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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(B)
OR 12 (G) OF THE SECURITIES EXCHANGE ACT OF 1934
TAMBORIL CIGAR COMPANY
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(Name of Small Business Issuer in Its Charter)
DELAWARE 65-0774638
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(State of Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2600 S.W. 3RD AVENUE, MIAMI, FL 33129
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(Address of Principal Executive Offices) (Zip Code)
(305) 860-9887
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(Registrant's Telephone Number, Including Area Code)
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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NONE NONE
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Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.0001 PER SHARE
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(Title of Class)
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INFORMATION REQUIRED IN
REGISTRATION STATEMENT
ITEM 1. DESCRIPTION OF BUSINESS.
(A) BUSINESS DEVELOPMENT.
TAMBORIL CIGAR COMPANY (hereinafter referred to as the "Company"
and/or the "Issuer"), a Delaware corporation, manufactures and markets premium,
hand-rolled cigars under the TAMBORIL/TM/, CORDOVA/TM/ and FORE/TM/ brand names.
The Company was incorporated in March and began operations in April of 1996 to
commercialize the efforts of its founders in order to create a new premium brand
of cigar. These founders believed that the strong growth in the popularity of
cigar smoking which can be traced back to 1992 had created a demand for
additional premium brands. Abraham Shafir, President of the Company's
manufacturing subsidiary, had previously lived in the Dominican Republic and was
intimately familiar with the long history of quality tobacco growing and cigar
production in that country. After investigating the availability of a steady
supply of high quality tobacco and the skilled labor pool necessary to produce
premium cigars by hand, the founders settled on the town of Tamboril, acquired a
warehouse and manufacturing facility and began the process of formulating the
blend of tobaccos and perfecting the fermenting, curing, aging and rolling
processes that have resulted in the Company's Tamboril line of cigars.
The Company conducts its business through two principal operating
subsidiaries: Tamboril Cigar International, Inc., a Delaware corporation
("TCI"), and Tabacalera Tamboril, S.A., a corporation organized and existing
under the laws of the Dominican Republic ("Tabacalera"). Tabacalera conducts
its business in the Dominican Republic, where it contracts with tobacco growers
and manufactures, packs and ships Tamboril cigars to the United States. TCI is
the U.S. sales and marketing company through which Tamboril cigars are sold to
tobacconists throughout the U.S. The Company has established a third
subsidiary, Diversified Tobacco Company, a Delaware corporation ("Diversified"),
to manufacture and/or distribute private label cigars and non-tobacco-related
products intended to capitalize on the Tamboril/TM/ brand recognition.
Diversified is to begin operations in the latter part of 1997 as part of the
Company's plan to address other market segments. TCI is wholly-owned by the
Company and, in turn, owns all the issued and outstanding common stock of
Diversified and 99.4% of the issued and outstanding capital stock of Tabacalera,
with the remaining 0.6% owned by Dominican citizens as required by the laws of
that country.
The Company's corporate structure was established through a
reorganization that was completed in October 1996 (the "Reorganization"). The
Reorganization was effected through an Acquisition Agreement and Plan of
Reorganization dated October 23, 1996 by and between the Company and TCI (the
"Reorganization"). In the Reorganization the Company acquired all the issued
and outstanding common stock of TCI in exchange for 5,281,671 shares of the
Company's Common Stock. The Company was originally formed under the laws of
the State of Washington on May 24, 1937 for the primary purpose of engaging in
the mining business and operated under the name "Idaho Leadville Mines Co."
Available corporate records indicate that the Company did operate in the mining
business at various times since its inception. The Company engaged in only
minimal activity for at least five (5) years prior to the Reorganization and for
the two (2) years prior to the Reorganization the Company's business plan was to
reorganize itself as a vehicle to effect a merger, exchange of capital stock,
asset acquisition, or other similar combination with one or more operating
businesses. From its formation until the consummation of the Reorganization,
the Company did not conduct any significant commercial operations. Pursuant to
the Reorganization, and in furtherance of its new business plan, the Company's
name was changed to "Tamboril Cigar Company" and its state of incorporation was
changed to Delaware. The Company's remaining mining claims were, pursuant to
the Reorganization, transferred to a corporation controlled by the former
controlling shareholders of the Company ("Mining Co."). The principal
shareholder of Mining Co. received the sum of $50,000 plus 50,000 shares of
Common Stock. The Company retained a small minority interest (1,000 shares) in
Mining Co.
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TCI commenced business in early 1996 under the name "Conquistador
Cigar Company" and changed its name to "Tamboril Cigar Company" to reflect its
business plan to market and distribute premium cigars under the "Tamboril" brand
name. As part of the Reorganization, the operating subsidiary changed its name
to "Tamboril Cigar International, Inc." Tabacalera was established in the
Dominican Republic for the purpose of purchasing, processing, rolling, finishing
and packaging tobacco grown in the Tamboril region into finished and packaged
cigars for export to the U.S. market. Tabacalera sells all its finished product
to TCI which markets and distributes premium cigars in the U.S. under the
TAMBORIL/TM/, CORDOVA/TM/ AND FORE/TM/ brand names.
(B) BUSINESS OF THE ISSUER.
PRODUCTS
The Company's product line now consists of 22 cigars of varying styles
and sizes which are sold in over 500 upscale tobacconists nationwide at retail
prices from $4 to $9.50 per cigar. Premium cigars are generally defined as
cigars that are hand-made from high quality, natural leaf binder, long-filler
and wrapper tobaccos and that retail for $1 or more per cigar. The principal
elements that determine the quality of the cigar are the quality of the tobacco,
the curing and aging process and the skill of the hand-roller. The Company's
binder and filler tobaccos are Cuban-seed Piloto Cubano and Olor Dominicano
varieties from the Tamboril region of the Dominican Republic. These varieties
of tobacco were introduced to the Dominican Republic by immigrants who fled Cuba
after the United States imposed a trade embargo on all imports from Cuba in
1962. Many tobacco growers fled Cuba at that time, taking with them seeds from
what have always been considered the world's finest cigar tobaccos and
resettling in various areas of Latin America, including the Dominican Republic.
The Company's wrapper tobaccos are of two varieties: Connecticut shade-grown
(universally regarded as the world's finest wrapper tobacco) and Sumatra leaf, a
darker more spice-laden tobacco than the Connecticut variety. These wrapper
styles define the Company's principal two products lines: The CONNECTICUT
COLLECTION and the SUMATRA COLLECTION.
Company employees in the Dominican Republic purchase whole-leaf
tobacco, which is then shipped to the Company's facilities in the town of
Tamboril where it is inspected, graded and re-graded. Tobacco that passes
inspection is sprayed with a red wine solution to enhance flavor, fermented,
dried, stripped, aged and hand-rolled into Tamboril cigars. In the rolling
process, binder tobacco is hand-wrapped around the filler tobacco to create a
"bunch," which is then pressed into a mold to ensure uniformity of shape.
Wrapper tobacco is then hand-wrapped around the bunch to complete the cigar,
which is then banded and boxed for shipment. The Company also manufactures the
boxes in which Tamboril cigars are shipped at its factory in the Dominican
Republic.
The Company's principal business strategy is to expand sales of the
current product line through increased sales, marketing and promotional
activities through existing distribution channels and expansion into new
channels. The Company intends to become a significant factor in the market for
premium cigars by (i) continuing to establish and extend the brand recognition
of the Tamboril name, (ii) establishing its reputation for uncompromising
quality, (iii) focusing on hands-on customer service to establish a loyal
following among tobacconists and (iv) expanding its product line to cover other
market segments. As product awareness of the Company's cigars grows, the
Company will seek to introduce additional cigar and non-cigar products to
capitalize on the status of the Tamboril name as a recognized luxury brand.
The Company is currently introducing a moderately priced line of
cigars under the brand name "CORDOVA." The Cordova brand is made of Sumatran
wrapper and Dominican filler and binder tobaccos, is treated with cocoa for a
milder, somewhat sweeter smoke than the Company's other cigars and is available
in eight sizes. Cordova is being positioned through marketing and pricing as an
entry-level cigar for the new cigar smoker. This line will be positioned to
appeal to a broader market and will be intended to enable the Company to expand
its distribution channels to retailers in several distribution channels that
have not before been exploited by the Company, including fine restaurants, hotel
gift shops and executive gift programs.
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The Company has also introduced a golf-theme novelty line of cigars
under the brand name "FORE." Fore cigars are displayed in a unique 30-cigar
package, are sold in a novelty glass tube with a golf motif and are available in
one size only. The Fore cigar is targeted towards country club pro shops and
golf equipment and accessories shops throughout North America.
The Company also currently sells less expensive cigars under a private
label licensing arrangement. Sales under the private label arrangement totaled
approximately $93,000 in the period ended December 31, 1996.
The Company's business strategy is intended to take advantage of the
significant growth in the market for premium cigars over the past few years.
