, $424,000 and
$54,000, respectively.
(n) Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(o) Pending Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." SFAS No. 130 and SFAS No. 131 are effective
for fiscal years beginning after December 15, 1997 and the Company does
not believe that adoption of these standards will have a material
impact on the Company's results of operations.
(p) Reclassifications
Certain reclassifications of 1997 and 1996 amounts have been made to
conform to the 1998 financial statement presentation.
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 years ended March 31, 1998, 1997 and
1996. The net assets of the discontinued operations consist primarily of
inventories and property and equipment.
F-9
<PAGE> 31
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
The estimated loss on the disposal of the retail division is $700,000.
Summarized results of the retail division are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Sales $ 2,346,383 $ 1,996,424 $ 544,307
Income (loss) from discontinued operations (210,162) 111,349 120,647
Loss on disposal of discontinued operations (700,000) -- --
Income (loss) per common share (0.17) 0.02 0.04
</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 $ 1,686,329 $ 699,731
Property and equipment 394,007 853,520
Other assets 42,211 41,976
Current liabilities (36,556) (21,168)
----------- -----------
Net assets of retail division $ 2,085,991 $ 1,574,059
=========== ===========
</TABLE>
Note 3. Acquisitions
On April 1, 1997, the Company acquired certain assets of American Western
Cigar Co. for $237,000. The acquisition has been accounted for using the
purchase method with the purchase price allocated to tobacco inventory,
cigar molds, finished cigars, trademarks and goodwill. In connection with
the acquisition, the Company entered into consulting agreements with the
two principals to provide consulting services for three years at varying
rates of performance based compensation as defined in the agreements.
The Company is currently in a dispute with the two principals, due to
among other things, their breach of certain provisions of the consulting
agreements. As a result, the agreements were terminated in fiscal 1998.
The Company has accrued all amounts which may be due under the consulting
agreements.
Note 4. Insurance Proceeds Receivable
On January 2, 1998, the Company incurred a loss due to a flood at its leaf
processing facility in Jaibon, Dominican Republic. The Company settled the
loss with the insurance carrier in February 1998 and received the proceeds
in April 1998.
Note 5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
Raw materials $ 1,227,441 $ 643,006
Finished goods 1,711,522 3,139,732
------------ -----------
$ 2,938,963 $ 3,782,738
============ ===========
</TABLE>
F-10
<PAGE> 32
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 6. Property and Equipment
Property and equipment consist of the following:
<TABLE>
<CAPTION>
1998 1997
--------- --------
<S> <C> <C>
Land $ 40,141 $ 20,000
Building 379,763 200,557
Leasehold improvements 386,618 361,694
Machinery and equipment 927,008 742,460
</TABLE>
<TABLE>
<S> <C> <C>
Furniture and fixtures 235,547 208,014
---------- ----------
1,969,077 1,532,725
Accumulated depreciation (375,982) (150,636)
---------- ----------
$1,593,095 $1,382,089
========== ==========
</TABLE>
Depreciation and amortization expense, not including amounts related to
discontinued operations, amounted to approximately $398,000, $208,000 and
$11,000 for fiscal 1998, 1997 and 1996, respectively.
Note 7. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following items
at:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Advances on tobacco $ 149,939 $ 1,019,145
Prepaid insurance 92,056 122,861
Deferred pre-opening costs -- 92,707
Other 76,005 181,850
--------- -----------
$ 318,000 $ 1,416,563
========= ===========
</TABLE>
Note 8. Short-Term Borrowings
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 March 31, 1998, the Company
had borrowed approximately $1,470,000 under the facility. At March 31,
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 Credit Facility (See Note 14).
From December 1997 to February 1998, the Company borrowed $755,000 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. At March 31, 1998, 1,045,870 shares of common
stock have been issued in connection with these notes, which resulted in
interest expense of approximately $400,000 being recorded. Approximately
$375,000 has been repaid subsequent to March 31, 1998. The Company is in
default on the remaining notes.
In June 1997, the Company borrowed $250,000 from its directors to fund
working capital needs. In connection with the notes, the Company granted to
the directors warrants to purchase 37,500 shares of the Company's common
stock at a price of $6.25 for a period of five years. The notes were repaid
out of the proceeds from the Finova Credit Facility.
Note 9. Commitments and Contingencies
Lease Commitments
The Company leases office and retail facilities under non-cancelable,
operating leases. The lease agreements provide for certain minimum fixed
rental increases and/or increases based upon changes in the consumer price
index. The
F-11
<PAGE> 33
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
agreements also contain options to extend the term of the lease. The
approximate future minimum lease payments, including the lease payments for
discontinued operations, at March 31, 1998, were as follows:
<TABLE>
<S> <C>
1999 $ 568,285
2000 541,087
2001 538,837
2002 413,232
2003 204,107
Thereafter 122,932
-----------
$ 2,388,480
===========
</TABLE>
Rent expense, not including amounts related to discontinued operations,
amounted to approximately $204,000, $173,000 and $20,000 in fiscal 1998,
1997 and 1996, respectively.
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.
Note 10. Related Party Transactions
In June 1997, certain of the Company's directors loaned the Company
$250,000. The loans were repaid from the proceeds of the Finova Credit
Facility (see note 8).
As of March 31, 1998, the Company's chief financial officer had loaned the
Company a total of $70,000. In connection with the series 9%
subordinated notes (see note 8), the Company has issued the chief financial
officer 20,000 shares of common stock.
As of March 31, 1997, the Company had loaned $58,314 to an officer and
various employees of the Company. Approximately $34,000 was collateralized
by stock and the remaining balance was unsecured.
The Company from time to time purchased and sold tobacco to entities
affiliated with a former member of the Board of Directors of the Company.
Purchases and sales were approximately $0 and $257,000 and $1,032,000
and $154,000, respectively, for the years ended March 31, 1998 and 1997.
F-12
<PAGE> 34
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 11. Income Taxes
A summary of the income tax provision for the years ended March 31, 1998,
1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ---------
<S> <C> <C> <C>
Currently payable $ -- $ -- $ --
Deferred tax benefit 2,697,404 40,460 225,990
Rate adjustments and other -- (40,800) --
Less: Valuation allowance (2,697,404) 340 (225,990)
----------- -------- ---------
Provision for income taxes $ -- $ -- $ --
=========== ======== =========
</TABLE>
The Company's deferred tax assets consist primarily of the following at
March 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------- ----------
<S> <C> <C> <C>
Deferred tax assets:
Available federal and state net operating
loss carryovers $ 2,516,826 $263,923 $ 222,482
Discontinued operations 245,000 -- --
Other 161,228 (38,273) 3,508
Less: Valuation allowance (2,923,054) (225,650) (225,990)
----------- -------- ---------
Net deferred tax assets $ -- $ -- $ --
=========== ======== =========
</TABLE>
There are no significant deferred tax liabilities. The Company has used a
combined federal and state effective tax rate of approximately 35% for all
deferred tax computations.
The Company has recorded a valuation allowance in accordance with the
provisions of SFAS No. 109 to reflect the estimated amount of deferred tax
assets that may not be realized.
The Company has tax net operating loss carryovers ("NOLs") of approximately
$7,073,000, expiring at various dates beginning in the year 2011. Certain
provisions of the tax law may limit the net operating loss carry-forwards
available for use in any given year in the event of a significant change in
ownership interest. There have already been significant changes in stock
ownership; however, management believes that an ownership change has not
yet occurred which would cause the net operating loss carryover to be
limited.
Note 12. Stockholders' Equity
The Company completed an initial public offering ("IPO") on August 1, 1996,
in which it issued and sold 1,523,750 shares of its common stock for $7.00
a share which resulted in net proceeds of approximately $8,711,000. Prior
to the IPO, the Company sold 181,329 shares of common stock through a
private placement of such securities. The offering price of such stock was
$3.50 per share and resulted in net proceeds of approximately $640,000.
During the year ended March 31, 1996, the Company issued shares of common
stock to certain employees for services rendered or to be rendered. Under
the terms of one of the issuances, the shares would vest after completion
of one year of service. If the employee left the Company prior to vesting,
such stock would be forfeited. The fair value of the common stock, as
defined above had been reflected as compensation expense, to the extent
earned, in the accompanying financial statements. The deferred compensation
was recognized in fiscal 1997.
During the year ended March 31, 1998, the Company issued shares of common
stock to an employee and a contractor for services rendered. The Company
also issued shares of common stock in connection with certain subordinated
notes payable (see note 8).
F-13
<PAGE> 35
Warrants
On July 31, 1996, redeemable common stock purchase warrants were issued in
connection with the Company's initial public offering to purchase a total of
1,325,000 at an exercise price of $7.00 per share. The redeemable common stock
purchase warrants expire on August 1, 1999.
On July 31, 1996, underwriters warrants were issued in connection with the
Company's initial public offering to purchase 132,500 shares of common stock at
an exercise price of $10.15 per share and 132,500 redeemable common stock
purchase warrants at an exercise price of $0.18125. The underwriters' warrants
expire on August 1, 2001.
On June 20, 1997, in connection with loans made to the Company by certain of
its directors, the Company issued warrants to purchase 187,500 shares of common
stock at a price of $6.18 per share. The warrants expire on June 21, 2002.
On September 30, 1997, in connection with loans made to the Company, the Company
issued warrants to purchase 37,500 shares of common stock at a price of $4.69
per share. The warrants expire on October 1, 2002.
The following table represents information related to the Company's warrant
activity for the year indicated:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------- ----------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,457,500 $ 7.30 - $ - - $ -
Granted 225,000 5.93 1,457,500 7.30 - -
Exercised - - - - - -
Expired - - - - - -
Forfeited - - - - - -
--------- - --------- -------
Outstanding at end of year 1,682,500 7.12 1,457,500 7.30 - -
========= ========= =======
Warrants exercisable at end of year 1,682,500 7.12 1,457,000 7.30 - -
========= ========= =======
</TABLE>
F-14
<PAGE> 36
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
Note 13. Stock Option Plans
The Company has established two stock option plans (1996 Long-Term
Incentive Stock Option Plan and Non-Employee Directors Stock Option Plan)
to grant incentive and nonqualified stock options for common stock to key
employees and directors. The plans expire in May 2006 and June 2006,
respectively. The Company has authorized and reserved 500,000 shares under
the 1996 Long-Term Incentive Stock Option Plan and 100,000 shares under the
Non-Employee Directors Stock Option Plan. Except for options held by one
key employee, which are non-terminable during the life of the option,
outstanding options until fully vested are contingent upon continued
service.
