U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21081
CARIBBEAN CIGAR COMPANY
(Exact name of registrant as specified in its charter)
FLORIDA 65-0613303
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
321 TROY CIRCLE
KNOXVILLE, TENNESSEE
(Address of principal executive offices)
37919
(Zip Code)
(423) 292-0006
(Issuer's telephone number)
8305 NW 27th STREET
SUITE 111
MIAMI, FLORIDA 33122
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 842,992 shares as of November 12,
1998
Page 1 of 14
<PAGE>
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, March 31,
1998 1998
--------------- ----------------
(Unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 381 $ 72,986
Accounts receivable, net of allowance for doubtful
accounts of $58,000 at Sept. 30, 1998 and March 31, 1998 877,771 217,536
Insurance proceeds receivable - 1,333,418
Inventories 2,165,767 2,938,963
Prepaid expenses and other current assets 213,005 318,000
Net assets held for sale 765,826 2,085,991
--------------- ----------------
Total current assets 4,022,750 6,966,894
Property and equipment, net 1,448,115 1,593,095
Other assets 59,820 107,422
--------------- ----------------
$ 5,530,685 $ 8,667,411
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,226,272 $ 2,078,114
Short-term borrowings 1,081,088 2,257,714
Accrued litigation and professional fees 38,000 307,500
Other accrued expenses and taxes payable 251,357 610,706
--------------- ----------------
Total current liabilities 2,596,717 5,254,034
--------------- ----------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized; Sept. 30, 1998 -
issued and outstanding - 42,128; March 31, 1998 -
none issued and outstanding 42 -
Common stock, $.001 value; 25,000,000
shares authorized; Sept. 30, 1998 -
issued and outstanding - 842,994;
March 31, 1998 - issued and
outstanding - 772,075 843 772
Additional paid-in capital 11,975,745 11,785,720
Accumulated deficit (9,042,662) (8,373,115)
---------------- ----------------
Stockholders' equity 2,933,968 3,413,377
--------------- ----------------
$ 5,530,685 $ 8,667,411
=============== ================
</TABLE>
The accompanying notes are an integral part hereof.
Page 2 of 14
<PAGE>
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1998 1997 1998 1997
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Sales $ 765,617 $ 1,498,802 $ 1,414,707 $ 3,786,371
Cost of sales 821,207 2,167,469 1,259,862 3,354,378
--------------- ---------------- --------------- ----------------
Gross profit (loss) (55,590) (668,667) 154,845 431,993
--------------- ---------------- --------------- ----------------
Operating expenses:
Selling expenses 111,347 248,729 314,562 943,262
General and administrative expenses (66,945) 853,540 145,886 1,894,259
--------------- ---------------- --------------- ----------------
44,402 1,102,269 460,448 2,837,521
--------------- ---------------- --------------- ----------------
Loss from continuing operations before
interest expense (99,992) (1,770,936) (305,603) (2,405,528)
Interest expense, net 5,052 23,705 278,162 12,414
--------------- ---------------- --------------- ----------------
Loss from continuing operations (105,044) (1,794,641) (583,765) (2,417,942)
Loss from discontinued operations (729,396) (255,948) (831,008) (239,736)
--------------- ---------------- --------------- ----------------
Loss before extraordinary item - gain on
debt restructuring (834,440) (2,050,589) (1,414,773) (2,657,678)
Extraordinary item - gain on debt
restructuring 745,226 - 745,226 -
--------------- ---------------- --------------- ----------------
Net income (loss) $ (89,214) $ (2,050,589) $ (669,547) $ (2,657,678)
=============== ================ =============== ================
Basic and diluted loss from continuing
operations per common share $ (.12) $ (2.80) $ (.71) $ (3.77)
Basic and diluted loss from discontinued
operations per common share (.87) (.40) (1.02) (.37)
Basic and diluted - extraordinary item - gain
on debt restructuring .88 - .91 -
--------------- ---------------- --------------- ----------------
Basic and diluted net loss per common share $ (.11) $ (3.20) $ (.82) $ (4.14)
=============== ================ =============== ================
Basic and diluted weighted average number
of common shares 842,994 641,271 817,718 641,271
=============== ================ =============== ================
</TABLE>
The accompanying notes are an integral part hereof.