Retail sales of cigars of all categories have risen dramatically since 1992,
both in terms of numbers of cigars and total dollar sales. Even in this strong
market, sales of premium cigars have grown significantly faster than the cigar
market as a whole. The number of premium cigars sold in the United States has
grown over 64% since 1992 to more than 176,000,000 cigars in 1995 (the last full
year for which statistics are available). Industry experts have estimated that
this total will have grown to approximately 265,000,000 cigars for 1996, as
premium cigar imports in the first half of 1996 grew 48.6% over 1995's totals to
just over 115,000,000 cigars. Total dollar sales of cigars have expanded even
more dramatically as prices have continued to rise significantly. Total dollar
sales of all cigars in the U.S. were in excess of 1 Billion Dollars in 1995.
Premium cigars, the market segment the Company's products are intended to
penetrate, constituted just over 4% of the number of cigars sold, but accounted
for a significantly larger percentage of total dollar sales.
The rapid growth in the cigar market has led to significant back
orders across the entire industry as existing inventories were insufficient to
meet demand. Several of the Company's larger competitors have had difficulty in
filling these back orders and are adding additional capacity to meet consumer
demand. The Company believes this places it in an advantageous competitive
position, as the current mismatch of supply and demand creates unprecedented
opportunity for new brands to penetrate the market. Management believes that
the success of its initial sales and marketing efforts, as evidenced by its
penetration into over 500 of the country's finer tobacco retailers, is a strong
indication that the Company's cigars are well positioned to take advantage of
the ongoing growth of the premium cigar market.
Management of the Company believes the increased popularity of cigar
smoking in the United States is due to certain demographic and social trends
that should continue for at least the next few years. The Company believes that
the principal changes that have contributed to growth in the cigar market are
(1) the emergence of an expanding base of younger new cigar smokers, both male
and female, (2) increasing popularity of cigars among celebrities who are viewed
as trend-setters, (3) increased media interest, especially the successful launch
and continued popularity of Cigar Aficionado magazine, (4) promotion of "cigar
friendly" restaurants and nightclubs and (5) the increase in the population of
people over 50 years of age, a group that has traditionally been viewed as
consuming more luxury goods, including cigars, than other demographic groups.
SALES AND MARKETING; DISTRIBUTION
The Company's sales and marketing efforts are conducted from its
headquarters in Miami, Florida. The initial focus of the Company's sales
efforts has been the establishment of positive relationships with premium
tobacconists nationwide, with a strong emphasis on added-value to the retailer
through superior customer service, promotional events and supporting point of
sales. To date, the Company's product introductions have been conducted with
over 500 retail outlets throughout the United States.
The Company began operations in April 1996 and in the period from
inception to December 31, 1996 recorded sales in excess of $1,400,000. For the
six months ended June 30, 1997, sales were just over $2,500,000. On July 7,
1997, the Company entered into a distribution agreement (the "Distribution
Agreement") with Hubbard Imports that will result in sales of at least
$5,000,000 in the period between June 1, and December 31, 1997. Sales of
$1,150,000 to Hubbard were booked in June 1997 in respect of shipments against
purchase orders issued in anticipation of signing the definitive Distribution
Agreement. Until June of 1997 the company sold its products through distributors
and directly to retail tobacconists. The Company pursued its relationship with
Hubbard to take advantage of Hubbard's broad network of tobacco subdistributors
in order to more rapidly expand the Company's sales. Pursuant to the
Distribution Agreement, Hubbard will be the sole distributor of the Company's
products in the U.S. until December 31, 2000 so long as Hubbard meets minimum
annual purchase requirements that are to be set in January of each year for the
current calendar year.
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The Company has begun an extensive advertising and promotional
campaign centered on a series of full-page, four-color ads in the major cigar
publications such as Cigar Aficionado, Smoke, Tobacconist and Smoke Shop, as
well as several regional cigar magazines, installation of in-store point-of-sale
displays at major upscale tobacconist shops and a nationwide series of cigar
tastings to be co-sponsored with local cigar retailers and cigar-friendly
restaurants. This advertising and promotional campaign is intended to support
Hubbard's sales efforts relating to the Company's products.
The Company has opened TAMBORIL AT THE PARK, an upscale cigar bar and
lounge at the Lombardy Hotel in midtown New York City. TAMBORIL AT THE PARK,
which opened in May 1997, is intended to serve as a flagship for the TAMBORIL
and CORDOVA brands, to piggy-back on the success that both branded (such as Club
Macanudo) and unbranded cigar clubs have experienced in the past few years and
to reinforce the premium, luxury status of the TAMBORIL and CORDOVA brands and
their association with fine food and wine. The project, which is anchored by a
350 seat restaurant named THE PARK, has been orchestrated by restaurateur John
Scotto of New York's FRESCO restaurant, who has brought together a team
including designer Robert Denning of DENNING & FOURCADE (whose clients include
Oscar de la Renta and Henry Kravis) and chef Fabrizzio Salerni (formerly of New
York's LESPINASSE) to bring new life to a space where William Randolph Hearst
(and his then-girlfriend, film star Marion Davies) lived and where Rudi Vallee
once crooned to full houses. TAMBORIL AT THE PARK will seat 30, with sidewalk
cafe seating for an additional 20, and will feature cigars from the Company's
CONNECTICUT, SUMATRA and CORDOVA Collections. TAMBORIL AT THE PARK will be
complemented by THE PARK'S casual yet-upscale bar menu and a selection of fine
wines, cognacs, vintage ports and single malt Scotches. The Company plans to use
TAMBORIL AT THE PARK as the center of promotional events such as tastings and
new product launches.
RAW MATERIALS: TOBACCO
The Company's Tabacalera subsidiary was established in the Tamboril
region of the Dominican Republic, which is universally recognized to be one of
the finest tobacco growing regions in the world, and where there is a large pool
of skilled cigar rollers. Dominican cigars currently account for just under 50%
of the world's production of premium cigars. Other noted growing and producing
areas include Honduras, Costa Rica, Indonesia, the Canary Islands and Mexico.
Tabacalera has established relationships with several of the largest growers in
the Dominican Republic and believes that its requirements for tobacco have been
arranged for through the year 2000 through the execution of financing/harvesting
agreements with its key growers. The Company and Tabacalera cement these
relationships by providing financing for growers to enable them to plant and
harvest their crops, which are then committed to the Company. While the Company
believes its requirements for high-grade tobacco to produce "Tamboril" cigars
will be met for the foreseeable future, the current demand for high-grade
tobacco for use in premium cigars may result in higher prices and/or scarcities
which could, if they occur, have a materially adverse impact on the Company's
business.
EMPLOYEES
The Company currently employs approximately 100 full-time employees:
12 in its Miami offices and 88 in the Dominican Republic. Of these,
approximately 5 are engaged in sales and marketing, 8 in administrative roles,
and 87 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
in the Dominican Republic. Tabacalera recruits rollers on the basis of
favorable working conditions at the Company's new facilities and competitive
wages. Tabacalera maintains an extensive training program to ensure the quality
of its cigars and to provide a continuing source of skilled rollers. While the
Company believes its requirements for skilled workers will be met for the
foreseeable future, there can be no assurance that the significant backlog of
orders in the cigar industry and the increased demand for workers to meet that
demand will not make it difficult or prohibitively expensive for the Company to
attract and retain a sufficient staff of skilled rollers to meet its business
plan.
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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 applied for trademark protection on the
marks and/or design logos TAMBORIL, CORTADITO, DIABLO, THE OFFICIAL CIGAR OF
WALL STREET, SERIOUS CIGARS MADE BY SERIOUS SMOKERS and CONQUISTADOR, and has
made application for the marks FORE and CORDOVA in the United States. 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. The Company intends to
vigorously defend, police, and maintain its trademarks and trade secrets.
COMPETITION
The Company has several large, well-financed competitors in the market
for premium cigars, each of whom enjoys strong, well-known brand names and a
history of successful product launches. These companies compete directly with
the Company for consumer sales, as well for supplies of tobacco and employees.
The largest of these competitors are Consolidated Cigar Holdings Inc. (NYSE
symbol: "CIG"), General Cigar Co. Inc., a division of Culbro Corporation (NYSE
symbol: "CUC"), and Swisher International Group Inc. (NYSE symbol: "SWR").
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. The Company believes, however, that the
market for premium cigars is growing rapidly enough to support the entry of new
brands such as those offered by the Company and that the inability of the
entrenched competitors to meet current demand, as evidenced by their large back
order positions, supports this position. Hubbard currently distributes several
brands of cigars that compete directly with the Company's products.
POSSIBLE CONSTRAINTS ON MEETING DEMAND
The substantial growth in demand for cigars has 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. While (i) the Company has not
yet experienced such shortages, (ii) the Company believes 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 (iii)
the Company's relationships with its workers are sufficiently good and the
supply of skilled workers in the Tamboril region is sufficiently large to ensure
that it will continue to have a sufficient staff of skilled rollers, there can
be no assurance that the Company will not experience such shortages as it seeks
to expand sales and production capabilities. While the Company's competitors
have geographically diverse operations, the Company is dependent on supplies of
tobacco in the Dominican Republic. Shortages of Dominican tobacco, whether from
natural disaster, economic forces or otherwise, could have a material adverse
effect on the business and prospects of the Company.