Prior to the establishment of the 1996 Long-Term Incentive Stock Option
Plan and Non-Employee Directors Stock Option Plan, the Company granted
options for common stock to certain individuals. In March 1996, the Company
issued an option for the purchase of 8,000 shares at $4.20 per share, which
exceeded the fair market value on the date of the grant. The option was
issued in consideration for certain consulting services provided to the
Company. Prior to March 31, 1996, the Company accounted for such options
under APB Opinion 25 and related Interpretations. Commencing April 1, 1996,
the Company accounts for nonqualified options issued to non-employees under
SFAS 123. As a result, certain options granted to non-employees in fiscal
1997 resulted in compensation expense of $44,750.
Had compensation cost for the stock option plan options issued to employees
been determined based on the fair value of the options at the grant dates
consistent with the method of SFAS 123, the Company's net loss and loss per
share would have been changed to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1998 1997 1996
----------- --------- ----------
<S> <C> <C> <C>
Net Loss
As reported $(7,706,866) $(115,506) $(521,587)
Pro forma $(7,839,059) $(288,961) $(566,087)
Basic and diluted loss per share
As reported $ (1.46) $ (.03) $ (0.16)
Pro forma $ (1.49) $ (.06) $ (0.17)
</TABLE>
The above pro forma disclosures may not be representative of the effects on
reported net income for future years as options vest over several years and
the Company may continue to grant options to employees.
The fair value of each option grant is estimated on the date of grant using
the binomial option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively: dividend
yield of 0.0 percent for all years; expected volatility of 200.0%, 30.59%
and 30.59%, respectively; risk-free interest rates of 5.72%, 6.36% and
5.72%, respectively; and expected holding periods of one year in all years.
The following table represents information related to the Company's stock
option activity for the year indicated:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 624,000 $3.88 225,000 $1.36 -- $ --
Granted 413,500 3.03 399,000 5.30 225,000 1.36
Exercised -- -- -- -- -- --
Expired (125,000) 1.25 -- -- -- --
Forfeited (234,000) 4.55 -- -- -- --
---------- --------- ---------
Outstanding at end of year 678,500 3.72 624,000 3.88 225,000 1.36
========= ========= =========
Options exercisable at end of year 437,500 465,000 225,000
========= ========= =========
</TABLE>
F-15
<PAGE> 37
Caribbean Cigar Company
NOTES TO FINANCIAL STATEMENTS
March 31, 1998 and 1997
<TABLE>
<S> <C> <C> <C>
Weighted-average fair value of
options granted during the year $ 0.90 $0.84 $0.20
======= ===== =====
</TABLE>
The following information applies to options outstanding at March 31, 1998.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Weighted-
Average Weighted- Weighted-
Range of Shares Remaining Average Shares Average
Exercise Prices Contractual Life Exercise Price Exercise Price
-------------------- ---------- ---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$0 - $1.50 312,500 6.92 $1.02 302,500 $1.02
$1.51 - $5.00 156,000 4.43 4.62 -- --
$5.01 - $7.00 210,000 6.29 7.11 165,000 7.00
</TABLE>
Note 14. Subsequent Events
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 $1,500,000. 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 remedies under the line of
credit. 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 permit Finova proceed to claim and
liquidate the assets of the Company. If this were to occur, the Company's
shareholders and creditors other than Finova would receive no value for their
rights and claims against the Company, and would realize a total loss on their
investments in the Company.
F-16
<PAGE> 1
================================================================================
EXHIBIT 10.1
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN
CARIBBEAN CIGAR COMPANY
AND
KEVIN DOYLE
DATED
APRIL 1, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
EXECUTIVE EMPLOYMENT AGREEMENT
<TABLE>
<CAPTION>
PARAGRAPH PAGE NO.
- --------- --------
<S> <C> <C>
1. BACKGROUND ...................................................................................... 1
2. DEFINITIONS...................................................................................... 1
3. EMPLOYMENT....................................................................................... 4
4. RESPONSIBILITIES................................................................................. 4
5. NON-STOCK COMPENSATION AND REIMBURSEMENTS........................................................ 4
6. EQUITY-BASED COMPENSATION........................................................................ 6
7. REGISTRATION RIGHTS.............................................................................. 6
8. TERMINATION ..................................................................................... 7
9. PROPRIETARY INFORMATION.......................................................................... 7
10. INDEMNIFICATION ................................................................................. 8
11. SEVERABILITY .................................................................................... 8
12. ATTORNEYS' FEES.................................................................................. 8
13. HEADINGS ........................................................................................ 9
14. NOTICES ......................................................................................... 9
15. GENERAL PROVISIONS .............................................................................. 9
16. ENTIRE AGREEMENT ................................................................................ 9
</TABLE>
<PAGE> 3
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is
entered into this 1st day of April, 1998 by and between Caribbean Cigar Company,
a Florida corporation with its principal offices at 8305 N.W. 27th Street, Suite
111 Miami, Florida 33122 (the "Company") and KEVIN DOYLE ("Employee"), an
individual, and shall be effective on the Effective Date, as defined below.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements of the parties hereto, the parties do hereby
covenant and agree as follows:
1. BACKGROUND.
A. The Company is engaged in the business of
manufacturing and distributing premium cigars and cigar-related products.
B. The Company desires to secure and retain
the services of Employee in the office of Executive Vice President, and such
services are considered by the Company to be valuable with regard to the
business of manufacturing, distributing and retailing premium cigars and
cigar-related products.
C. Employee desires to be in the full and
active employ of the Company in accordance with the terms and conditions herein
set forth, and the Company desires to retain Employee's valuable skills and
services for the benefit of the Company.
2. DEFINITIONS.
As used in this Agreement and the Exhibits, the following
terms shall have the meaning as set forth below, and the parties hereto agree to
be bound by the provisions hereof:
A. BOARD OF DIRECTORS means the Board of
Directors of the Company.
B. CHANGE OF CONTROL means the occurrence of
any of the following events:
(i) Merger or consolidation where the
Company is not the consolidated or surviving company and the surviving or
resulting company does not expressly agree to be bound by and have the benefits
of the provisions of this Agreement, and through which any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of the Company representing fifty percent (50%) or more of the
combined voting power of Company's then outstanding securities;
(ii) Transfer of all or substantially all of
the assets or stock of the Company and the transferee of the Company's assets or
stock does not expressly agree to be bound by and have the benefits of the
provisions of this Agreement;
<PAGE> 4
(iii) Change in control of Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date thereof, provided that, without limitation, such a
change in control shall be deemed to have occurred if: (a) any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of the Company representing fifty percent (50%) or more of the
combined voting power of Company's then outstanding securities; or, (b) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board cease for any reasons to constitute a majority
thereof, unless the election or nomination for election by Company's
shareholders of each new director was approved by a vote of at least two-thirds
of the directors who were directors at the beginning of such period; or
(iv) discontinuation of the business by
Company.
C. COMPANY means Caribbean Cigar Company and
its successors.
D. CONSTRUCTIVE TERMINATION means a
termination of this Agreement resulting from any material failure by the Company
to fulfill its obligations under this Agreement which is not cured within twenty
(20) days after receipt of written notice by the Company from Employee
specifying the nature of the failure, which failure shall include, but shall not
be limited to, (a) removal of Employee, other than removal as a result of a
Termination With Cause or a Voluntary Termination, as Executive vice president
of the Company or any material change by the Company in the functions, duties or
responsibilities of Employee from those in which Employee was engaged as
Executive vice president of the Company on the Effective Date, without the
consent of Employee, (b) a material, non voluntary reduction in Employee's Base
Salary and eligibility for bonus amounts, or (c) the occurrence of a Change of
Control. Constructive Termination shall occur only (A) after receipt by the
Company of written notice from Employee specifying Employee's reasonable belief
that an event of Constructive Termination has occurred, as defined herein, and
(B) if Employee provides such notice to the Company and the Board of Directors
within sixty (60) days after the date of such event. The effective date of
Employee's termination of employment shall be the date specified by the Employee
which date must be not later than sixty (60) days after the giving of the notice
specified in the immediately preceding sentence. Notice by Employee of
Constructive Termination shall not constitute a Voluntary Termination for
purposes of this Agreement.
E. EFFECTIVE DATE means April 1, 1998.
F. EMPLOYEE'S CURRENT SALARY means, with
respect to any payment obligation pursuant to this Agreement, an amount equal to
the greater of (i) Employee's current base salary as of the date any
determination of Employee's Current Salary hereunder, plus an amount equal to
the bonus compensation paid to the Employee for the most recent fiscal year,
plus an amount equal to the annualized value of any and all benefits currently
paid to or for the benefit of the Employee; or (ii) Employee's gross income as
reported cumulatively on Employee's Form W-2 and any Form 1099 issued for the
previous calendar year.
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<PAGE> 5
G. INITIAL TERM means the basic term of this
Agreement, which shall be thirty-six (36) months, beginning on the Effective
Date and ending on the date which is thirty-six (36) months following the
Effective Date.
H. PERMANENT DISABILITY means a physical or
mental incapacity or disability which renders Employee incapable of performing
his regular duties hereunder for a period of one hundred twenty (120)
consecutive days, as certified by either Employee's attending physician or a
licensed physician retained by the Company for the purposes of making such
determination.
I. REGISTRABLE SECURITIES means the shares
of common stock of the Company ("Common Stock") held by Employee or his
transferees, or shares of Common Stock hereafter acquired by Employee or which
he hereafter obtains the right to acquire. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when they
have been distributed to the public pursuant to the an offering registered under
the Securities Act or sold to the public through a broker, dealer or market
maker in compliance with Rule 144 under the Securities Act (or similar rule then
in force) or repurchased by the Company. For purposes of this Agreement,
Employee shall be deemed to be a holder of Registrable Securities, and the
Registrable Securities shall be deemed to be in existence, whenever Employee has
the right to acquire directly or indirectly such Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected, and Employee
shall be entitled to exercise the rights of a holder of Registrable Securities
hereunder.