Page 3 of 14
<PAGE>
Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended Sept. 30,
----------------------------------
1998 1997
---------------- ----------------
Continuing Operations:
Cash flows from operating activities:
<S> <C> <C>
Net loss from continuing operations $ (583,765) $ (2,417,942)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 164,144 220,065
Allowance for doubtful accounts - 150,000
Write-off of leasehold improvements - 122,483
Common stock issued for services - 24,196
Interest expense recorded for common stock
issued in connection with notes payable 190,138 -
Increase in accounts receivable (660,235) (51,607)
Decrease in insurance receivable 1,333,418 -
Decrease (increase) in inventory 923,135 207,670
Increase in prepaid expenses (44,944) (389,753)
Decrease (increase) in other assets 47,602 (427,256)
Increase (decrease) in accounts payable (851,842) 544,456
Increase (decrease) in accrued expenses (628,849) 283,912
---------------- ----------------
Net cash used in operating activities (111,198) (1,733,776)
---------------- ----------------
Cash flows from investing activities:
Additions to property and equipment (19,164) (835,793)
Trademark costs - (1,180)
---------------- ----------------
Net cash used in investing activities (19,164) (836,973)
---------------- ----------------
Cash flows from financing activities:
(Decrease) increase in short-term borrowings (581,400) 1,734,081
Advances from officers and directors - 249,700
Repayment of advances from officers and directors - (249,700)
Proceeds from convertible debt 150,000 -
Advances to/from related parties - 9,274
---------------- ----------------
Net cash provided by (used in) financing activities (431,400) 1,743,355
---------------- ----------------
Net decrease in cash from continuing operations (561,762) (827,394)
---------------- ----------------
Discontinued Operations:
Net income (loss) from discontinued operations (831,008) (239,736)
Net change in assets held for sale 1,320,165 (1,790,260)
---------------- ----------------
Net increase (decrease) in cash from discontinued operations 489,157 (2,029,996)
---------------- ----------------
Net decrease in cash (72,605) (2,857,390)
Cash and cash equivalents at beginning of period 72,986 2,896,620
---------------- ----------------
Cash and cash equivalents at end of period $ 381 $ 39,230
================ ================
Supplemental information:
Cash paid for interest $ 88,024 $ -
================ ================
Cash paid for income taxes $ - $ -
================ ================
</TABLE>
The accompanying notes are an integral part hereof.
Page 4 of 14
<PAGE>
CARIBBEAN CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of September 30, 1998, and the results of its operations and cash
flows for the six months ended September 30, 1998 and 1997. Such consolidated
financial statements have been condensed in accordance with the applicable
regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed financial statements be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended March 31, 1998 included in its Annual Report filed on
Form 10-KSB, file no. 0-21081, which was filed on July 14, 1998. The results of
operations for the six months ended September 30, 1998 are not necessarily
indicative of operating results for the full year.
All share and per share amounts have been adjusted to reflect the one for eight
reverse split of the Company's common stock effective on September 1, 1998. The
authorized shares of common stock have been adjusted per subsequent shareholder
action (see Note 8).
Note 1. Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires companies with
complex capital structures that have publicly held common stock or common
stock equivalents to present both basic and diluted earnings per share
("EPS") on the face of the income statement. Basic EPS is calculated as
income available to common stockholders divided by the weighted average
number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and
the treasury stock method for options and warrants as previously prescribed
by Accounting Principles Board Opinion No. 15, "Earnings Per Share." The
effect of shares issuable under the Company's stock plans and shares
issuable upon exercise of warrants are excluded from the calculation of
diluted EPS since the effect is antidilutive. The adoption of SFAS 128,
which also required the restatement of previously reported EPS, did not
have a material impact on the Company's reported EPS for any periods
presented.
For the three months ended September 30, 1998, basic and diluted earnings
per share do not include 4,000,000 common shares to be issued in connection
with the conversion of preferred stock into common stock, and 999,197
additional shares of common stock issuable under certain other agreements.