REGULATION AND LITIGATION IN THE TOBACCO INDUSTRY
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
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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. Presumably, the trend
toward increased regulation will continue at all levels. Depending on these
outcomes, there may be a materially adverse effect on the tobacco products
industry in general and the Company in particular.
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 excise taxes on
its products 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.
DEPENDENCE ON KEY CUSTOMERS
Management of the Company believes that its Distribution Arrangement
with Hubbard will enable the Company to expand sales more rapidly than it would
be able to do through its direct sales force. However, since Hubbard will be the
exclusive U.S. distributor of the Company's products, the Company will be
totally dependent on Hubbard for its U.S. sales. The Distribution Agreement
provides that minimum annual purchase commitments will be mutually agreed upon
by Hubbard and the Company in January for each year of the Distribution
Agreement. Should the Company and Hubbard fail to reach agreement on such
minimum commitments, the Distribution Agreement could terminate. In the event
the Distribution Agreement is terminated or if Hubbard fails to honor its
minimum purchase commitments, the Company would be forced to obtain another
distributor or distributors for its product and/or to implement an internal
sales force to sell the Company's products to retail tobacconists and other
outlets. The termination of the Distribution Agreement or the failure of Hubbard
to purchase its minimum commitments from the Company would have a material
adverse effect on the business and prospects of the Company.
Hubbard also distributes several brands of cigars that compete
directly with the Company's products.
In the six months ended June 30, 1997, $1,150,000 of the Company's
$2,538,988 in sales (45.29%) were made to Hubbard. All of the sales to
Hubbard were in the month of June pursuant to Hubbard's first purchase
order.
The Company made approximately $170,000, or 12%, of its
$1,413,815 in sales during the period from commencement of operations in April
1996 through December 31, 1996 to Famous Smoke Shop, located in New York, New
York. No other customer accounted for 10% of the Company's sales during that
period.
RESEARCH AND DEVELOPMENT
The Issuer has no material research and development expenses.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Issuer has no material expenses and no material impact on its
business occasioned by compliance with environmental laws.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The Registrant was incorporated in April 1996 to commercialize the
efforts of its founders to establish a business to manufacture and distribute
premium cigars. The Registrant began operations on April 15, 1996 and commenced
sales in the fourth quarter of 1996. Sales of cigars bearing the TAMBORIL/TM/
and CORDOVA/TM brand names constituted 100% of the Company's sales for the
period ended December 31, 1996 and for the six months ended June 30, 1997.
The market for sales in the United States of premium cigars, generally
defined to be those made by hand and retailing for prices in excess of $1, has
expanded considerably since 1993 after declining consistently from 1964 through
1993. Management of Registrant believes that the demographic factors underlying
the growth in the cigar market since
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1993 will contribute to continued expansion of the market for at least the next
few years. Among these factors are (1) the emergence of an expanding base of
younger new cigar smokers, both male and female, (2) increasing popularity of
cigars among celebrities who are viewed as trend-setters, (3) increased media
interest, especially the successful launch of Cigar Aficianado magazine, (4)
promotion of "cigar friendly" restaurants and nightclubs and (5) the increase in
the population of people over fifty years of age, a group that has traditionally
been viewed as consuming more luxury goods, including cigars, than any other
demographic group.
The Company has established one manufacturing facility in the
Dominican Republic and is building a second facility to meet estimated increased
demand for the Company's cigars. The growth of the demand for cigars in general,
and premium cigars in particular, has created substantial competition within the
industry for the purchase of raw tobacco used in manufacturing cigars and for
the skilled labor required to roll cigars by hand. While the Company has not yet
experienced any shortages of tobacco or labor, there can be no assurance that it
will not encounter such difficulties as it expands its operations. The effect of
any shortages of materials or labor could be to prevent the Company from filling
demand or to make the cost of doing so prohibitive.
RESULTS OF OPERATIONS
The following discussion relates to the consolidated operations of the
Company and its subsidiaries, Tamboril Cigar International, Inc. ("TCI") and
Tabacalera Tamboril, S.A. ("Tabacalera") for the period from inception at April
15, 1996 through December 31, 1996 and for the period from January 1, 1997
through June 30, 1997. The Company is a holding company, the sole assets of
which are the capital stock of TCI and Tabacalera and the operations summarized,
therefore, relate to the operations of these operating subsidiaries.
Net sales for the period ended December 31, 1996 were $1,413,815,
representing sales of the Company's first two product lines, the CONNECTICUT
COLLECTION and the SUMATRA COLLECTION from April 15 through December 31, 1996.
Most of these sales occurred in the fourth quarter of 1996, as the initial
period was spent organizing the Company's facilities, hiring a skilled work
force and formulating the blends of tobacco and other ingredients used in
manufacturing the Company's brands. The Company intends to increase sales of
these two product lines by increasing the number of retail tobacconists to whom
the products are distributed and by opening additional distribution channels
such as large tobacco distributors. In addition, the Company has introduced two
new product lines in April 1997, the CORDOVA/TM/ Collection, which is a more
moderate priced series of cigars, and FORE/TM/, a golf-motif packaged cigar
designed for sale in golf pro shops and golf equipment outlets. The Company
believes that its products are well-placed to take advantage of the continued
growth of the cigar market and that the results from the period from inception
to December 31, 1996 support management's views.
Net sales for the six month period ended June 30, 1997 were
$2,538,988. Of this total, $1,150,000 was attributable to sales to Hubbard in
the month of June pursuant to its distribution arrangement with the Company.
Comparisons with the comparable period in 1996 are not possible, since the
Company was still in its initial stages of operations and had no sales and
virtually no manufacturing operations during the period from April 15, 1996
(commencement of operations) through June 30, 1996.
The Company is currently building a second manufacturing facility to
increase capacity four-fold from 200,000 cigars to approximately 800,000 cigars
per month. The Company believes that market conditions for cigars generally and
for the Company's products (based on initial product reaction) are sufficient to
account for this additional capacity and that the Company's sales have the
potential to grow considerably from the results reflected in the financial
statements for the period from April 15, 1996 through December 31, 1996 and
January 1, 1997 through June 30, 1997. There can be no assurance, however, that
the Company's products will receive market acceptance or that sales will
increase, or even maintain the initial sales figures.
Cost of goods sold in the period from April 15, 1996 through December
31, 1996 amounted to $573,687 or 40.58% of sales, leaving gross profits of
$840,128, or 59.42%. In the period from January 1, 1997 through June 30, 1997
cost of goods sold was $906,380 or 35.70% of sales. Gross profits for the period
were $1,632,608, or 64.30%. The Company believes that these levels are above
average for the industry, but the limited nature of the Company's operations
make comparisons difficult. Gross margins should decline as the Company develops
products, such as CORDOVA and FORE which are aimed at broader, but less
expensive, market segments. The use of distributors to sell the Company's
products, rather than relying on direct sales by the Company, may also have a
depressive effect on gross margins. The impact of these changes is impossible to
assess, given the limited operations of the Company to date.
7
<PAGE>
Selling, general and administrative expenses totaled $1,034,386, or
73.16% of sales in the period from April 15, 1996 through December 31, 1996,
representing the costs of establishing the Company infrastructure. In the period
from January 1, 1997 through June 30, 1997 selling, general and administrative
expenses were $1,498,411 or 59.0% of sales. These levels should continue to
decline substantially as the Company's operations in manufacturing and sales
expand. The Company spent approximately $120,000 in the period from April 15,
1996 through December 31, 1996 in advertising and travel expenses for new brand
introductions. Expenses in this category should increase in actual dollars, but
should decline as a percentage of total sales if the Company is successful in
expanding its sales according to plan.
The Company's loss from operations in the period from April 15, 1996
through December 31, 1996 was $194,258, principally due to the expenses of
establishing the Company and formulating and promoting its first product lines.
Interest expense was $27,369, representing the expense associated with loans
obtained by the Company to support start-up costs and operations. In the period
from January 1, 1997 through June 30, 1997 the Company had operating income of
$294,697 and net income of $212,659. Interest expense for the period was
$82,806. The Company has incurred additional debt of $1,975,000 since December
31, 1996 and may incur additional debt to support the completion of construction
of its second manufacturing facility. The Company's interest expense may
increase considerably, although the Company is exploring sources of equity
financing to retire much, if not all of that debt, which would have the effect
of reducing interest expense. There can be no assurance, however that such
equity financing will be available on terms acceptable to the Company or at all.
Although the Company had a net profit of $212,659, for the six months
ended June 30, 1997, there can be no assurance that the Company will attain
significant sales, will be able to contain expenses or will be able to sustain
itself through operations.