J. RENEWAL TERMS means the period, if any,
following the Initial Term during which the Agreement is extended as set forth
in Section 8B.
K. SEVERANCE AMOUNT shall have the meaning as
set forth in Section 5C.
L. TERM means the Initial Term and any Renewal
Term.
M. TERMINATION DATE means the following:
(w) with respect to Termination With Cause, the date the Company notifies
Employee in writing of the actions described in Subsection 2P.(i) and the
termination of this Agreement based thereon, or the date which is twenty (20)
days after written notice of violation to Employee pursuant to Subsection
2P.(ii) not cured by Employee; (x) with respect to the death of Employee, the
date of his death; (y) with respect to Termination Without Cause, the date on
which the Company so terminates Employee; and (z) with respect to Voluntary
Termination, the date on which Employee terminates his employment relationship
with the Company.
N. TERMINATION WITH CAUSE means the
termination of this Agreement and the employment relationship of Employee with
the Company, only for the following:
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<PAGE> 6
(i) Any action by Employee constituting
fraud, theft or embezzlement with regard to material property of the Company; or
(ii) Continued neglect by Employee in
fulfilling his duties as Executive Vice President of the Company as a result of
alcoholism, drug addiction, nervous breakdown or excessive unauthorized
absenteeism, after written notification from the Board of Directors of such
neglect, setting forth in detail the matters involved and Employee's failure to
cure the problem resulting in such neglect within a reasonable time.
(iii) Continued gross failure by Employee
to fulfill his duties as Executive Vice President of the Company after written
notice from the Board of Directors of such failure, setting forth in detail the
matters involved and specifying a reasonable time for cure, which time shall not
be less than sixty (60) days, and a reasonable method, set forth with
specificity, by which Employee may cure such failure.
O. TERMINATION WITHOUT CAUSE means any of the
following:
(i) A termination by the Company of this
Agreement and the employment relationship of Employee with the Company
which is not a Termination With Cause, a Voluntary Termination or a Constructive
Termination, including the expiration of the Term as a result of either party at
the end of the Renewal Term electing to terminate this Agreement;
(ii) After a Change of Control or within the
one hundred and twenty (120) day period immediately prior to the occurrence of a
Change of Control, any termination of this Agreement by the Company because
Employee is determined to have incurred a Permanent Disability or to have died;
(iii) Any alteration or revision in the
corporate position of Employee such that Employee's responsibilities or
compensation are materially reduced or decreased for any reason; or
(iv) Any relocation of Employee by the Company,
not agreed to in a writing by the Employee (which writing must reference this
Agreement), to a location other than metropolitan Miami.
P. TRIGGERING EVENT means a termination of Employee's
employment (i) by the Company during the Term due to a Termination Without Cause
or (ii) a Constructive Termination of Employee's employment with the Company.
Q. VOLUNTARY TERMINATION means termination by Employee
of his employment with the Company prior to the end of the Term and in the
absence of a Triggering Event. Notice by Employee to the Company of a failure by
the Company to fulfill its obligations under the Agreement pursuant to Section
2E. shall not constitute a Voluntary Termination for purposes of this Agreement.
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<PAGE> 7
3. EMPLOYMENT. The Company, through its Board of
Directors, agrees to employ Employee in the office of Executive Vice President
of the Company for the Term, and Employee agrees to accept such employment and
office upon the terms and conditions set forth herein.
4. RESPONSIBILITIES. Pursuant to this Agreement,
Employee shall assume the responsibilities, perform the duties, and exercise the
powers as Executive Vice President of the Company, as set forth in the Bylaws of
the Company and consistent with the responsibilities, duties and powers
exercised by Employee as Executive Vice President of the Company as of the
Effective Date and such other duties as may be assigned from time to time by the
Board of Directors.
5. NON-STOCK COMPENSATION AND REIMBURSEMENTS. The
Company shall pay, and Employee agrees to accept, as partial compensation for
services to be rendered hereunder during the Term, the remuneration described
below:
A. ANNUAL SALARY. The Company shall pay
Employee a base annual salary as of the Effective Date of one hundred fifty
thousand dollars ($150,000.00) per year ("Base Salary"), subject to annual
increases which, if granted, shall be effective on the first day of the
Company's fiscal year, as the Board of Directors in its sole discretion deems
appropriate in accordance with the Company's customary procedures regarding the
salaries of its executive officers. Base Salary shall be payable according to
the customary payroll practices of the Company, but in no event less frequently
than monthly.
B. BONUSES. In the event the Company adopts an
incentive compensation plan (as determined by its Board of Directors), the
Employee shall be eligible for bonuses subject to the satisfaction of such
performance criteria as may be established pursuant to such plan. During the
Term, Employee shall be entitled to participate in other incentive and/or bonus
cash and equity compensation plans of the Company which provide benefits to
senior officers, as determined by the Board of Directors of the Company.
C. SEVERANCE PAYMENTS AND AGREEMENTS.
(i) Upon the occurrence of a Triggering
Event, Employee shall be deemed to have earned the Severance Amount, as defined
below, on the effective date of the Triggering Event. The obligation of the
Company under this Subsection 5.C. shall take the place of any other obligations
of the Company under this Section 5 to pay to Employee for the balance of the
Term Employee's then Base Salary pursuant to Subsection 5.A.
(ii) If a Triggering Event occurs as a
result of a Constructive Termination in connection with a Change of Control, the
Severance Amount shall be an amount equal to two (2) multiplied times Employee's
Current Salary.
(iii) If the Triggering Event occurs as a
result of a Termination Without Cause, other than the expiration of the Term as
a result of either party at the end of the
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<PAGE> 8
Renewal Term electing to terminate this Agreement, the Severance Amount shall be
an amount equal to the greater of (i) Base Salary over the remaining term or
(ii) Employee's Current Salary.
(iv) If the Triggering Event occurs as a
result of the expiration of the Term of this Agreement because of the election
of either or both of the parties not to renew the Term, the Severance Amount
shall be an amount equal to Employee's Current Salary.
(v) Any Severance Amount payable
pursuant to this Section shall be paid as follows: (a) fifty percent (50%) of
such amount shall be payable immediately as of the date of the Triggering Event,
and (b) the remaining fifty percent (50%) of such amount shall be paid over the
twelve (12) month period thereafter according to the Company's payroll practices
and procedures in effect at the time of the Triggering Event.
(vi) In addition to receiving payment of
the Severance Amount, upon the occurrence of a Triggering Event, any and all
stock options to purchase shares of the Company which are held by Employee shall
become one hundred percent (100%) vested and immediately exercisable as of the
date of such Triggering Event, and shall be exercisable by the Employee over the
balance of the remaining stated term of any such stock options (which term shall
be the term applicable to the Employee in the absence of termination of
employment), notwithstanding any provision contained in the stock option
agreement to the contrary.
(vii) In the event of termination of
employment hereunder for any reason, the Company shall cause to be immediately
terminated any agreement to which the Employee is a party which shall prohibit
the Employee in any way from selling any of Employee's Common Stock in the
public markets (provided, however, this paragraph shall not obligate the Company
to terminate any restriction applicable to the Employee because the Employee
shall hold "restricted securities" as defined under applicable federal or state
securities laws).
(viii) Any controversy or claim arising
out of or relating to whether termination of Employee's employment is due to a
Triggering Event, or is a Termination With Cause, a Termination Without Cause, a
Constructive Termination or a Voluntary Termination as provided herein, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules
("Rules") of the American Arbitration Association ("AAA"). Arbitration shall be
initiated by a party by giving notice in the manner set forth herein to the
other party of its intention to arbitrate, which notice shall contain a
statement setting forth the nature of the dispute, the amount claimed, if any,
and the remedy sought. The initiating party shall then file a copy or copies of
the notice as set forth under the Rules. Atlanta, Georgia shall be the location
where the arbitration is held. The parties shall agree upon and appoint three
(3) arbitrators in accordance with the Rules within twenty (20) days of the
effective date of notice of arbitration; however, if the parties fail to make
such designation within twenty (20) days, the AAA shall make the appointment.
The determinations of such arbitrators will be final and binding upon the
parties to the arbitration, and judgment upon the award rendered by the
arbitrators may be entered in any such court having jurisdiction, or application
may be made to such court for a judicial acceptance of the award and an order of
enforcement, as the case may
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<PAGE> 9
be. The arbitrators shall apply the laws of the State of Georgia as to both
substantive and procedural questions.
D. INSURANCE AND BENEFITS.
(i) The Company shall allow Employee to
participate in or receive benefits under all employee and executive benefit
plans or arrangements and perquisites of employment, including, without
limitation, plans or arrangements providing for health and disability insurance
coverage, life insurance for the benefit of Employee's beneficiaries, deferred
compensation and pension benefits, and personal financial, investment, legal or
tax advice, all at the highest level that is available through the Company to
other senior officers of the Company subject to the same terms and conditions as
apply to such other senior officers. The Company will bear all costs for the
employee's and employee's family's health care coverage.
(ii) Employee shall be entitled to all holidays
recognized by the Company and vacation time for not less than four (4) weeks per
year (plus such additional time as is available under the vacation policy of the
Company in effect for senior officers) with continuing payment of all
compensation as set forth herein. Employee shall be reimbursed by the Company
for all expenses incurred on behalf of the Company in accordance with the then
current reimbursement policies of the Company. Nothing paid to Employee under
any plan, arrangement or perquisite presently in effect or made available in the
future shall be deemed to be in lieu of the salary and other compensation or
payments paid or payable to Employee under this Agreement.
(iii) In the event of a termination of Employee's
employment with the Company as a result of or in connection with a Triggering
Event, Employee shall be entitled to continue to receive the insurance benefits
set forth above (at the highest level of insurance benefits within the twelve
(12) month period prior to such event) for a twenty-four (24) month period
following the Triggering Event; provided, however, that in the event the Company
is legally prohibited from providing a specified insurance benefit after
termination of employment, it shall provide Employee the economic equivalent
thereof.