These additional shares of common stock could not be issued until the
shareholders of the Company approved the increase in authorized shares of
common stock of the Company that was completed on November 9, 1998. The
Company expects to issue the 999,197 additional shares in November 1998.
Note 2. Discontinued Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. In October 1998, the Company completed the sale of one of
its retail locations and closed two others. The Company anticipates that
the remaining locations will be disposed of by December 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 six months ended September 30, 1998 and 1997. The net
assets of the discontinued operations consist primarily of inventories and
property and equipment.
Page 5 of 14
<PAGE>
Summarized results of the retail division are as follows for the six months
ended September 30:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Sales $ 891,979 $ 1,236,215
Loss from discontinued operations (831,008) (239,736)
Loss per common share (0.30) (0.37)
</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>
Sept. 30, March 31,
1998 1998
--------------- ---------------
<S> <C> <C>
Inventories $ 557,841 $ 1,686,329
Property and equipment 177,611 394,007
Other assets 35,761 42,211
Current liabilities (5,387) (36,556)
--------------- ---------------
Net assets of retail division $ 765,826 $ 2,085,991
=============== ===============
</TABLE>
Note 3. Debt
Finova Credit Facility - On August 28, 1997, the Company entered into a
credit facility with Finova Capital Corporation ("Finova Credit 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 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 had agreed to advance the Company up to $1.5million. In
exchange for such forbearance, the Company had agreed to pay Finova in full
by September 8, 1998.
On August 14, 1998, the Company and Finova entered into an agreement (the
"Agreement") wherein Finova agreed to reduce the principal to $1,000,000
and the interest rate to prime plus one. Under the terms of the Agreement,
the Company agreed to pay Finova $16,000 weekly for 52 weeks with the
remaining balance due on August 18, 1999. In addition, Finova collected
$105,600 from a customer as a reduction in the principal amount. As of
September 30, 1998, the outstanding balance was approximately $780,000. The
Company is accounting for the restructuring of the Finova Credit Facility
following the applicable provisions of SFAS No. 15, "Accounting for Debtors
and Creditors for Troubled Debt Restructurings."
Subordinated Notes - The Company has borrowed a total of $785,000 under a
series of 9% subordinated promissory notes due 60 days from the date of
funding. In connection the borrowing, the Company agreed to issue shares of
the Company's common stock in an amount based upon the length of time the
loans remain outstanding. For the six months ended September 30, 1998, an
additional 325,850 shares of common stock have been issued in connection
with these notes, which resulted in interest expense of approximately
$190,000 being recorded.
In August and September 1998, holders of approximately $322,500 of the
subordinated notes agreed to forgive the principal and interest due under
the notes. Approximately $87,500 remains outstanding as of September 30,
1998, which the Company is in default. In October 1998, an additional
$50,000 of the subordinated notes agreed to forgive the principal and
interest due under the notes.
Other - In June 1998, the Company borrowed an additional $150,000 which is
convertible into 150,000 shares of common stock of the Company.
Page 6 of 14
<PAGE>
Note 4. Litigation
The Company is involved in various legal proceedings, including pending
litigation. From November 1997 to January 1998, eight class action lawsuits
were filed in federal court against the Company, its then chief executive
officer and its former chief financial officer alleging violations of the
federal securities laws between August 14, 1997 and November 14, 1997. In
March 1998 the court dismissed seven of the complaints and required the
plaintiffs of the dismissed complaints to file by amending the remaining
complaint. Once the amended complaint (Roger Garrity, William Brotski,
Gregory C. Zaremba, James G. Smith, CIV - Louis Allard, Lynda M. Bradley,
Kathleen E. Dalton and Allen Cohen v. Caribbean Cigar Company, Kevin Doyle,
and Thomas R. Dilk) was filed, the Company had 30 days to answer. The
Company has answered the complaint.
On September 28, 1998, a memorandum of understanding (the "Memorandum") was
entered into between the Company, the plaintiffs and the Company's
insurance company. Under the terms of the Memorandum, the plaintiffs agreed
to release the Company and the other named defendants from any and all
claims in exchange for the insurance company paying $925,000 to the
plaintiffs and their counsel.