LIQUIDITY AND CAPITAL RESOURCES
In the period from April 15, 1996 through December 31, 1996, the
Company had negative cash flows from operations of $221,627 and net cash used in
operating activities of $1,410,528 for the period. Cash inflows from financing
activities in that period totaled $2,040,589, representing $931,810 in net
proceeds from sales of its capital stock and $975,000 in proceeds of loans
evidenced by promissory notes from investors and $133,779 in advances from a
related party. This resulted in cash available at the end of the period of
$245,939.
In the period from January 1, 1997 through June 30, 1997, the Company
had negative cash flows from operations of $1,808,013, representing a
significant expansion of the Company's operations. Net cash inflows from
financing activities during the period were $1,975,000, representing the
proceeds of loans from shareholders. Cash on hand at the end of the period was
$124,321.
After June 30, 1997 the Company's cash position and liquidity were
enhanced by payment of approximately $1,075,000 by Hubbard in respect of sales
made to Hubbard prior to June 30, 1997.
The Company has incurred additional debt of $1,975,000 in the period
from December 31, 1996 to support continued construction of its second
manufacturing facility in the Dominican Republic and construction costs for
TAMBORIL AT THE PARK, an upscale cigar lounge and bar which opened in May at the
historic Lombardy Hotel in midtown New York City. The Company intends to use the
TAMBORIL AT THE PARK facility as a sales outlet for its cigars, to promote its
brands and to introduce new brands. Additional costs of completing the
manufacturing facility are approximately $700,000, which the Company intends to
fund from additional debt or equity financing. The Company has no lines of
credit or similar arrangements with banks or other traditional lending services.
The Company plans to seek a capital infusion of from $2 million to $7
million in equity capital to retire debt and support expansion of manufacturing
(including additional inventory purchases of tobacco) and sales and marketing
activities. The Company will be dependent on an infusion of at least the minimum
amount of this additional capital to support expansion. Failure to obtain such
equity capital could have a material adverse impact on the Company's ability to
expand its operation. There can be no assurance that equity capital will be
available to the Company on acceptable terms or at all.
INFLATION
Inflationary trends in the time the Company has been in operation have
not been material. Historically, cigar companies, especially manufacturers of
premium cigars, have been able to pass most inflationary increase through to
their customers through price increases.
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 excise taxes on
its products 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.
8
<PAGE>
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 in the future. Presumably, the trend toward increased
regulation will continue at all levels. Depending on these outcomes, there may
be a materially adverse effect on the tobacco products industry in general and
the Company in particular.
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-SB 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 be dependent 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 material, 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.
ITEM 3. DESCRIPTION OF PROPERTY.
(a) The Company maintains its administrative, sales and marketing
offices in its headquarters which consists of approximately 5,800 square feet of
space leased from an unrelated party at 2600 S.W. 3rd Avenue, Miami, FL 33129.
The Company's lease extends to March, 2001, with an option to renew for an
additional 5 years, and is at rates which the Company believes are competitive
for like space in its area. Annual rental payments under this lease are $93,000
as of April 1, 1997, $99,000 as of April 1, 1998, with annual increases
thereafter tied to the Consumer Price Index. The Company believes this facility
will be adequate for the foreseeable future and that, if additional space were
needed, it could be obtained in close geographic proximity at similar rates.
The Company's obligations under the lease are guaranteed by Viking Investment
Group II, Inc. ("Viking"), which is a substantial shareholder of the Company.
Ian Markofsky, the President and sole shareholder of Viking, is the father of
Anthony A. Markofsky, the Company's President and a Director.
9
<PAGE>
The Company's manufacturing facilities are housed in a mixed use
facility of approximately 6,700 square feet leased by Tabacalera at Calle Real
#167, Tamboril, Santiago de los Caballeros, Republica Dominica. This facility
also houses warehouse and administrative offices of Tabacalera. Tabacalera is
currently building an additional facility on land owned outright by Tabacalera
adjacent to its existing facility. This facility will consist of approximately
33,000 square feet and is projected to approximately quadruple the Company's
existing manufacturing capacity.
(b) The Issuer does not invest in real estate, other than as incident
to its manufacturing operations.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners.
The following information relates to those persons known to the Issuer to be the
beneficial owner of more than five percent (5%) of the Common Stock, par value
$.0001 per share, the only class of voting securities of the Issuer outstanding.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND NATURE OF
TITLE OF ADDRESS OF BENEFICIAL
CLASS BENEFICIAL OWNER OWNERSHIP PERCENTAGE OF CLASS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Abraham Shafir 800,000 shares 14.35%
Stock, par c/o Tamboril Cigar Company
value $.0001 2600 S.W. Third Ave. Direct
per share Miami, FL 33129
- --------------------------------------------------------------------------------------------
" South Edge International Limited (a) 425,000 shares 7.62%
P.O. Box HM 279
Hamilton HM AX Direct
Bermuda
- --------------------------------------------------------------------------------------------
Ian Markofsky
" c/o Viking Investment Group II, Inc. 1,500,000 shares (b) 26.90%
630 Third Ave.
New York, NY 10017 Direct
- --------------------------------------------------------------------------------------------
</TABLE>
(b) Security Ownership of Management.
The number of shares of Common Stock of the Issuer owned by the
Directors and Executive Officers of the Issuer is as follows:
_________________
(a) South Edge International Limited is a British Virgin Islands
corporation. The officers of South Edge having the authority to vote and/or
dispose of the shares of the Issuer's Common Stock held by South Edge are
William Manuel, President, and Jasmine Anderson, Secretary. Mr. Manuel and Ms.
Anderson are the only two directors of South Edge.
(b) Represents 1,500,000 shares owned of record by Viking Investment
Group II Inc., of which Ian Markofsky is President and Sole Shareholder.
10
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND NATURE OF
TITLE OF ADDRESS OF BENEFICIAL
CLASS BENEFICIAL OWNER OWNERSHIP PERCENTAGE OF CLASS
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Anthony Markofsky 90,000 Shares 1.61%
Stock, par Director, President and Chief
value $.0001 Executive Officer Direct
per share c/o Tamboril Cigar Company
2600 S.W. 3rd Ave.
Miami, FL 33129
- -----------------------------------------------------------------------------------------
" Thomas E. Knudson 90,000 Shares 1.61%
Director, Vice President
c/o Tamboril Cigar Company Direct
2600 S.W. 3rd Ave.
Miami, FL 33129
- -----------------------------------------------------------------------------------------
" Abraham Shafir 800,000 Shares 14.35%
Director
c/o Tamboril Cigar Company Direct
2600 S.W. 3rd Ave.
Miami, FL 33129
- -----------------------------------------------------------------------------------------
" David S. Rector 120,000 Shares 2.15%
Director, Secretary
c/o David Stephen Group Direct
1640 Terrace Way
Walnut Grove, CA 94596
- -----------------------------------------------------------------------------------------
" Pedro J. Mirones -0- N/A
Vice President and Chief
Financial
Officer
c/o Tamboril Cigar Company
2600 S.W. 3rd Ave.
Miami, FL 33129
- -----------------------------------------------------------------------------------------
" All Officers and Directors 1,106,000 19.84%
as a Group
- -----------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) The Directors and Executive Officers of the Company are as
follows. Directors of the Company serve for a term of one year or until their
successors are elected. Officers are appointed by, and serve at the pleasure
of, the Board.
ANTHONY MARKOFSKY, 30, PRESIDENT, CHIEF EXECUTIVE OFFICER AND
DIRECTOR.
Mr. Markofsky became President and Chief Executive Officer of the
Company on April 28, 1997. He has been a Director since October 1996. Prior to
that time, Mr. Markofsky served as Vice President and Sales Administration
Manager of the Company, a position he has held with TCI since its founding in
March 1996. From April 1995 to January 1996, Mr. Markofsky served as a
consultant to Intercare Inc., a medical management company. From April 1991 to
April 1995, he held various positions with CareFlorida Inc., a health
maintenance organization. Mr. Markofsky is also a Director and Secretary of
United Health Partners Inc., a company listed as a "Related Party" in the Notes
to the Consolidated Financial Statements included as Exhibit "C" to this
Memorandum. UHP currently has no operations. Mr. Markofsky's father is Ian
Markofsky, President and sole shareholder of Viking Investment Group II., Inc.,
a substantial shareholder of the Company and guarantor of the Company's
obligations under the lease for its Miami premises.
THOMAS E. KNUDSON, 42, DIRECTOR, VICE PRESIDENT OF SALES.
Mr. Knudson joined the TCI in June of 1996 and has occupied his
current position and has been a Director of the Company since October 1996.
Prior to that time, Mr. Knudson was a principal of several entrepreneurial
ventures including serving as Secretary of Leadville Development Corp., a
commercial real estate developer (1990 until June 1996), President and owner of
Cocobianco, a clothing importer and retailer (1986 to 1996) and Principal of
Fast Incorporated, a BMW dealership, all located in and around Sun Valley Idaho.
Mr. Knudson is also a Director and President of United Health Partners Inc.
("UHP"), a company listed as a "Related Party" in the Notes to the Consolidated
Financial Statements included as Exhibit "C" to this Memorandum. UHP currently
has no operations.