6. TERMINATION.
A. This Agreement will commence on the
Effective Date and shall continue during the Initial Term.
B. In addition to the Initial Term, this
Agreement shall be renewed for additional one (1) year periods (the "Renewal"),
ad infinitum, unless either party gives notice of non-renewal at least one
hundred and eighty (180) days prior to the expiration of the Initial Term or the
then current Renewal Term.
C. During the Term, the Company or Employee may
terminate this Agreement, subject to the terms, conditions and obligations
hereof, by mutual written agreement expressed in a single document signed by
both the Company and Employee.
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<PAGE> 10
D. This agreement shall terminate upon the
occurrence of any of the following events:
(i) Permanent Disability of Employee;
(ii) Voluntary Termination by Employee;
(iii) Death of Employee;
(iv) Termination Without Cause;
(v) Termination With Cause; or
(vi) Constructive Termination.
E. Upon termination for any of the foregoing
reasons, Employee shall continue to render services and shall be paid his Base
Salary and benefits up to the Termination Date. Any Severance Amount payable to
Employee is in addition to the regular Base Salary and benefits which Employee
shall receive up to the Termination Date and shall be paid by the Company on the
last date that Employee actually reports to the Company's premises for full time
duties. In the event of such termination, this Agreement shall be deemed
terminated for all purposes except to the extent otherwise herein provided. The
obligations of Employee under Section 7 shall survive termination or expiration
of this Agreement. The obligations of the Company under Section 8, and those
obligations under Section 5 that by their terms are to be paid or to continue
after termination of this Agreement, shall also survive such termination.
7. PROPRIETARY INFORMATION.
A. In performance of services under this
Agreement, Employee may have access to:
(i) information which derives economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and is the subject of efforts that are
reasonable under the circumstances to maintain its secrecy (hereinafter "Trade
Secrets" or "Trade Secret"); or
(ii) information which does not rise to
the level of a Trade Secret, but is valuable to the Company and provided in
confidence to Employee (hereinafter "Confidential Information").
B. Employee acknowledges and agrees with
respect to Trade Secrets and Confidential Information provided to or obtained by
Employee (hereinafter collectively the "Proprietary Information"):
(i) that the Proprietary Information is
and shall remain the exclusive property of the Company;
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<PAGE> 11
(ii) to use the Proprietary Information
exclusively for the purpose of fulfilling the obligations under this Agreement;
(iii) to return the Proprietary Information, and
any copies thereof, in his possession or under his control, to the Company upon
request of the Company, or expiration or termination of this Agreement for any
reason; and
(iv) to hold the Proprietary Information in
confidence and not to copy, publish, or disclose to others or allow any other
party to copy, publish, or disclose to others, in any form, any Proprietary
Information without the prior written approval of an authorized representative
of the Company.
C. The obligations and restrictions set forth in this
section 9. shall survive expiration or termination of this Agreement, for any
reason, and shall remain in full force and effect as follows:
(i) as to Trade Secrets, for so long as such
information remains subject to protection under applicable law;
(ii) as to Confidential Information, for a period
of two (2) years after expiration or termination of this Agreement for any
reason.
D. The obligations set forth in this Section 9 shall not
apply or shall terminate with respect to any particular portion of the
Proprietary Information which:
(i) was in Employee's possession, free of any
obligation of confidence, prior to his receipt of the Confidential Information
from the Company;
(ii) is in the public domain at the time the
Company communicates it to Employee, or becomes available to the public through
no breach of this Agreement by Employee; or
(iii) is received by Employee independently and in
good faith from a third party lawfully in possession thereof and having no
obligation to keep such information confidential.
8. INDEMNIFICATION. The Company shall execute an agreement in
which it agrees to indemnify Employee to the fullest extent possible under
Florida law against and from any loss, liability, claim, damage or expense
(including reasonable legal fees and expenses) suffered or incurred by Employee
to the extent arising from or in connection with Employee's performance of his
duties under this Agreement.
9. SEVERABILITY. If any provision of this Agreement is held to be
invalid or unenforceable by any court of competent jurisdiction, such holdings
shall not affect the enforceability of any other provision of this Agreement,
and all other provisions shall continue in full force and effect.
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<PAGE> 12
10. ATTORNEYS' FEES. If a dispute between the parties arises in
connection with this Agreement, the prevailing party as determined through
arbitration or final judgment of a court of competent jurisdiction (which
arbitration or judgment is not subject to further appeal due to the passage of
time or otherwise) shall be entitled to reimbursement from the other party for
reasonable attorneys' fees and expenses incurred by the prevailing party in
connection with the resolution of the dispute.
11. HEADINGS. The headings of the several paragraphs in this
Agreement are inserted for convenience of reference only and are not intended to
affect the meaning or interpretation of this Agreement.
12. NOTICES. All notices, consents, requests, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given or delivered if (i) delivered personally; (ii) mailed by certified
mail, return receipt requested, with proper postage prepaid; or (iii) delivered
by recognized courier contracting for same day or next day delivery with signed
receipt acknowledgment to:
(a) To the Company:
Caribbean Cigar Company
8305 N.W. 27th Street
Miami, Florida 33122
Attention: President
With a copy to:
Morris, Manning & Martin LLP
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attn: Oby T. Brewer, III
(b) To Employee:
Kevin Doyle
221 Upper Matecumber Road
Key Largo, Florida 33138
or at such other address as the parties hereto may
have last designated by notice to the other parties. Any item delivered
personally or by recognized courier contracting for same day or next day
delivery shall be deemed delivered on the date of delivery. Any item mailed
shall be deemed to have been delivered on the date evidenced on the return
receipt.
13. GENERAL PROVISIONS. This Agreement shall be governed by and
construed under the laws of the State of Florida, without giving effect to its
conflict of law principles. The terms of this Agreement shall be binding upon
and inure to the benefit of the Company and its
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<PAGE> 13
successors and assigns. Neither party may assign his or its rights and
obligations under this Agreement to any other party.
14. ENTIRE AGREEMENT. This Agreement contains the entire agreement
between the parties hereto, and except as otherwise provided in this Agreement,
supersedes and cancels all previous and contemporaneous written and oral
agreements, including all prior employment agreements between the Company and
Employee and amendments thereto. No amendment or modification of this Agreement
shall be valid or binding unless in writing and signed by the party to be bound.
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<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have affixed their
seals and executed this Agreement effective as of the date first above written.
By:
-----------------------------------------
Date:
-------------------
EMPLOYEE:
(SEAL)
--------------------------------------
Kevin Doyle, Individually
Date:
--------------------
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<PAGE> 1
================================================================================
EXHIBIT 10.2
EXECUTIVE EMPLOYMENT AGREEMENT
BETWEEN
CARIBBEAN CIGAR COMPANY
AND
EDWARD C. WILLIAMS
DATED
APRIL 1, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
EXECUTIVE EMPLOYMENT AGREEMENT
<TABLE>
<CAPTION>
PARAGRAPH PAGE NO.
- --------- --------
<S> <C> <C>
1. BACKGROUND ...................................................................................... 1
2. DEFINITIONS...................................................................................... 1
3. EMPLOYMENT....................................................................................... 4
4. RESPONSIBILITIES................................................................................. 4
5. NON-STOCK COMPENSATION AND REIMBURSEMENTS........................................................ 4
6. EQUITY-BASED COMPENSATION........................................................................ 6
7. REGISTRATION RIGHTS.............................................................................. 6
8. TERMINATION ..................................................................................... 7
9. PROPRIETARY INFORMATION.......................................................................... 7
10. INDEMNIFICATION ................................................................................. 8
11. SEVERABILITY .................................................................................... 8
12. ATTORNEYS' FEES.................................................................................. 8
13. HEADINGS ........................................................................................ 9
14. NOTICES ......................................................................................... 9
15. GENERAL PROVISIONS .............................................................................. 9
16. ENTIRE AGREEMENT ................................................................................ 9
</TABLE>
<PAGE> 3
EXECUTIVE EMPLOYMENT AGREEMENT
This EXECUTIVE EMPLOYMENT AGREEMENT (the "Agreement") is
entered into this 1st day of April, 1998 by and between Caribbean Cigar Company,
a Florida corporation with its principal offices at 8305 N.W. 27th Street, Suite
111 Miami, Florida 33122 (the "Company") and EDWARD C. WILLIAMS ("Employee"), an
individual, and shall be effective on the Effective Date, as defined below.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants and agreements of the parties hereto, the parties do hereby
covenant and agree as follows:
1. BACKGROUND.
A. The Company is engaged in the business of
manufacturing and distributing premium cigars and cigar-related products.
B. The Company desires to secure and retain the
services of Employee in the office of Chief Financial Officer, and such services
are considered by the Company to be valuable with regard to the business of
manufacturing, distributing and retailing premium cigars and cigar-related
products.
C. Employee desires to be in the full and
active employ of the Company in accordance with the terms and conditions herein
set forth, and the Company desires to retain Employee's valuable skills and
services for the benefit of the Company.
2. DEFINITIONS.
As used in this Agreement and the Exhibits, the following
terms shall have the meaning as set forth below, and the parties hereto agree to
be bound by the provisions hereof:
A. BOARD OF DIRECTORS means the Board of
Directors of the Company.
B. CHANGE OF CONTROL means the occurrence of
any of the following events:
(i) Merger or consolidation where the
Company is not the consolidated or surviving company and the surviving or
resulting company does not expressly agree to be bound by and have the benefits
of the provisions of this Agreement, and through which any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of the Company representing fifty percent (50%) or more of the
combined voting power of Company's then outstanding securities;
(ii) Transfer of all or substantially
all of the assets or stock of the Company and the transferee of the Company's
assets or stock does not expressly agree to be bound by and have the benefits of
the provisions of this Agreement;
<PAGE> 4
(iii) Change in control of Company of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of
1934 as in effect on the date thereof, provided that, without limitation, such a
change in control shall be deemed to have occurred if: (a) any person or persons
acting in concert (as such term is used in Section 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial holder directly or indirectly of
securities of the Company representing fifty percent (50%) or more of the
combined voting power of Company's then outstanding securities; or, (b) during
any period of two (2) consecutive years, individuals who at the beginning of
such period constitute the Board cease for any reasons to constitute a majority
thereof, unless the election or nomination for election by Company's
shareholders of each new director was approved by a vote of at least two-thirds
of the directors who were directors at the beginning of such period; or
(iv) discontinuation of the business by
Company.