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 5. Income Taxes
There is no provision or benefit for income taxes in either period, as any
deferred tax assets generated by the losses are offset in their entirety by
valuation allowances. There are no significant deferred tax liabilities.
The Company has tax net operating loss carry-forwards ("NOLs") of
approximately $7,700,000, expiring at various dates beginning in the year
2011. Certain provisions of the tax law may limit the NOLs available for
use in any given year in the event of a significant change in ownership
interest. There have been significant changes in stock ownership that may
cause the NOLs to be limited.
Note 6. Recent Accounting Pronouncements
Effective April 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These new standards
will not have an effect on the Company, as (i) the Company currently has no
items of other comprehensive income, therefore the Statement of
Comprehensive Income will not be presented, and (ii) since the Company's
continuing operations are in a single reportable segment, the provisions of
SFAS No. 131 are not applicable to its continuing business. See Note 2 for
the disclosures related to discontinued operations.
Note 7. Stockholders' Equity
On July 28, 1998, the Company entered into an agreement with Mr. Ron
Jenkins (the "Jenkins Agreement"). Under the terms of the Jenkins
Agreement, Mr. Jenkins, president of SJI Wholesale, Inc. ("SJI"), (i) will
facilitate the consummation of an agreement between the Company and SJI
whereby the Company would grant SJI the exclusive right to market the
Company's products in the United States; (ii) will attempt to arrange for
the purchase of cigars manufactured for SJI by the Company; (iii) will
arrange for SJI to purchase certain of the inventory of the Company for
$500,000; (iv) will transfer $25,000 to the Company to cover expenses; and
(v) will assist the Company in either restructuring or repaying its debt
obligations with Finova.
In consideration for the services to be performed by Mr. Jenkins, the
Company agreed subject to shareholder approval to issue Mr. Jenkins
1,000,000 shares of preferred stock of the Company (the "Preferred Stock").
Each share of the Preferred Stock is convertible into four shares of common
stock of the Company at a conversion price of $.80 per share of the
Preferred Stock. The Preferred Stock must be converted within 48 months
from the date of issuance or Mr. Jenkins must immediately return the
unconverted portion of the Preferred Stock to the Company. The Company also
appointed Mr. Jenkins Chief Operating Officer, Executive Vice President and
a Director of the Company. In addition,
Page 7 of 14
<PAGE>
J.D. Jenkins was appointed Chief Executive Officer, President and a
Director of the Company. In connection with the Jenkins Agreement, Mr.
Kevin Doyle resigned as Executive Vice President and a Director of the
Company.
Note 8. Subsequent Events
On November 9, 1998, the Company held its annual meeting of shareholders
(the "1998 Annual Meeting"). At the 1998 Annual Meeting, the shareholders
of the Company elected J.D. Jenkins, Ron Jenkins, Edward C. Williams,
Gabriel Ripoll, Jr., Daniel Daley, Thomas Cristiano and Curtis Zimmerman to
the Board of Directors of the Company, approved the issuance of in excess
of 19.99% of the presently issued and outstanding Common Stock of the
Company, approved the amendment to the Company's Articles of Incorporation
increasing the number of authorized shares of Common Stock from 1,250,000
to 25,000,000 and approved Ahearn, Jasco + Company, P.A. as the Company's
independent certified public accountants.
Page 8 of 14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The forward-looking statements contained
in this Form 10-QSB are subject to certain risks and uncertainties. Actual
results could differ materially from current expectations. Among the factors
that could affect the Company's actual results and could cause results to differ
from those contained in the forward-looking statements contained herein is the
Company's ability to implement its business strategy successfully, which will
depend on business, financial, and other factors beyond the Company's control,
including, among others, prevailing changes in consumer preferences, access to
sufficient quantities of raw materials, availability of trained laborers and
changes in tobacco products regulation. There can be no assurance that the
Company will continue to be successful in implementing its business strategy.
Other factors could also cause actual results to vary materially from the future
results covered in such forward-looking statements. Words used in this Form
10-QSB, such as "expects," "believes," "estimates" and "anticipates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements.
The following should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Form 10-QSB.