PEDRO J. MIRONES, 57, VICE PRESIDENT, FINANCE AND ADMINISTRATION,
CHIEF FINANCIAL OFFICER AND TREASURER.
Mr. Mirones joined the Company in his current position in December,
1996. From 1978 until January of 1996, Mr. Mirones held several positions with
Suave Shoe Corporation, a publicly traded manufacturer and distributor of shoes,
which is now known as French Fragrances, Inc. These positions included Vice
President Finance and Controller of the Manufacturing Division, Vice President
Finance--Corporate and Senior Vice President Finance and Administration. From
January 1996 until joining the Company in December 1996, Mr. Mirones attended
Florida International University. Prior to joining Suave, Mr. Mirones was
associated with the public accounting firm of Ernst & Young from 1969 to 1978.
Mr. Mirones is a member of the Florida Institute of Certified Public
Accountants.
12
<PAGE>
ABRAHAM SHAFIR, 48, DIRECTOR, PRESIDENT OF TABACALERA.
Mr. Shafir, a citizen of the State of Israel, relinquished the post of
President of the Company on April 28, 1997 to focus his energies on the
manufacturing operations of Tabacalera, where he has spent much of his time with
the Company. Mr. Shafir served as President and Chief Executive Officer and a
Director of TCI since its founding in March of 1996 and of the Company from
October 1996 to April 1997. He will continue in his role as a Director. From
1994 to 1995, Mr. Shafir served as President of Bagel Factory, a baked goods
manufacturing company located in the State of Israel. From 1988 to 1993, Mr.
Shafir was President of Mesa Gold, a jewelry import and sales company located in
Miami, Florida and New York, New York. From 1979 to 1988, Mr. Shafir owned and
operated various manufacturing and import sales companies in Israel and Miami,
Florida. Mr. Shafir lived and worked in the Dominican Republic for three years
and was Vice President, Manufacturing of the Weaving Division of Casa Central, a
major garment manufacturer located in Santo Domingo, from 1972 to 1975.
DAVID S. RECTOR, 50, DIRECTOR, SECRETARY
Mr. Rector has been a Director since August, 1996. From August 1996 to
March 1997, Mr. Rector was also Executive Vice President and General Manager of
the Company, where he was instrumental in organizing the Company's operations
and administration. In June of 1997, Mr Rector became Secretary of the company,
replacing Grant M Harasyn, who joined an affiliate of Hubbard in connection with
the company's distribution arrangement. Over the past two decades, Mr. Rector
has served as a business consultant to, and held senior positions in, a variety
of ventures. From July of 1995 until July 1996, Mr. Rector was principal of
David Stephen Group, a business consulting firm. Mr. Rector was Chief Operating
Officer of Headstrong Group, a manufacturer and distributor of hats, from July
to November 1995. From January to June of 1995 Mr. Rector was General Manager of
Bemiss-Jason, a distributor of paper products. From June 1992 to April 1994 he
was President of Supercart International, a distributor of shopping carts. From
April 1986 to June 1992 he was principal of Blue Moon, a distributor of garment
buttons. From 1980 to 1985, Mr. Rector served as President of Sunset Designs, a
designer of leisure time craft. From 1972 to 1980, Mr. Rector held various
managerial sales and marketing positions with Crown Zellerbach Corporation, a
multi-billion dollar manufacturer of paper and forest products.
As of August 2, 1997 Dr. William F. Coyro, Chief Executive Officer and
Chairman of the Board of National TechTeam, Inc., a publicly traded systems
integration company (NASDAQ Symbol "TEAM") resigned as a Director of the
Company, citing personal reasons.
Each of the Directors and officers of the Company also serve in the
same capacities in TCI and Diversified. Mr. Shafir is Director and President and
Mr. Knudson is Director, Treasurer and Vice President of Tabacalera.
(b) Another key employee of the Company is MR. JUAN CAPELLAN, GENERAL
MANAGER OF TABACALERA. Mr. Capellan, who has spent over 20 years in the cigar
industry in the Dominican Republic, is operations manager at Tabacalera. Prior
to joining Tabacalera in May, 1996, Mr. Capellan was Factory Manager in charge
of Human Resources and Product Development at the Anillo de Oro plant in
Tamboril and was production supervisor at the E. Leon Jimenes factory, also in
Tamboril. Prior to that Mr. Capellan worked as a cigar roller at various
facilities in the Tamboril area.
13
<PAGE>
(c) Anthony Markofsky, President and a Director of the Issuer, is the
son of Ian Markofsky, the President and sole shareholder of Viking Investment
Group II, Inc., which is a principal shareholder of the Issuer. Mr. Ian
Markofsky was instrumental in the founding of the Issuer and plays a significant
role in promoting the Issuer to the investment community.
ITEM 6. EXECUTIVE COMPENSATION.
The annual compensation for the Chief Executive Officer and the next
most highly compensated executive officers of the Issuer, on an annual basis,
for the fiscal year ended December 31, 1996 was:
<TABLE>
<CAPTION>
Other
Office Name Year Salary Compensation Total
- -------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CEO, Abraham Shafir 1996 $120,000 $37,000 $157,000
President
- -------------------------------------------------------------------
</TABLE>
No other executive officer received total compensation in excess of $100,000 for
the fiscal year ended December 31, 1996. No stock, stock option or other
compensatory awards were granted during the fiscal year ended December 31, 1996.
Amounts listed under Other Compensation relate to life insurance payments made
by the Issuer on behalf of Mr. Shafir.
David S. Rector, a Director, Secretary, and formerly Executive Vice
President of the Issuer, was paid $31,200 during the year ended December 31,
1996, based on an annual salary of $108,000.
The Company has no employment agreements with any members of its
management.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
(a) Abraham Shafir, Anthony Markofsky, Thomas Knudson and David Rector
each received the shares of the Issuer's Common Stock, par value $.0001 per
share, listed in Item 4, above, as founders shares in consideration of their
services in organizing TCI, arranging for the manufacturing facility in
Tamboril, staffing that operation and commencing the product development process
that led to the Company's Connecticut Collection and Sumatra Collection product
lines and negotiating the Reorganization transaction described in Item 1, above.
At the time of issuance, the shares were of nominal value, and the Board of
Directors of TCI determined that the value of services rendered by each of
Messrs. Shafir, Markofsky, Knudson and Rector exceed the par value of the shares
so issued. The shares in TCI held by each of these individuals were exchanged
for shares of the Issuer in connection with the Reorganization on the same terms
as all shareholders of TCI.
(b) The Company has obtained loans totaling $2,700,000 from certain
shareholders of the Company to help finance its operations to date.
The names of all shareholders who are also the company's creditors, the amounts
and the maturity dates of their loans are:
<TABLE>
<CAPTION>
Lender Amount of Loan Maturity Date
- ------ -------------- --------------
<S> <C> <C>
Jenadosa Holdings Limited $ 75,000 August 1998
Jenadosa Holdings Limited 100,000 September 1998
South Edge International Inc. 200,000 August 1998
Shangri La Investments Ltd. 150,000 October 1998
Shangri La Investments Ltd. 200,000 December 1998
Tradewinds Investments Ltd. $ 300,000 January 1998
Tradewinds Investments Ltd. 375,000 March 1998
Tradewinds Investments Ltd. 500,000 April 1998
Tradewinds Investments Ltd. 50,000 May 1998
Tradewinds Investments Ltd. 300,000 June 1998
Effingham Investments Limited 250,000 May 1998
Effingham Investments Limited 200,000 June 1998
</TABLE>
These loans bear interest at a rate of ten percent (10%) per annum and are each
evidenced by a promissory note in a face amount equal to the principal amount of
the loan to which it relates. The Loan Agreements entered into in connection
with the loans and the Promissory Notes provide for acceleration of the debt
upon the occurrence of certain events of default. One loan, in the amount of
$200,000 was made to the Company by South Edge International, Inc., which owns
7.62% of the issued and outstanding Common Stock of the Issuer.
14
<PAGE>
(c) Viking Investment Group II, Inc. ("Viking"), which owns 1,500,000
shares (26.9%) of the Issuer's Common Stock, received those shares as founder's
shares in connection with Viking's efforts in founding the Issuer in conjunction
with Messrs. Shafir, Markofsky, Knudson and Rector as described above. Ian
Markofsky, the President and sole shareholder of Viking, is the father of
Anthony Markofsky, President and a Director of the Issuer. Viking has also
guaranteed the Company's obligations on the lease for its Miami facilities. See
Item 3, above.
(d) The shares of South Edge and Viking in TCI were exchanged for
shares of the Issuer pursuant to the Reorganization on the same terms as all
other shareholders of TCI.
(e) In April 1996 the Company assumed the lease on its current Miami
premises from United Health Partners ("UHP") and in connection with the
assumption of the lease purchased certain furniture and fixtures from UHP.