C. COMPANY means Caribbean Cigar Company and
its successors.
D. CONSTRUCTIVE TERMINATION means a termination
of this Agreement resulting from any material failure by the Company to fulfill
its obligations under this Agreement which is not cured within twenty (20) days
after receipt of written notice by the Company from Employee specifying the
nature of the failure, which failure shall include, but shall not be limited to,
(a) removal of Employee, other than removal as a result of a Termination With
Cause or a Voluntary Termination, as Chief Financial Officer of the Company or
any material change by the Company in the functions, duties or responsibilities
of Employee from those in which Employee was engaged as Chief Financial Officer
of the Company on the Effective Date, without the consent of Employee, (b) a
material, non voluntary reduction in Employee's Base Salary and eligibility for
bonus amounts, or (c) the occurrence of a Change of Control. Constructive
Termination shall occur only (A) after receipt by the Company of written notice
from Employee specifying Employee's reasonable belief that an event of
Constructive Termination has occurred, as defined herein, and (B) if Employee
provides such notice to the Company and the Board of Directors within sixty (60)
days after the date of such event. The effective date of Employee's termination
of employment shall be the date specified by the Employee which date must be not
later than sixty (60) days after the giving of the notice specified in the
immediately preceding sentence. Notice by Employee of Constructive Termination
shall not constitute a Voluntary Termination for purposes of this Agreement.
E. EFFECTIVE DATE means April 1, 1998.
F. EMPLOYEE'S CURRENT SALARY means, with
respect to any payment obligation pursuant to this Agreement, an amount equal to
the greater of (i) Employee's current base salary as of the date any
determination of Employee's Current Salary hereunder, plus an amount equal to
the bonus compensation paid to the Employee for the most recent fiscal year,
plus an amount equal to the annualized value of any and all benefits currently
paid to or for the benefit of the Employee; or (ii) Employee's gross income as
reported cumulatively on Employee's Form W-2 and any Form 1099 issued for the
previous calendar year.
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<PAGE> 5
G. INITIAL TERM means the basic term of this
Agreement, which shall be thirty-six (36) months, beginning on the Effective
Date and ending on the date which is thirty-six (36) months following the
Effective Date.
H. PERMANENT DISABILITY means a physical or
mental incapacity or disability which renders Employee incapable of performing
his regular duties hereunder for a period of one hundred twenty (120)
consecutive days, as certified by either Employee's attending physician or a
licensed physician retained by the Company for the purposes of making such
determination.
I. REGISTRABLE SECURITIES means the shares of
common stock of the Company ("Common Stock") held by Employee or his
transferees, or shares of Common Stock hereafter acquired by Employee or which
he hereafter obtains the right to acquire. As to any particular Registrable
Securities, such securities shall cease to be Registrable Securities when they
have been distributed to the public pursuant to the an offering registered under
the Securities Act or sold to the public through a broker, dealer or market
maker in compliance with Rule 144 under the Securities Act (or similar rule then
in force) or repurchased by the Company. For purposes of this Agreement,
Employee shall be deemed to be a holder of Registrable Securities, and the
Registrable Securities shall be deemed to be in existence, whenever Employee has
the right to acquire directly or indirectly such Registrable Securities (upon
conversion or exercise in connection with a transfer of securities or otherwise,
but disregarding any restrictions or limitations upon the exercise of such
right), whether or not such acquisition has actually been effected, and Employee
shall be entitled to exercise the rights of a holder of Registrable Securities
hereunder.
J. RENEWAL TERMS means the period, if any,
following the Initial Term during which the Agreement is extended as set forth
in Section 8B.
K. SEVERANCE AMOUNT shall have the meaning as
set forth in Section 5C.
L. TERM means the Initial Term and any
Renewal Term.
M. TERMINATION DATE means the following: (w)
with respect to Termination With Cause, the date the Company notifies Employee
in writing of the actions described in Subsection 2P.(i) and the termination of
this Agreement based thereon, or the date which is twenty (20) days after
written notice of violation to Employee pursuant to Subsection 2P.(ii) not cured
by Employee; (x) with respect to the death of Employee, the date of his death;
(y) with respect to Termination Without Cause, the date on which the Company so
terminates Employee; and (z) with respect to Voluntary Termination, the date on
which Employee terminates his employment relationship with the Company.
N. TERMINATION WITH CAUSE means the termination
of this Agreement and the employment relationship of Employee with the Company,
only for the following:
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<PAGE> 6
(i) Any action by Employee constituting
fraud, theft or embezzlement with regard to material property of the Company; or
(ii) Continued neglect by Employee in
fulfilling his duties as Chief Financial Officer of the Company as a result of
alcoholism, drug addiction, nervous breakdown or excessive unauthorized
absenteeism, after written notification from the Board of Directors of such
neglect, setting forth in detail the matters involved and Employee's failure to
cure the problem resulting in such neglect within a reasonable time.
(iii) Continued gross failure by Employee
to fulfill his duties as Chief Financial Officer of the Company after written
notice from the Board of Directors of such failure, setting forth in detail the
matters involved and specifying a reasonable time for cure, which time shall not
be less than sixty (60) days, and a reasonable method, set forth with
specificity, by which Employee may cure such failure.
O. TERMINATION WITHOUT CAUSE means any of the
following:
(i) A termination by the Company of
this Agreement and the employment relationship of Employee with the Company
which is not a Termination With Cause, a Voluntary Termination or a Constructive
Termination, including the expiration of the Term as a result of either party at
the end of the Renewal Term electing to terminate this Agreement;
(ii) After a Change of Control or within
the one hundred and twenty (120) day period immediately prior to the occurrence
of a Change of Control, any termination of this Agreement by the Company because
Employee is determined to have incurred a Permanent Disability or to have died;
(iii) Any alteration or revision in the
corporate position of Employee such that Employee's responsibilities or
compensation are materially reduced or decreased for any reason; or
(iv) Any relocation of Employee by the
Company, not agreed to in a writing by the Employee (which writing must
reference this Agreement), to a location other than metropolitan Miami.
P. TRIGGERING EVENT means a termination of
Employee's employment (i) by the Company during the Term due to a Termination
Without Cause or (ii) a Constructive Termination of Employee's employment with
the Company.
Q. VOLUNTARY TERMINATION means termination by
Employee of his employment with the Company prior to the end of the Term and in
the absence of a Triggering Event. Notice by Employee to the Company of a
failure by the Company to fulfill its obligations under the Agreement pursuant
to Section 2E. shall not constitute a Voluntary Termination for purposes of this
Agreement.
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<PAGE> 7
3. EMPLOYMENT. The Company, through its Board of
Directors, agrees to employ Employee in the office of Chief Financial Officer of
the Company for the Term, and Employee agrees to accept such employment and
office upon the terms and conditions set forth herein.
4. RESPONSIBILITIES. Pursuant to this Agreement, Employee
shall assume the responsibilities, perform the duties, and exercise the powers
as Chief Financial Officer of the Company, as set forth in the Bylaws of the
Company and consistent with the responsibilities, duties and powers exercised by
Employee as Chief Financial Officer of the Company as of the Effective Date and
such other duties as may be assigned from time to time by the Board of
Directors.
5. NON-STOCK COMPENSATION AND REIMBURSEMENTS. The Company
shall pay, and Employee agrees to accept, as partial compensation for services
to be rendered hereunder during the Term, the remuneration described below:
A. ANNUAL SALARY. The Company shall pay
Employee a base annual salary as of the Effective Date of one hundred thousand
dollars ($100,000.00) per year ("Base Salary"), subject to annual increases
which, if granted, shall be effective on the first day of the Company's fiscal
year, as the Board of Directors in its sole discretion deems appropriate in
accordance with the Company's customary procedures regarding the salaries of its
executive officers. Base Salary shall be payable according to the customary
payroll practices of the Company, but in no event less frequently than monthly.
B. BONUSES. In the event the Company adopts an
incentive compensation plan (as determined by its Board of Directors), the
Employee shall be eligible for bonuses subject to the satisfaction of such
performance criteria as may be established pursuant to such plan. During the
Term, Employee shall be entitled to participate in other incentive and/or bonus
cash and equity compensation plans of the Company which provide benefits to
senior officers, as determined by the Board of Directors of the Company.
C. SEVERANCE PAYMENTS AND AGREEMENTS.
(i) Upon the occurrence of a Triggering
Event, Employee shall be deemed to have earned the Severance Amount, as defined
below, on the effective date of the Triggering Event. The obligation of the
Company under this Subsection 5.C. shall take the place of any other obligations
of the Company under this Section 5 to pay to Employee for the balance of the
Term Employee's then Base Salary pursuant to Subsection 5.A.
(ii) If a Triggering Event occurs as a
result of a Constructive Termination in connection with a Change of Control, the
Severance Amount shall be an amount equal to one and one-half (1 1/2) multiplied
times Employee's Current Salary.
(iii) If the Triggering Event occurs as a
result of a Termination Without Cause, other than the expiration of the Term as
a result of either party at the end of the
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<PAGE> 8
Renewal Term electing to terminate this Agreement, the Severance Amount shall be
an amount equal to the greater of (i) Base Salary over the remaining term or
(ii) Employee's Current Salary.
(iv) If the Triggering Event occurs as a
result of the expiration of the Term of this Agreement because of the election
of either or both of the parties not to renew the Term, the Severance Amount
shall be an amount equal to Employee's Current Salary.
(v) Any Severance Amount payable
pursuant to this Section shall be paid as follows: (a) fifty percent (50%) of
such amount shall be payable immediately as of the date of the Triggering Event,
and (b) the remaining fifty percent (50%) of such amount shall be paid over the
twelve (12) month period thereafter according to the Company's payroll practices
and procedures in effect at the time of the Triggering Event.