Comparison of Results of Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. In October 1998, the Company completed the sale of one of its
retail locations and closed two other. The Company anticipates that the
remaining locations will be disposed of by December 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 six
months ended September 30, 1998 and 1997. The net assets of the discontinued
operations consist primarily of inventories and property and equipment.
The following table presents, for the periods indicated, certain items in the
historical consolidated statements of operations as a percentage of sales.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 31, September 31,
------------------------ ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 107.3 144.6 89.1 88.6
----------- ----------- ----------- -----------
Gross profit (loss) (7.3) (44.6) 10.9 11.4
Operating expenses
Selling expenses 14.5 16.6 22.2 24.9
General and administrative expenses (8.7) 56.9 10.3 50.0
----------- ----------- ----------- -----------
5.8 73.5 32.5 74.9
----------- ----------- ----------- -----------
Operating income (loss) (13.1) (118.1) (21.6) (63.5)
Interest expense 0.6 1.6 19.7 0.3
----------- ----------- ----------- -----------
Loss from continuing operations (13.7)% (119.7)% (41.3)% (63.8)%
=========== =========== =========== ===========
</TABLE>
Three Months Ended September 30, 1998 Compared With Three Months Ended September
30, 1997
Sales for the three months ended September 30, 1998 were approximately $766,000,
a decrease of approximately $733,000 or 48.9% from sales for the three months
ended September 30, 1997 of approximately $1,499,000. This decrease is primarily
Page 9 of 14
<PAGE>
attributed to a weakening of the domestic market for cigars, offset in part by
increased demand for the Company's cigars internationally, and increased
competition, including expanded supply from larger, well-known cigar
manufacturers. Sales for the three months ended September 30, 1998 included a
one-time sale of approximately $250,000.
Cost of sales for the three months ended September 30, 1998 were approximately
$821,000, or approximately 107.3% of sales, as compared to cost of sales for the
three months ended September 30, 1997 of approximately $2,167,000, or
approximately 144.6% of sales. Cost of sales for the three months ended
September 30, 1998 includes approximately $500,000 of costs related to the
one-time sale of $250,000 described above.
Selling expenses includes salaries and wages, marketing and advertising
expenses, shipping costs and other miscellaneous expenses. Selling expenses for
the three months ended September 30, 1998 were approximately $111,000, or
approximately 14.5% of sales, as compared to selling expenses for the three
months ended September 30, 1997 of approximately $249,000, or approximately
16.6% of sales. The decrease consists primarily of decreases in expenditures for
advertising and promotional expenses, sales and marketing salaries, and shipping
costs. Effective July 28, 1998, the Company entered into an exclusive supply
agreement with SJI Wholesale for the distribution of its cigars in the United
States. As such, the Company has eliminated most of the costs associated with
selling its products domestically.
General and administrative expenses include administrative salaries,
professional fees, travel and entertainment, insurance and other expenses.
General and administrative expenses for the three months ended September 30,
1998 were approximately ($67,000), or approximately (8.7%) of sales, as compared
to general and administrative expenses for the three months ended September 30,
1997 of approximately $854,000, or approximately 56.9% of sales. For the three
months ended September 30, 1998, the Company recorded the reversal of $195,000
related to the settlement of the class action lawsuit. After taking the reversal
of the $195,000 into account the decrease in general and administrative expenses
is primarily attributable to decreased expenditures for professional fees,
administrative salaries, and travel. In addition, for the three months ended
September 30, 1997, the Company recorded a loss on abandonment of its Miami
factory.
Interest expense for the three months ended September 30, 1998 was approximately
$5,000, or approximately 0.6% of sales, as compared to interest expense for the
three months ended September 30, 1997 of approximately $24,000, or approximately
1.6% of sales.
Income (loss) from discontinued operations includes the results of the Company's
retail division.
For the three months ended September 30, 1998, the Company recorded a gain on
the restructuring of the debt owed to Finova Capital Corporation and certain
Subordinated Note Holders of approximately $745,000.
As a result of the forgoing factors, the Company sustained a loss of
approximately $89,000, or $.02 per share for the three months ended September
30, 1998, as compared to a loss of approximately $2,051,000 or $3.20 per share
for the three months ended September 30, 1997.