Anthony Markofsky, President and a Director, and Thomas Knudson, Vice President
and a Director of the Corporation, are also directors and officers of UHP. The
Company is indebted to UHP in the amount of approximately $134,000 for advances
on operating expenses made by UHP. The debt is non-interest bearing and is
payable on demand. UHP no longer has any operations.
ITEM 8. LEGAL PROCEEDINGS.
By letter agreement dated January 21, 1997 (the "Agreement"), the
Company appointed Carlin Equities Corp. ("Carlin"), as exclusive placement
agent in connection with a contemplated offering of approximately 1.4 million
shares of the Company's common stock at $7.00 per share (the "Proposed
Offering"). Pursuant to the Agreement, the Company was to provide a confidential
offering memorandum in form and substance satisfactory to Carlin. During the
period January 21, 1997 through April 30, 1997, various meetings took place
between Carlin and the Company and their respective counsel, and documents and
correspondence were exchanged. The Company provided Carlin and its counsel with
several drafts of a confidential offering memorandum and related documents
drafted to the specifications of Carlin and its counsel. Carlin and its counsel
repeatedly and, in the opinion of the Company, unreasonably rejected these
documents. In light of these developments and the fact that Carlin had not
introduced the Company to prospective investors, the Company concluded that
Carlin had abandoned the Proposed Offering. The Company then decided not to
go forward with the Proposed Offering. On April 30, 1997, the Company released
an offering memorandum in connection with a new and substantively different
offering contemplated by the Company, of between approximately .33 and 1.17
million shares of preferred stock at $6.00 per share (the "New Offering").
Carlin was advised by letter of May 2, 1997 that the Company decided not to go
forward with the Proposed Offering and was instead proceeding on its own to
pursue the New Offering.
By letter of May 13, 1997, Carlin advised the Company that Carlin
believes it is entitled to certain compensation and costs if the Company
completes the New Offering. In early July, 1997, Carlin commenced an action in
the United States District Court, Southern District of New York, styled Carlin
------
Equities Corp. v. Tamboril Cigar Company, Docket No. 97 Civ. 4988 (the "Carlin
- ----------------------------------------
Action"), for breach of contract seeking compensation for various fees and
commissions, and in lieu of the issuance of warrants to purchase the Company's
stock, with total damages of an unspecified amount but of at least $1,680,000.
The Company believes that Carlin's claims lack merit since the Agreement
terminated before the Company incurred any obligation to Carlin, Carlin
abandoned the Proposed Offering, and Carlin failed to satisfy conditions
precedent to its rights to receive fees and other compensation. On July 16,
1997, the Company requested that the Carlin Action be voluntarily dismissed.
Carlin agreed to take this request under advisement. By August 5, 1997, no
decision on this request had been received by the Company nor had the Company
been served with a Summons and Complaint in the Carlin Action. The Company
intends to vigorously defend itself against all claims made in the Carlin
Action.
Except as disclosed above in this Item 8, the Issuer is not party to
any pending legal proceeding, nor is its property the subject of any pending
legal proceeding that is not routine litigation that is incidental to its
business.
ITEM 9. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
(a) The Issuer's Common Stock trades on the National Association of
Securities Dealers, Inc. Electronic Bulletin Board under the trading symbol of
"SMKE." The Common Stock resumed trading under that symbol on November 5, 1996.
Prior to that time, the Common Stock was listed for trading under the symbol
"ILLD," but there was no established bid price for the Common Stock.
Accordingly, the high and low bid prices for the Issuer's Common Stock for each
quarter within the last two fiscal years and the 1st and 2nd Quarters of 1997,
as reported by National Quotation Bureau, LLC, are as follows:
<TABLE>
<CAPTION>
QUARTER HIGH BID PRICE LOW BID PRICE
- ---------------------------------------------------------------------
<S> <C> <C>
1995 Q1 (1/3-3/31) None None
- ---------------------------------------------------------------------
Q2 (4/3-6/30) None None
- ---------------------------------------------------------------------
Q3 (7/3-9/29) None None
- ---------------------------------------------------------------------
Q4 (10/2-12/29) None None
- ---------------------------------------------------------------------
1996 Q1 (1/2-3/29) None None
- ---------------------------------------------------------------------
Q2 (4/1-6/28) None None
- ---------------------------------------------------------------------
Q3 (7/1-9/30) None None
- ---------------------------------------------------------------------
Q4 (10/1-11/4) None None
- ---------------------------------------------------------------------
(11/5-12/31) $11.375 $7.50
- ---------------------------------------------------------------------
1997 Q1 (1/2-3/31) 11.0625 7.25
- ---------------------------------------------------------------------
Q2 (4/1-6/30) 7.50 4.625
- ---------------------------------------------------------------------
</TABLE>
Prices for the period November 5, 1996 through December 31, 1996 reflect closing
bid prices and a 1-for-20 reverse stock split. These quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.
15
<PAGE>
(b) There were 676 beneficial owners of the Company's Common Stock as
of May 15, 1997.
(c) The Issuer has not paid any cash dividends on its Common Stock,
nor does it intend to do so in the foreseeable future. Under the General
Corporation Law of the State of Delaware, the Issuer may only pay dividends out
of capital and surplus, or out of certain delineated retained earnings, all as
defined in the General Corporation Law. There can be no assurance that the
Issuer will have such funds legally available for the payment of dividends in
the event that the Issuer should decide to do so.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Tamboril Cigar International, Inc., was originally founded under the
name "Conquistador Cigar Company" in the State of Delaware in 1996.
"Conquistador" changed its name to "Tamboril Cigar Company" in June of 1996 and
to "Tamboril Cigar International, Inc. ("TCI")" in January of 1997. TCI is
currently the principal U.S.-based operating subsidiary of the Company.
In connection with the founding of the company now known as TCI,
2,600,000 shares of common stock, par value $.0001 per share ("TCI Common
Stock") were issued to its founders in March and April 1996. These founders were
Ian Markofsky (through Viking Investment Group II, Inc.), Abraham Shafir, David
S. Rector, Anthony Markofsky and Thomas E. Knudson. See Item 4, above. As TCI
was then a start-up company with no assets or business, the shares issued to the
founders were valued at par, or $.0001 per share. Since the founders' shares
were issued pursuant to certain exemptions from registration contained in
Sections 4(2) and 4(6) of the Securities Act, the shares were "restricted
securities" (as defined by the Securities Act) which were issued with an
appropriate restrictive legend.
From April 15, 1996 through October 23, 1996, in order to raise its
initial working capital to begin its business, TCI conducted an offering under
Rule 504 of Regulation D under the Securities Act. In connection with the Rule
504 offering, TCI said 2,833,338 shares of TCI Common Stock to domestic and
foreign accredited investors at a price of $.35 per share, for proceeds to TCI
of $990,000. TCI also issued 25,000 restricted shares of TCI Common Stock to its
legal counsel in satisfaction of legal fees due and owing in the amount of
$5,000, which valued such shares at $.20 per share. These 25,000 shares were
issued in reliance upon the exemption from registration pursuant to Rule 701
under the Securities Act.
On October 23, 1996, TCI entered into an Acquisition Agreement and
Plan of Reorganization (the "Agreement") with Idaho Leadville Mines Company, a
company organized and existing under the laws of the State of Washington ("Idaho
Leadville"). Under the terms of the Agreement, the shareholders of TCI exchanged
each of their shares of TCI Common Stock for one share of Idaho Leadville's
common stock, so that 5,458,338 shares of Idaho Leadville stock were issued to
the shareholders of TCI on a one-share-for-one-share basis and TCI became a
wholly-owned subsidiary of Idaho Leadville. Therefore, the founders of TCI
received 2,600,000 restricted shares of Idaho Leadville common stock, the
purchasers of TCI Common Stock in TCI's offering under Rule 504 received
2,833,338 unrestricted shares of Idaho Leadville common stock, legal counsel to
TCI received 25,000 restricted shares of Idaho Leadville common stock and the
prior shareholders of Idaho Leadville retained the 116,972 shares of Idaho
Leadville common stock that they held prior to the Agreement.
In connection with the reorganization effected under the Agreement,
Idaho Leadville changed its name to "Tamboril Cigar Company" and changed its
state of incorporation to Delaware. For additional description of the
reorganization transaction, see Item 1, above.
ITEM 11. DESCRIPTION OF SECURITIES.
COMMON STOCK
The only security of the Issuer outstanding is its Common Stock, par
value $.0001 per share. The Company is authorized to issue up to 20,000,000
shares of Common Stock, par value $.0001 per share, of which 5,575,310 shares
are outstanding on the date hereof. Holders of Common Stock are entitled to one
vote for each share held of record on each matter submitted to a vote of
stockholders. There is no cumulative voting for election of directors. Subject
to the prior rights of any series of preferred stock which may from time to time
be outstanding, if any, holders of Common Stock are entitled to receive ratably,
dividends when, as, and if declared by the Board of Directors out of funds
legally available therefor and, upon the liquidation, dissolution, or winding up
of the Company, are entitled to share ratably in all assets remaining after
payment of liabilities and payment of accrued dividends and liquidation
preferences on the preferred stock, if any. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding Common Stock is validly authorized and
issued, fully paid, and nonassessable.