(vi) In addition to receiving payment of
the Severance Amount, upon the occurrence of a Triggering Event, any and all
stock options to purchase shares of the Company which are held by Employee shall
become one hundred percent (100%) vested and immediately exercisable as of the
date of such Triggering Event, and shall be exercisable by the Employee over the
balance of the remaining stated term of any such stock options (which term shall
be the term applicable to the Employee in the absence of termination of
employment), notwithstanding any provision contained in the stock option
agreement to the contrary.
(vii) In the event of termination of
employment hereunder for any reason, the Company shall cause to be immediately
terminated any agreement to which the Employee is a party which shall prohibit
the Employee in any way from selling any of Employee's Common Stock in the
public markets (provided, however, this paragraph shall not obligate the Company
to terminate any restriction applicable to the Employee because the Employee
shall hold "restricted securities" as defined under applicable federal or state
securities laws).
(viii) Any controversy or claim arising
out of or relating to whether termination of Employee's employment is due to a
Triggering Event, or is a Termination With Cause, a Termination Without Cause, a
Constructive Termination or a Voluntary Termination as provided herein, shall be
settled by arbitration in accordance with the Commercial Arbitration Rules
("Rules") of the American Arbitration Association ("AAA"). Arbitration shall be
initiated by a party by giving notice in the manner set forth herein to the
other party of its intention to arbitrate, which notice shall contain a
statement setting forth the nature of the dispute, the amount claimed, if any,
and the remedy sought. The initiating party shall then file a copy or copies of
the notice as set forth under the Rules. Atlanta, Georgia shall be the location
where the arbitration is held. The parties shall agree upon and appoint three
(3) arbitrators in accordance with the Rules within twenty (20) days of the
effective date of notice of arbitration; however, if the parties fail to make
such designation within twenty (20) days, the AAA shall make the appointment.
The determinations of such arbitrators will be final and binding upon the
parties to the arbitration, and judgment upon the award rendered by the
arbitrators may be entered in any such court having jurisdiction, or application
may be made to such court for a judicial acceptance of the award and an order of
enforcement, as the case may
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<PAGE> 9
be. The arbitrators shall apply the laws of the State of Georgia as to both
substantive and procedural questions.
D. INSURANCE AND BENEFITS.
(i) The Company shall allow Employee to
participate in or receive benefits under all employee and executive benefit
plans or arrangements and perquisites of employment, including, without
limitation, plans or arrangements providing for health and disability insurance
coverage, life insurance for the benefit of Employee's beneficiaries, deferred
compensation and pension benefits, and personal financial, investment, legal or
tax advice, all at the highest level that is available through the Company to
other senior officers of the Company subject to the same terms and conditions as
apply to such other senior officers. The Company will bear all costs for the
employee's and employee's family's health care coverage.
(ii) Employee shall be entitled to all holidays
recognized by the Company and vacation time for not less than four (4) weeks per
year (plus such additional time as is available under the vacation policy of the
Company in effect for senior officers) with continuing payment of all
compensation as set forth herein. Employee shall be reimbursed by the Company
for all expenses incurred on behalf of the Company in accordance with the then
current reimbursement policies of the Company. Nothing paid to Employee under
any plan, arrangement or perquisite presently in effect or made available in the
future shall be deemed to be in lieu of the salary and other compensation or
payments paid or payable to Employee under this Agreement.
(iii) In the event of a termination of Employee's
employment with the Company as a result of or in connection with a Triggering
Event, Employee shall be entitled to continue to receive the insurance benefits
set forth above (at the highest level of insurance benefits within the twelve
(12) month period prior to such event) for a twenty-four (24) month period
following the Triggering Event; provided, however, that in the event the Company
is legally prohibited from providing a specified insurance benefit after
termination of employment, it shall provide Employee the economic equivalent
thereof.
6. EQUITY-BASED COMPENSATION. Effective on the date
hereof (the "Date of Grant"), Company shall grant to Employee the right and
option to acquire, for a period of ten years, one hundred eighty seven thousand
five hundred (187,500) shares of the Company's common stock at an exercise price
of one cent (.01) (the "Option"). The Option shall be a non-qualified stock
option issued pursuant to the Company's 1996 Long Term Incentive Plan (the
"Plan"). The Option shall be immediately exercisable and notwithstanding
anything to the contrary in the Plan, shall not terminate after termination of
employment.
7. REGISTRATION RIGHTS.
A. S-8 REGISTRATION. Not later than one hundred
eighty (180) days following the effective date hereof, the Company shall file
with the Securities and Exchange Commission a registration statement on Form S-8
which shall register the shares reserved under the
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<PAGE> 10
Plan, including the Option Shares, and the Company shall take all necessary
action to maintain and keep such registration statement effective at all times
during the term of the Option.
B. PIGGYBACK REGISTRATION. If at any time or
from time to time, the Company shall determine to register any of its securities
for its own account in an underwritten public offering, the Company will:
(i) promptly give to Employee written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and underwriting, all
the Option Shares (subject to cutback as set forth in this Section 7.B)
specified in a written request made within thirty (30) days after receipt of
such written notice from the Company by Employee.
The right of Employee to registration pursuant to this Section 7. shall
be conditioned upon Employee's participation in such underwriting and the
inclusion of Registrable Securities in the underwriting to the extent provided
herein. If Employee proposes to distribute its securities through such
underwriting, Employee shall (together with the Company and any other
shareholders distributing their securities through such underwriting) enter into
an underwriting agreement in customary form with the managing underwriter
selected for such underwriting by the Company. Notwithstanding any other
provision of this Section 7.B, if the managing underwriter determines that
marketing factors require a limitation of the number of shares to be
underwritten, the managing underwriter, in its sole discretion, may limit or
exclude the Registrable Securities to be included in such registration. The
Company shall so advise Employee and any other holders distributing their
securities through such underwriting pursuant to piggyback registration rights
similar to this Section 7.B, and the number of shares of Registrable Securities
and other securities that may be included in the registration and underwriting
shall be allocated among Employee and the other shareholders requesting
registration (the "Requesting Shareholders") in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by the
Requesting Shareholders at the time of filing the registration statement.
The Company shall have the right to terminate or withdraw any
registration initiated by it under this Section 7.B prior to the effectiveness
of such registration, whether or not Employee has elected to include securities
in such registration.
C. TERMINATION OF REGISTRATION RIGHTS. The
rights of Employee to receive notice and to participate in a registration
pursuant to the terms of Sections 7.A and 7.B shall terminate at the earliest to
occur of (i) the sale by Employee of all Registrable Securities held by
Employee; or (ii) the date on which Employee could sell all remaining
Registrable Securities then held by Employee in any one three-month period under
the terms of Rule 144 or Rule 144(k) under the Securities Act.
8. TERMINATION.
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<PAGE> 11
A. This Agreement will commence on the
Effective Date and shall continue during the Initial Term.
B. In addition to the Initial Term, this
Agreement shall be renewed for additional one (1) year periods (the "Renewal"),
ad infinitum, unless either party gives notice of non-renewal at least one
hundred and eighty (180) days prior to the expiration of the Initial Term or the
then current Renewal Term.
C. During the Term, the Company or Employee may
terminate this Agreement, subject to the terms, conditions and obligations
hereof, by mutual written agreement expressed in a single document signed by
both the Company and Employee.
D. This agreement shall terminate upon the
occurrence of any of the following events:
(i) Permanent Disability of Employee;
(ii) Voluntary Termination by Employee;
(iii) Death of Employee;
(iv) Termination Without Cause;
(v) Termination With Cause; or
(vi) Constructive Termination.
E. Upon termination for any of the foregoing
reasons, Employee shall continue to render services and shall be paid his Base
Salary and benefits up to the Termination Date. Any Severance Amount payable to
Employee is in addition to the regular Base Salary and benefits which Employee
shall receive up to the Termination Date and shall be paid by the Company on the
last date that Employee actually reports to the Company's premises for full time
duties. In the event of such termination, this Agreement shall be deemed
terminated for all purposes except to the extent otherwise herein provided. The
obligations of Employee under Section 9 shall survive termination or expiration
of this Agreement. The obligations of the Company under Section 10, and those
obligations under Sections 5, 6 and 7 that by their terms are to be paid or to
continue after termination of this Agreement, shall also survive such
termination.
9. PROPRIETARY INFORMATION.
A. In performance of services under this
Agreement, Employee may have access to:
(i) information which derives economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use, and is the
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<PAGE> 12
subject of efforts that are reasonable under the circumstances to maintain its
secrecy (hereinafter "Trade Secrets" or "Trade Secret"); or
(ii) information which does not rise to
the level of a Trade Secret, but is valuable to the Company and provided in
confidence to Employee (hereinafter "Confidential Information").
B. Employee acknowledges and agrees with
respect to Trade Secrets and Confidential Information provided to or obtained by
Employee (hereinafter collectively the "Proprietary Information"):
(i) that the Proprietary Information is
and shall remain the exclusive property of the Company;
(ii) to use the Proprietary Information
exclusively for the purpose of fulfilling the obligations under this Agreement;
(iii) to return the Proprietary
Information, and any copies thereof, in his possession or under his control, to
the Company upon request of the Company, or expiration or termination of this
Agreement for any reason; and
(iv) to hold the Proprietary Information
in confidence and not to copy, publish, or disclose to others or allow any other
party to copy, publish, or disclose to others, in any form, any Proprietary
Information without the prior written approval of an authorized representative
of the Company.
C. The obligations and restrictions set forth
in this section 9. shall survive expiration or termination of this Agreement,
for any reason, and shall remain in full force and effect as follows:
(i) as to Trade Secrets, for so long as
such information remains subject to protection under applicable law;
(ii) as to Confidential Information, for
a period of two (2) years after expiration or termination of this Agreement for
any reason.
D. The obligations set forth in this Section 9
shall not apply or shall terminate with respect to any particular portion of the
Proprietary Information which:
(i) was in Employee's possession, free
of any obligation of confidence, prior to his receipt of the Confidential
Information from the Company;
(ii) is in the public domain at the time
the Company communicates it to Employee, or becomes available to the public
through no breach of this Agreement by Employee; or
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<PAGE> 13
(iii) is received by Employee independently
and in good faith from a third party lawfully in possession thereof and having
no obligation to keep such information confidential.