Six Months Ended September 30, 1998 Compared With Three Months Ended September
30, 1997
Sales for the six months ended September 30, 1998 were approximately $1,415,000,
a decrease of approximately $2,372,000 or 62.6% from sales for the six months
ended September 30, 1997 of approximately $3,786,000. This decrease is primarily
attributed to a weakening of the domestic market for cigars, offset in part by
increased demand for the Company's cigars internationally, and increased
competition, including expanded supply from larger, well-known cigar
manufacturers. Sales for the three months ended September 30, 1998 included a
one-time sale of approximately $250,000. In addition, due to supply problems,
for the six months ended September 30, 1998, the Company did not record any
sales of its flavored cigars until late June 1998. Production of flavored cigars
began in June 1998 at the Company's Jaibon, Dominican Republic facility.
Cost of sales for the six months ended September 30, 1998 were approximately
$1,260,000, or approximately 89.1% of sales, as compared to cost of sales for
the six months ended September 30, 1997 of approximately $3,354,000, or
approximately 88.6% of sales. Cost of sales for the three months ended September
30, 1998 includes approximately $500,000 of costs related to the one-time sale
of $250,000 described above. The increase as a percentage of sales is primarily
attributable to discounting of some cigar products and the general decline in
premium cigar sales.
Page 10 of 14
<PAGE>
Selling expenses includes salaries and wages, marketing and advertising
expenses, shipping costs and other miscellaneous expenses. Selling expenses for
the six months ended September 30, 1998 were approximately $315,000, or
approximately 22.2% of sales, as compared to selling expenses for the six months
ended September 30, 1997 of approximately $943,000, or approximately 24.9% of
sales. The decrease consists primarily of decreases in expenditures for
advertising and promotional expenses, sales and marketing salaries, and shipping
costs. In addition, effective July 28, 1998, the Company entered into an
exclusive supply agreement with SJI Wholesale for the distribution of its cigars
in the United States. As such, the Company has eliminated most of the costs
associated with selling its products domestically.
General and administrative expenses include administrative salaries,
professional fees, travel and entertainment, insurance and other expenses.
General and administrative expenses for the six months ended September 30, 1998
were approximately $146,000, or approximately 10.3% of sales, as compared to
general and administrative expenses for the six months ended September 30, 1997
of approximately $1,894,000, or approximately 50.0% of sales. This decrease is
primarily attributable to decreased expenditures for professional fees,
administrative salaries, and travel. For the six months ended September 30,
1998, the Company recorded the reversal of $195,000 related to the settlement of
the class action lawsuit. After taking the reversal of the $195,000 into account
the decrease in general and administrative expenses is primarily attributable to
decreased expenditures for professional fees, administrative salaries, and
travel. In addition, for the six months ended September 30, 1997, the Company
recorded a loss on abandonment of its Miami factory.
Interest expense for the six months ended September 30, 1998 was approximately
$278,000, or approximately 19.7% of sales, as compared to interest expense for
the six months ended September 30, 1997 of approximately $12,000, or
approximately 0.3% of sales. Interest expense for the six months ended September
30, 1998 is due to the Company's credit facility and subordinated notes payable
which were entered into in late August 1997 and December 1997, respectively.
Income (loss) from discontinued operations includes the results of the Company's
retail division.
For the three months ended September 30, 1998, the Company recorded a gain on
the restructuring of the debt owed to Finova Capital Corporation and certain
Subordinated Note Holders of approximately $745,000.
As a result of the forgoing factors, the Company sustained a loss of
approximately $670,000, or $.02 per share for the six months ended September 30,
1998, as compared to a loss of approximately $2,658,000 or $4.14 per share for
the six months ended September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of approximately
$1,426,000. Since its inception, the Company has sustained losses of
approximately $9,043,000. The Company's operations have been funded by loans
from investors, the sale of common stock (including an initial public offering
of its common stock in August 1996) and a credit facility from a lending
institution. These funds have been used for working capital, capital
expenditures, information systems development and other corporate purposes.
The Company has an ample supply of tobacco for the production of cigars as well
as the maintenance of a sufficient supply of non-tobacco retail products for its
stores. The Company has no commitments for purchases.