SERIES A PREFERRED STOCK
The Company is authorized to issue up to five million (5,000,000)
shares of preferred stock par value $.0001 of any number of classes or series
with such rights, preferences, powers and limitations as shall be determined by
the Board of Directors of the Company. Pursuant to a Certificate of
Designations, Preferences and Rights of the Series A Preferred Stock, adopted as
of April 25, 1997, the Board of Directors authorized the issuance of up to one
million five hundred thousand (1,500,000) shares of Series A Cumulative
Convertible Preferred Stock, par value $.0001 per Share, (the "Series A
Preferred Stock"). The Shares of Series A Preferred Stock pay an annual
dividend of four percent (4%), which is fully cumulative, payable quarterly on
each March 31, June 30, September 30 and December 31, out of funds legally
available therefor in either cash, shares of Common Stock or any combination of
cash and Common Stock, all
16
<PAGE>
as determined by the Board of Directors of the Company. Any payment of any
portion of any dividend in shares of Common Stock is to be calculated in
accordance with the Conversion Price, as defined below.
The Shares are, from and after the one hundred and eightieth (180th)
day following their date of issuance (the "Issue Date"), convertible into shares
of the Company's Common Stock, par value $.0001 per share (the "Common Stock").
The Conversion Price for each Share of Series A Preferred Stock is equal to the
lesser of (i) $6.00 or (ii) eighty percent (80%) of the market price per share
of the Common Stock, defined as the mean average of the last sale price on the
ten (10) trading days immediately preceding the date upon which the Company
receives notice of the holder's intention to convert (the "Conversion Date").
The Shares are, from and after the three hundred and sixty-fifth
(365th) day following the Issue Date, redeemable by the Company at a Redemption
Price per Share equal to the amount of all accrued but unpaid dividends, plus:
<TABLE>
<S> <C>
From 1st anniversary to 2nd
anniversary of Issue Date Issue Price
2nd anniversary to 3rd
anniversary of Issued Date 105% of Issue Price
3rd anniversary to 4th
anniversary of Issue Date 110% of Issue Price
4th anniversary to 5th
anniversary of Issue Date 115% of Issue Price
After 5th anniversary of Issue Date 120% of Issue Price
</TABLE>
The Company may elect to redeem any portion of the then outstanding Shares of
Series A Preferred Stock and, if redeeming a portion of the outstanding Shares,
will do so pro rata for all holders. Upon any proposed redemption by the
Company, the holder of any Series A Preferred Stock may elect to convert any or
all of the Shares into Common Stock in lieu of redemption.
OTHER PREFERRED STOCK
Under the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors of the Company is authorized to designate, and cause the
Company to issue, up to five million (5,000,000) shares of preferred stock of
any class or series, having such rights, preferences, powers and limitations as
the Board shall determine. As the Series A Preferred Stock consists of
1,500,000 Shares, the Board could, in the future, authorize and cause the
Company to issue up to 3,500,000 shares of preferred stock of one or more series
or classes, having rights, preferences and powers as determined by the Board,
which could be senior to those of the Series A Preferred Stock, including the
right to receive dividends and/or preferences upon liquidation, dissolution or
winding-up of the Company in excess of, or prior to, the rights of the holders
of the Series A Preferred Stock. This could have the effect of materially
impairing the rights of the holders of the Series A Preferred Stock to receive
such dividends or preferential payments and/or of reducing, or eliminating, the
amounts that would otherwise have been available for payment to the holders of
the Series A Preferred Stock.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Issuer's Amended and Restated Certificate of Incorporation and By-
laws contain provisions eliminating the personal liability of a director to the
Issuer and its stockholders for certain breaches of his or her fiduciary duty of
17
<PAGE>
care as a director. This provision does not, however, eliminate or limit the
personal liability of a director (i) for any breach of such director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Delaware statutory provisions making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve
on the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above), including grossly negligent business decisions made in connection with
takeover proposals for the Company. As a result of this provision, the ability
of the Company or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care has been limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or recision based upon a director's breach of his duty of care. The
Securities and Exchange Commission (the "Commission") has taken the position
that the provision will have no effect on claims arising under the federal
securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the Delaware General Corporation Law.
ITEM 13. FINANCIAL STATEMENTS.
Registrant's Consolidated Financial Statements as of December 31, 1996
and for the period from April 15, 1996 (Date Operations Commenced) to December
31, 1996, and the independent auditors' report of Goldstein Golub Kessler &
Company, P.C., independent certified public accountants, with respect thereto,
appear on pages F-1 to F-10 of this Form 10-SB. Registrant's Unaudited
Consolidated Financial Statements as of June 30, 1997 and for the Six Months
ended June 30, 1997 appear on pages F-11 to F-19 of this Form 10-SB. These
financial statements are incorporated by reference herein by reference
thereto.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Registrant's Consolidated Financial Statements as of December 31,
1996 and for the period from April 15, 1996 (Date Operations Commenced) to
December 31, 1996, and the independent auditors' report of Goldstein Golub
Kessler & Company, P.C., independent certified public accountants, with respect
thereto, are included at Pages F-1 through F-10 of this Form 10-SB.
Registrant's Unaudited Consolidated Financial Statements as of June
30, 1997 and for the Six Months ended June 30, 1997 appear on pages F-11 to F-19
of this Form 10-SB.
(b) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2 Acquisition Agreement and Plan of Reorganization dated as
of October 23, 1996 by and between Idaho Leadville Mines
Company and Tamboril Cigar Company *
3.1 Amended and Restated Certificate of Incorporation of
Registrant. *
3.2 By-laws of Registrant *
4.1 Certificate of Designation for Registrant's Series A
Preferred Stock *
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
10.1 Lease for Miami Premises*
10.2 Distribution Agreement between the Company
and Hubbard Imports*
21 List of Subsidiaries of the Registrant*
</TABLE>
- ---------------
* Previously filed.
19
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
TAMBORIL CIGAR COMPANY
Date: August 20, 1997 By /s/ Anthony Markofsky
-------------------------------------------
Anthony Markofsky
President and Chief Executive Officer
Date: August 20, 1997 By /s/ Pedro J. Mirones
-------------------------------------------
Pedro J. Mirones
Vice President and Chief Financial Officer
20
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
================================================================================
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-10
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Tamboril Cigar Company
We have audited the accompanying consolidated balance sheet of Tamboril Cigar
Company and Subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from April 15, 1996 (date operations commenced) to December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our 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 Tamboril Cigar
Company and Subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the period from April 15, 1996 (date
operations commenced) to December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Goldstein Golub Kessler & Company, P.C.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
January 24, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
==============================================================================================
<S> <C>
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------
ASSETS (Note 10)
Current Assets:
Cash (Note 1) $ 245,939
Accounts receivable - less allowance for doubtful accounts of $15,000 275,696
Inventory (Notes 1 and 2) 813,938
Advances to suppliers 181,588
Other current assets 31,419
TOTAL CURRENT ASSETS 1,548,580
- -----------------------------------------------------------------------------------------------
Property and Equipment, net (Notes 1 and 3) 359,798
Other Assets 103,550
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $2,011,928
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 122,308
Accrued expenses and other current liabilities 65,658
Due to related party (Note 6) 133,779
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 321,745
Notes Payable (Note 4) 250,000
Notes Payable - stockholders (Note 7) 725,000
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,296,745
- -----------------------------------------------------------------------------------------------
Commitments (Note 8)
Stockholders' Equity (Notes 1 and 5):
Common stock - $.0001 par value; authorized 20,000,000 shares, issued 5,575,310 557
Additional paid-in capital 936,253
Accumulated deficit (221,627)
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 715,183
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,011,928
===============================================================================================
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
===========================================================================
PERIOD FROM APRIL 15, 1996 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1996
- ---------------------------------------------------------------------------
<S> <C>
Net sales (Notes 1 and 10) $1,413,815
Cost of goods sold 573,687
- ---------------------------------------------------------------------------
Gross profit 840,128
Selling, general and administrative expenses 1,034,386
- ---------------------------------------------------------------------------
Loss from operations (194,258)
Interest expense 27,369
- ---------------------------------------------------------------------------
Net loss $ (221,627)
===========================================================================
Net loss per common share (Note 1) $ (.05)
===========================================================================
Weighted average number of common shares outstanding (Note 1) 4,651,502
===========================================================================
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
==================================================================================================
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 2,600,000 $260 $ (50) - $ 210
Issuance of common stock for
professional services 25,000 2 4,998 - 5,000
Issuance of common stock for cash 2,833,338 283 989,717 - 990,000
Issuance of common stock in reverse
acquisition (Note 1) 116,972 12 (58,412) - (58,400)
Net loss - - - $(221,627) (221,627)
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,575,310 $557 $936,253 $(221,627) $ 715,183
==================================================================================================
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
======================================================================================
PERIOD FROM APRIL 15, 1996 (DATE OPERATIONS COMMENCED) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss $(221,627)
Provision for doubtful accounts 15,000
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 24,324
General and administrative expenses paid by issuance of stock 5,000
Changes in operating assets and liabilities:
Increase in accounts receivable (290,696)
Increase in other current assets (31,419)
Increase in advances to suppliers (181,588)
Increase in inventory (813,938)
Increase in other assets (103,550)
Increase in accounts payable 122,308
Increase in accrued expenses and other current liabilities 65,658
- --------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,410,528)
- --------------------------------------------------------------------------------------
Cash flows from investing activity - purchase of property and equipment (384,122)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 250,000
Proceeds from issuance of notes payable - stockholders 725,000
Proceeds from advances by related party 133,779
Net proceeds from issuance of common stock 931,810
- --------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,040,589
- --------------------------------------------------------------------------------------
Net increase in cash and cash at end of period $ 245,939
======================================================================================
</TABLE>
F-6
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
1. PRINCIPAL Tamboril Cigar Company is a manufacturer and
BUSINESS distributor of handmade cigars. The tobacco is
ACTIVITY AND purchased and the cigars are manufactured at
SIGNIFICANT facilities in the Dominican Republic and sold to
ACCOUNTING retail tobacconists throughout the United States.