10. INDEMNIFICATION. The Company shall execute an
agreement in which it agrees to indemnify Employee to the fullest extent
possible under Florida law against and from any loss, liability, claim, damage
or expense (including reasonable legal fees and expenses) suffered or incurred
by Employee to the extent arising from or in connection with Employee's
performance of his duties under this Agreement.
11. SEVERABILITY. If any provision of this Agreement is
held to be invalid or unenforceable by any court of competent jurisdiction, such
holdings shall not affect the enforceability of any other provision of this
Agreement, and all other provisions shall continue in full force and effect.
12. ATTORNEYS' FEES. If a dispute between the parties
arises in connection with this Agreement, the prevailing party as determined
through arbitration or final judgment of a court of competent jurisdiction
(which arbitration or judgment is not subject to further appeal due to the
passage of time or otherwise) shall be entitled to reimbursement from the other
party for reasonable attorneys' fees and expenses incurred by the prevailing
party in connection with the resolution of the dispute.
13. HEADINGS. The headings of the several paragraphs in
this Agreement are inserted for convenience of reference only and are not
intended to affect the meaning or interpretation of this Agreement.
14. NOTICES. All notices, consents, requests, demands
and other communications hereunder shall be in writing and shall be deemed to
have been duly given or delivered if (i) delivered personally; (ii) mailed by
certified mail, return receipt requested, with proper postage prepaid; or (iii)
delivered by recognized courier contracting for same day or next day delivery
with signed receipt acknowledgment to:
(a) To the Company:
Caribbean Cigar Company
8305 N.W. 27th Street
Miami, Florida 33122
Attention: President
With a copy to:
Morris, Manning & Martin LLP
1600 Atlanta Financial Center
3343 Peachtree Road, N.E.
Atlanta, Georgia 30326
Attn: Oby T. Brewer, III
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<PAGE> 14
(b) To Employee:
Edward C. Williams
2239 Goode Road
Conyers, Georgia 30094
or at such other address as the parties hereto may
have last designated by notice to the other parties. Any item delivered
personally or by recognized courier contracting for same day or next day
delivery shall be deemed delivered on the date of delivery. Any item mailed
shall be deemed to have been delivered on the date evidenced on the return
receipt.
15. GENERAL PROVISIONS. This Agreement shall be governed
by and construed under the laws of the State of Florida, without giving effect
to its conflict of law principles. The terms of this Agreement shall be binding
upon and inure to the benefit of the Company and its successors and assigns.
Neither party may assign his or its rights and obligations under this Agreement
to any other party.
16. ENTIRE AGREEMENT. This Agreement contains the entire
agreement between the parties hereto, and except as otherwise provided in this
Agreement, supersedes and cancels all previous and contemporaneous written and
oral agreements, including all prior employment agreements between the Company
and Employee and amendments thereto. No amendment or modification of this
Agreement shall be valid or binding unless in writing and signed by the party to
be bound.
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<PAGE> 15
IN WITNESS WHEREOF, the parties hereto have affixed their
seals and executed this Agreement effective as of the date first above written.
By:
----------------------------------------
Date:
----------------------
EMPLOYEE:
--------------------------------------(SEAL)
Edward C. Williams, Individually
Date:
-----------------------
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<PAGE> 1
EXHIBIT 10.4
CARIBBEAN CIGAR COMPANY
CARIBBEAN CIGAR COMPANY (CAYMAN) LIMITED
CARIBBEAN AWC CORPORATION
PRECISION MOLD, INC.
9 % Series A Subordinated Note
N-1 Miami, Florida
$____________ December 12, 1997
FOR VALUE RECEIVED, Caribbean Cigar Company, a Florida corporation
("Caribbean"), Caribbean Cigar Company (Cayman) Limited, a Cayman Islands
corporation, Caribbean AWC Corporation, a Delaware corporation and Precision
Mold, Inc., a Delaware corporation (collectively, the "Company"), hereby
promises to pay to the order of _________________, (the "Registered Holder") the
principal amount of __________________ ($_______), within sixty (60) days from
the date hereof, subject to earlier prepayment as hereinafter provided. Interest
on such principal amount shall be payable at the rate of nine percent (9%) per
annum at the time the full principal amount of this Note shall become due and
payable. Payments of principal and interest shall be made in lawful money of the
United States of America (by cashiers check or Federal reserve wire transfer)
against presentment of this Note. This Note is one of a series of the Company's
9% Series A Subordinated Notes (collectively, the "Notes"), in the aggregate
principal amount of not less than four hundred fifty thousand dollars ($450,000)
which were issued as part of a private placement of units.
In addition, Caribbean agrees to issue, subject to adjustment, shares
of Caribbean's common stock equal to the number of shares computed based upon
the face amount of this Note divided by the lesser of: (i) $.8125; or (ii) the
closing price on the day prior to the repayment of this Note.
In the event this Note is not paid when due, then the interest rate
shall be increased to the rate of eighteen percent (18%) per annum from and
after the due date of this Note. In addition, Caribbean shall issue additional
shares equal to fifteen percent (25%) of the unpaid balance of this Note for
every thirty (30) days this Note remains unpaid, such shares shall be computed
as above. The Company also agrees to pay reasonable attorney fees for the
collection of this Note upon the occurrence of an Event of Default (as
hereinafter defined).
ARTICLE 1.
PARTICULAR COVENANTS OF THE COMPANY
(a) Payment of Principal and Interest. The Company will
duly and punctually pay or cause to be paid the principal amount of this Note
and the interest thereon at the time and in the manner specified in this Note.
<PAGE> 2
(b) Prepayment Under Certain Conditions. The Company may
prepay this Note in whole prior to the stated maturity date of this Note. In the
event this Note is prepaid within thirty (30) days from the date hereof, then
the shares of Caribbean's common stock to be issued in connection with this Note
shall be reduced by one-half (1/2).
ARTICLE 2.
EVENTS OF DEFAULT AND ACCELERATION
(a) Events of Default Defined. The entire unpaid
principal amount of this Note, together with interest thereon shall, at the
option of the Registered Holder, exercised by written notice to the Company,
forthwith become and be due and payable if any one or more Events of Default
shall have occurred (for any reason whatsoever and whether such happening shall
be voluntary or involuntary or be affected or come about by operation of law
pursuant to or in compliance with any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body) and be
continuing. An Event of Default shall occur:
(i) if failure shall be made in the due and
punctual payment of the principal of or interest on this Note when and as the
same shall become due and payable whether at maturity or otherwise, and such
failure shall have continued for five (5) business days after receipt of notice;
(ii) if the Company shall consent to the
appointment of a receiver, trustee or liquidator of itself or of a substantial
part of its property, or shall admit in writing its inability to pay its debts
generally as they become due, or shall make a general assignment for the benefit
of creditors, or shall file a voluntary petition in bankruptcy, or an answer
seeking reorganization in a proceeding under any bankruptcy law (as now or
hereafter in effect) or an answer admitting the material allegations of a
petition filed against the Company, in any such proceeding, or shall by
voluntary petition, answer or consent, seek relief under the provisions of any
other now existing or future bankruptcy or other similar law providing for the
reorganization or winding up of corporations, or an arrangement, composition,
extension or adjustment with its creditors, or shall, in a petition in
bankruptcy filed against it be adjudicated a bankrupt, or the Company or its
directors or the holders of a majority of its equity interest shall vote to
dissolve or liquidate the Company;
(iii) if a court of competent jurisdiction shall
enter an order, judgment or decree appointing, without consent of the Company, a
receiver, trustee or liquidator of the Company or of all or any substantial part
of the property of the Company, or approving a petition filed against the
Company seeking a reorganization or arrangement of the Company under the Federal
bankruptcy laws or any other applicable law or statute of the United States of
America or any State thereof, or any substantial part of the property of the
Company shall be sequestered; and such order, judgment or decree shall not be
vacated or set aside or stayed within ninety (90) days from the date of the
entry thereof; or
(iv) if, under the provisions of any law for the
relief or aid of debtors, any court of competent jurisdiction shall assume
custody or control of the Company or of all or
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<PAGE> 3
any substantial part of the property of the Company and such custody or control
shall not be terminated or stayed within sixty (60) days from the date of
assumption of such custody or control.
(b) Rights of Note Holder. Nothing in this Note shall be
construed to modify, amend or limit in any way the rights of the holder of this
Note to bring an action against the Company in the event the Company fails to
pay the principal of or interest on this Note when due.
ARTICLE 3.
SUBORDINATION
(a) Agreement of Subordination. The Company, for itself,
its successors and assigns, covenants and agrees, and the Registered Holder by
his or her acceptance of this Note likewise covenants and agrees, that the
payment of the principal of and interest on this Note is hereby expressly
subordinated, to the extent and in the manner hereinafter set forth, to the
prior payment in full of all Senior Indebtedness, as hereinafter defined. The
provisions of this Article 3 shall constitute a continuing offer to all persons
who, in reliance upon such provision, become holders of, or continue to hold,
Senior Indebtedness, and such provisions are made for the benefit of the holders
of Senior Indebtedness, and such holders are hereby made obligees hereunder the
same as if their names were written herein as such, and they and/or each of them
may proceed to enforce such provisions.
(b) Company Not to Make Payments with Respect to Note in
Certain Circumstances.
(i) Upon the maturity of any Senior Indebtedness
by lapse of time, acceleration or otherwise, all principal thereof and premium,
if any, and interest thereon shall first be paid in full, or such payment duly
provided for in cash or in a manner satisfactory to the holder or holders of
such Senior Indebtedness, before any payment is made by the Company (A) on
account of the principal of or interest on this Note or (B) to acquire this
Note.
(ii) Upon the happening of an event of default
with respect to any Senior Indebtedness, as such event of default is defined
therein or in the instrument under which it is outstanding, permitting the
holders to accelerate the maturity thereof, and, if the default is other than
default in payment of principal of or premium, if any, or interest on such
Senior Indebtedness, upon written notice thereof given to the Company by the
holder or holders of such Senior Indebtedness or their representative or
representatives, then, unless and until such event of default shall have been
cured or waived or shall have ceased to exist, no payment shall be made by the
Company (A) on account of the principal of or interest on this Note or (B) to
acquire this Note.