In June 1998, the Company received notice from Finova Capital Corporation
("Finova") of its intent to declare a default under the Finova line of credit.
The Company and Finova entered into a forbearance agreement on July 10, 1998
(the "Forbearance Agreement"). Under the terms of the Forbearance Agreement,
Finova had agreed to advance the Company up to $1.5million. In exchange for such
forbearance, the Company had agreed to pay Finova in full by September 8, 1998.
On August 14, 1998, the Company and Finova entered into an agreement (the
"Agreement") wherein Finova agreed to reduce the principal to $1,000,000 and the
interest rate to prime plus one. Under the terms of the Agreement, the Company
agreed to pay Finova $16,000 weekly for 52 weeks with the remaining balance due
on August 18, 1999. In addition, Finova collected $105,600 from a customer as a
reduction in the principal amount. As of September 30, 1998, the outstanding
balance was approximately $780,000.
Page 11 of 14
<PAGE>
RISK FACTORS
Recently Organized Business; History of Losses
The Company was organized in October 1994 and has incurred a loss of $580,000,
or $.09 per share, on revenues of $649,000 for the six months ended June 30,
1998; a loss of $7.7 million, or $1.46 per share, on revenues of $5.8 million
for the fiscal year ended March 31, 1998; a loss of $116,000, or $.03 per share,
on revenues of $7.3 million for the fiscal year ended March 31, 1997; a loss of
$522,000, or $.16 per share, on revenues of $277,000 for the fiscal year ended
March 31, 1996; and a loss of $12,000, or $.00 per share, on revenues of $88,000
for the period from October 3, 1994 (inception) to March 31, 1995. The ability
of the Company to operate profitably is dependent upon its ability to increase
its manufacturing and distribution channels and a continuation of an increase in
the market for premium cigars (as to which no assurance can be made). In
addition, its costs may be increased as a result of government regulations,
which may affect the ability of the Company to operate profitably. The Company
is also subject to business risks associated with a developing business
enterprises. No assurance can be given as to the ability of the Company to
operate profitably.
Competition
The tobacco industry in general, including the cigar industry, is dominated by a
small number of companies which are well known to the public. The Company
believes that, as a manufacturer of premium cigars, it competes with a smaller
number of domestic and foreign companies that specialize in premium cigars and
certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Company, General Cigar Holdings, Inc., a division of Culbro
Corporation and Swisher International Group, Inc. Each of these companies has
substantially greater capital resources, manufacturing, sales and marketing
experience, substantially longer and more extensive relationships with growers
and long standing brand recognition and market acceptance than the Company.
However, the market for premium cigars constitutes a small portion of the cigar
market. The Company believes that smokers of premium cigars purchase cigars
based on the perceived quality of the tobacco. The process of producing premium
cigars is not patented, but is based on the know-how and experience of master
craftsmen who can identify and purchase the tobacco and roll the tobacco into
premium cigars. The principal characteristics that differentiate one premium
cigar from another are the quality of the tobacco in the cigar, the quality of
the tobacco used as a cigar wrapper, the blend of tobacco and the quality of the
rolling. No assurance can be given as to the ability of the Company to compete
successfully in any market in which it conducts, or may conduct, operations.
Page 12 of 14
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the discussion of litigation in (a) Note 9 to the Fiscal 1998 Annual
Financial Statements and (b) Note 4 to the Notes to Condensed Consolidated
Financial Statements of the Company for the fiscal quarter ended September
30, 1998, which are included elsewhere in this Quarterly Report on Form
10-QSB.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
See Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources and
Note 4 to the Notes to Condensed Consolidated Financial Statements of the
Company for the fiscal quarter ended September 30, 1998, which are included
elsewhere in this Quarterly Report on Form 10-QSB for a discussion on the
forbearance agreement entered into with Finova Capital Corporation and a
discussion on certain other subordinated notes which the Company is in
default.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibits
27.1 - Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1997
CARIBBEAN CIGAR COMPANY
/S/ EDWARD C. WILLIAMS
----------------------
Edward C. Williams
Chief Financial Officer
Page 13 of 14
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