(c) Note Subordinated to Prior Payment of all Senior
Indebtedness on Dissolution, Liquidation or Reorganization of Company. Upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization of the Company
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<PAGE> 4
(whether in bankruptcy, insolvency or receivership proceedings or upon an
assignment for the benefit of creditors or otherwise):
(i) The holders of all Senior Indebtedness shall
first be entitled to receive payment in full of the principal thereof, premium,
if any, and interest due thereon before the Registered Holder is entitled to
receive any payment on account of the principal of or interest on this Note
(other than payment of shares of stock of the Company as reorganized or
readjusted, or securities of the Company or any other corporation provided for
by a plan of reorganization or readjustment which stock and securities are
subordinated to the payment of all Senior Indebtedness and securities received
in lieu thereof which may at the time be outstanding); and
(ii) Any payment or distribution of assets of the
Company of any kind or character whether in cash, property or securities (other
than shares of stock of the Company as reorganized or readjusted, or securities
of the Company or any other corporation provided for by a plan of reorganization
or readjustment which stock and securities are subordinated to the payment of
all Senior Indebtedness and securities received in lieu thereof which may at the
time be outstanding), to which the Registered Holder would be entitled except
for the provisions of this Article 3, shall be paid by the liquidating trustee
or agent or other person making such payment of distribution, whether a trustee
in bankruptcy, a receiver or liquidating trustee or other trustee or agent,
directly to the holders of Senior Indebtedness or their representative or
representatives, or to the trustee or trustees under any indenture under which
any instruments evidencing any of such Senior Indebtedness may have been issued,
to the extent necessary to make payment in full of all Senior Indebtedness
remaining unpaid, after giving effect to any concurrent payment or distribution
or provision therefor to the holders of such Senior Indebtedness.
(d) Noteholder to be Subrogated to Right of Holders of
Senior Indebtedness. Subject to the payment in full of all Senior Indebtedness,
the Registered Holder shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of assets of the Company
applicable to the Senior Indebtedness until all amounts owing on this Note shall
be paid in full, and, for the purpose of such subrogation, no payments or
distributions to the holders of the Senior Indebtedness by or on behalf of the
Company or by or on behalf of the Registered Holder by virtue of this Article 3
which otherwise would have been made to the holders of this Note shall, as
between the Company and the Registered Holder, be deemed to be payment by the
Company to or on account of the Senior Indebtedness, it being understood that
the provisions of this Article 3 are, and are intended solely, for the purpose
of defining the relative rights of the holders of this Note, on the one hand,
and the holders of the Senior Indebtedness, on the other hand.
(e) Obligation of the Company Unconditional. Nothing
contained in this Article 3 or elsewhere in this Note is intended to or shall
impair as between the Company and the Registered Holder, the obligation of the
Company, which is absolute and unconditional, to pay to the Registered Holder
the principal of and the interest on this Note as and when the same shall become
due and payable in accordance with its terms, or is intended to or shall affect
the relative rights of the Registered Holder and creditors of the Company other
than the holders of the Senior
-4-
<PAGE> 5
Indebtedness, nor shall anything herein or therein prevent the Registered Holder
of this Note from exercising all remedies otherwise permitted by applicable law
upon default under this Note, subject to the rights, if any, under this Article
3 of the holders of Senior Indebtedness in respect of cash, property or
securities of the Company received upon the exercise of any such remedy. Upon
any distribution of assets of the Company referred to in this Article 3, the
holders of this Note shall be entitled to rely upon any order or decree made by
any court of competent jurisdiction in which any dissolution, winding up,
liquidation or reorganization proceedings are pending, or a certificate of the
liquidating trustee or agent or other person making any distribution to the
Registered Holder for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of the Senior Indebtedness and
other indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 3.
(f) Subordination Rights Not Impaired by Acts or
Omissions of the Company or Holders of Senior Indebtedness. No right of any
present or future holders of any Senior Indebtedness to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act on the part of the Company or by any act or failure to
act, in good faith, by any such holder, or by any noncompliance by Company with
the terms; provisions and covenants of this Note, regardless of any knowledge
thereof which any such holder may have or be otherwise charged with.
(g) Definition of Senior Indebtedness. The term "Senior
Indebtedness" is defined to mean the principal of and premium, if any, and
interest on the following: (i) all indebtedness and obligations (other than the
Notes) that are created, assumed or guaranteed by the Company, whether before or
after the issuance of the Notes, that are (A) for money borrowed under the
Security Agreement between Finova Capital Corporation and Caribbean Cigar
Company, Caribbean AWC Corporation, Precision Mold, Inc. and Caribbean Cigar
Company (Cayman) Limited or (B) secured by purchase money mortgages or other
similar security interests given by the Company or any subsidiary on real or
personal property, (ii) all obligations of the Company or of others which are
guaranteed by the Company, whether existing on or after the issuance of the
Notes, as lessee under a lease of real or personal property, which in accordance
with generally accepted accounting principles have been capitalized, unless,
with respect to any indebtedness or obligations described in clause (i) or (ii)
of this Paragraph 3(g), the instrument creating or evidencing such indebtedness
expressly provides that such indebtedness is not superior in right of payment of
the Notes, (iii) guaranteed by the Company in connection with the acquisition of
an existing business or assets, whether by means of a merger, consolidation,
stock acquisition or acquisition of all or part of the assets of a corporation,
partnership, limited liability company, business trust, sole proprietorship or
other entity, or otherwise, and (iv) any deferrals, renewals, extensions or
refundings of any of the foregoing, unless, in the case of any particular
indebtedness or obligation or renewal, extension or refunding thereof, under the
express provisions of the instrument creating or evidencing the same, or
pursuant to which the same is outstanding, such indebtedness or other obligation
or such renewal, extension or refunding thereof is not superior in right of
payment to this Note. Senior Indebtedness shall not include indebtedness
incurred for compensation to employees, other indebtedness incurred in the
ordinary course of business for goods, materials, or services or any
-5-
<PAGE> 6
obligations of the Company under, or in respect of, leases other than as
described in this Paragraph 3(g).
(h) Right of Registered Holder to Hold Senior
Indebtedness. The Registered Holder shall be entitled to all of the rights set
forth in this Article 3 in respect of any Senior Indebtedness at any time held
by the Registered Holder to the same extent as any other holder of Senior
Indebtedness, and nothing in this Article 3 or elsewhere in this Note shall be
construed to deprive the Registered Holder of any of its rights as such holder.
ARTICLE 4.
MISCELLANEOUS
(a) Transferability. No transfer shall be effective
unless such transfer is made in compliance with all applicable federal and state
securities laws and the Holder shall provide to the Company an opinion of
counsel, which counsel and opinion shall be acceptable to the Company, as to the
exemption from the registration requirements of the Securities Act of 1933, as
amended, and applicable state securities laws. The Company shall be entitled to
treat as the owner of this Note only the person shown as the Registered Holder
on its books and records, regardless of whether the Company has any contrary
knowledge.
(b) Waiver of Trial by Jury. In any legal proceeding to
enforce payment of this Note, the Company waives trial by jury.
(c) Notices. All notices and other communications
provided for or permitted hereunder shall be delivered (a) in person with
receipt acknowledged, (b) by a nationally registered overnight delivery service,
(c) by registered or certified mail, return receipt requested, postage prepaid,
or (d) by telecopy and confirmed by telecopy answerback addressed as follows:
If to the Company, at:
Caribbean Cigar Company
8305 N.W. 27th Street
Suite 111, Miami, Florida 33122
Attention: Edward C. Williams
Chief Financial Officer
Facsimile: (305) 267-6026
If to the Registered Holder, at:
_______________________
_______________________
_______________________
_______________________
_______________________
-6-
<PAGE> 7
(d) Governing Law. This Note shall be governed by the
laws of the State of ____________ applicable to agreements executed and to be
performed wholly within such State.
IN WITNESS WHEREOF, the Company has executed this Note on the date and
year first aforesaid.
CARIBBEAN CIGAR COMPANY
By:
----------------------------------------
CARIBBEAN CIGAR COMPANY (CAYMAN) LIMITED
By:
----------------------------------------
CARIBBEAN AWC CORPORATION
By:
----------------------------------------
PRECISION MOLD, INC.
By:
----------------------------------------
Witness:
------------------------------------
-7-
<PAGE> 1
EXHIBIT 10.5
FORBEARANCE AGREEMENT
THIS AGREEMENT, dated as of the 10th day of July 1998, by and between
FINOVA 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.
<PAGE> 2
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 Equiry
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 that $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.
<PAGE> 3
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 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, Acting President
<PAGE> 4
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 ____________________________________, 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.
--------------------------------------------
Notary Public
<PAGE> 5
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, chooses 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 with 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) 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
<PAGE> 6
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> 7
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 counterclaims, 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
<PAGE> 8
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.
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 serve 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.
<PAGE> 9
Very truly yours,
-----------------------------------
Edward C. Williams
Address:
SS No:
STATE OF FLORIDA )
ss:
COUNTY OF DADE )
On this _____ 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 21.1
List of Subsidiaries
--------------------
The subsidiaries of the Registrant are as follows:
<TABLE>
<S> <C>
Caribbean Cigar Company (Cayman) Limited Organized in the Cayman Islands
Precision Mold, Inc. Organized in the United States
Caribbean AWC Corporation Organized in the United States
</TABLE>
Each company does business in the name listed above.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 72,986
<SECURITIES> 0
<RECEIVABLES> 217,536
<ALLOWANCES> 0
<INVENTORY> 2,938,963
<CURRENT-ASSETS> 6,966,894
<PP&E> 1,593,095
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,667,411
<CURRENT-LIABILITIES> 5,254,034
<BONDS> 0
0
0
<COMMON> 6,177
<OTHER-SE> 3,407,200
<TOTAL-LIABILITY-AND-EQUITY> 8,667,411
<SALES> 5,786,029
<TOTAL-REVENUES> 5,786,029
<CGS> 5,706,011
<TOTAL-COSTS> 6,264,633
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612,089
<INCOME-PRETAX> (6,796,704)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,796,704)
<DISCONTINUED> (910,162)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,706,866)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