POLICIES:
The accompanying consolidated financial statements
at December 31, 1996 and for the period from April
15, 1996 (date operations commenced) to December
31, 1996 include the accounts of Idaho Leadville
Mines Co. (an inactive company), Tamboril Cigar
Company and Tamboril Cigar Company's wholly owned
and majority-owned subsidiaries, Diversified
Tobacco Company and Tabacalera Tamboril SA.
(collectively the "Company"). All intercompany
transactions and balances have been eliminated in
consolidation.
On October 23, 1996, Idaho Leadville Mines Co.
acquired all of the outstanding common stock of
Tamboril Cigar Company. For accounting purposes
the acquisition has been treated as a
recapitalization of Tamboril Cigar Company with
Tamboril Cigar Company as the acquirer (reverse
acquisition).
Subsequent to December 31, 1996, Tamboril Cigar
Company changed its name to Tamboril Cigar
International Inc. and Idaho Leadville Mines Co.
reincorporated in the state of Delaware by merging
into a newly formed Delaware company called
Tamboril Cigar Company.
Revenue from the sale of products is recognized at
the date of shipment to customers.
Depreciation of property and equipment is provided
for by the straight-line method over the estimated
useful lives of the respective assets.
Amortization of leasehold improvements is provided
for over the related lease term.
The Company maintains cash balances in bank
accounts which, at times, may exceed federally
insured limits. It has not experienced any losses
to date resulting from this policy.
Inventory is stated at the lower of cost
(first-in, first-out method) or market. In
accordance with generally recognized industry
practice, all 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.
Loss per share is calculated based upon the
weighted average number of shares of common stock
outstanding during the year.
Management does not believe that any recently
issued, but not yet effective, accounting
standards if currently adopted would have a
material effect on the accompanying consolidated
financial statements.
The Company and the cigar industry in general have
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 future
shortages will not have an adverse effect on the
Company.
F-7
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
Based on the borrowing rates currently available
for loans with similar terms and average
maturities, the fair value of the notes payable
and notes payable - stockholders approximates the
carrying amount.
Costs incurred for producing and communicating
advertising are expensed as incurred and are
included in selling, general and administrative
expenses in the accompanying consolidated
statement of operations. Advertising expenses
were approximately $70,000 for the period ended
December 31, 1996.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management affecting reported amounts of assets
and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities.
Actual results could differ from these estimates.
<TABLE>
<CAPTION>
2. INVENTORY: Inventory consists of the following:
<S> <C>
Raw materials $454,789
Finished goods 359,149
-----------------------------------------------------------------
$813,938
=================================================================
3. PROPERTY AND Property and equipment, at cost, consists of the following:
EQUIPMENT:
Estimated
Useful Life
-----------------------------------------------------------------
Machinery and equipment $176,821 5 to 7 years
Land 97,691
Buildings and building
improvements 41,206 20 years
Furniture and fixtures 16,194 5 years
Computers 11,118 5 years
Leasehold improvements 41,092 Term of lease
-----------------------------------------------------------------
384,122
Less accumulated depreciation
and amortization 24,324
------------------------------------------------------------------
$359,798
==================================================================
Approximately $270,000 of the Company's property and equipment
(net of $13,856 accumulated depreciation) is located in the
Dominican Republic.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================================
4. NOTES PAYABLE: Notes payable consist of the following:
<S> <C>
Note payable - Highgate Resources Ltd.:
Due April 1998 bearing interest at 10% per annum $ 50,000
--------------------------------------------------------------------
Note payable - Alphacom Data Security Services Ltd.:
Due October 1998 bearing interest at 10% per annum $200,000
--------------------------------------------------------------------
$250,000
====================================================================
5. STOCKHOLDERS' On April 16, 1996, the Company issued 25,000 shares of common stock
EQUITY: to its attorney in exchange for services valued at $5,000. On
October 23, 1996, the Company issued 116,972 shares of common stock
to the stockholders of Idaho Leadville Mines Co. in a transaction
accounted for as a reverse acquisition (see Note 1).
6. RELATED PARTY The Company purchased furniture and fixtures from United Health
TRANSACTIONS: Partners, Inc. ("UHP"), a company that has a stockholder and
officer that is a stockholder and officer of the Company.
The Company assumed the office lease of UHP in April 1996.
There is an amount due UHP of approximately $134,000 that is
noninterest-bearing and due on demand.
7. NOTES PAYABLE - Notes payable - stockholders consist of the following:
STOCKHOLDERS:
Notes payable - Jenadosa Holdings Limited:
Due August 1998 bearing interest at 10% per annum $ 75,000
Due September 1998 bearing interest at 10% per annum 100,000
Note payable - South Edge International Inc.:
Due August 1998 bearing interest at 10% per annum 200,000
Notes payable - Shangri La Investments Ltd.:
Due October 1998 bearing interest at 10% per annum 150,000
Due December 1998 bearing interest at 10% per annum 200,000
--------------------------------------------------------------------
$725,000
====================================================================
</TABLE>
F-9
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<C> <S>
8. COMMITMENTS: The Company has entered into noncancelable operating leases for
office and warehouse facilities, which expire in March 2001.
The approximate future minimum rental commitments under these leases,
exclusive of required payments for increases in certain operating
costs, are as follows:
Year ending December 31,
1997 $ 87,000
1998 93,000
1999 99,000
2000 99,000
2001 25,000
--------------------------------------------------------------------
$403,000
====================================================================
The office lease has an option to renew for five years at a base rent,
as defined. Rent expense for the period ended December 31, 1996 was
approximately $38,000.
The Company's lease commitment for office space is guaranteed by a
stockholder of the Company.
9. INCOME TAXES: As of December 31, 1996, the Company has a net operating loss
carryforward for both financial reporting and income tax purposes
of approximately $223,000 available to offset future income through
2011. There were no material temporary differences between the book
bases and tax bases of assets and liabilities. This resulted in a
deferred income tax asset of approximately $55,000 for which the
Company recorded a full valuation allowance due to uncertainty
of future realization of such losses.
10. Foreign Operations: The Company operates principally in two geographic areas: the United
States and the Dominican Republic. Following is a summary of information
by area for 1996:
Net sales to unaffiliated customers:
United States $1,413,815
Dominican Republic 0
----------
Net sales as reported in the accompanying
consolidated statement of operations $1,413,815
==========
Inter-area sales:
United States $0
Dominican Republic 538,604
----------
Total inter-area sales $538,604
==========
Loss from operations:
United States ($14,801)
Dominican Republic (206,826)
----------
Net loss as reported in the accompanying
consolidated statement of operations ($221,627)
==========
Identifiable assets:
United States $806,453
Dominican Republic 1,182,378
----------
1,988,831
General corporate assets 23,097
----------
Total assets as reported in the accompanying
consolidated balance sheet $2,011,928
==========
Inter-area sales are accounted for at cost and are eliminated in
consolidation in the accompanying consolidated statement of operations.Identifiable
assets are those that are identifiable with operations in each geographic
area. General corporate assets consist of organizational costs.
</TABLE>
F-10
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 124,321 $ 245,939
Accounts receivable 1,689,936 275,696
Inventory 1,486,886 813,938
Prepaid expenses and other current assets 403,253 213,007
- --------------------------------------------------------------------------------
Total current assets 3,704,396 1,548,580
- --------------------------------------------------------------------------------
Property and equipment 620,038 359,798
Other assets 220,724 103,550
- --------------------------------------------------------------------------------
TOTAL ASSETS $4,545,158 $2,011,928
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 257,393 122,308
Accrued expenses and other current
liabilities 276,144 65,658
Due to related party 133,779 133,779
- --------------------------------------------------------------------------------
Total current liabilities 667,316 321,745
================================================================================
Long term debt
Notes payable 250,000 250,000
Notes payable stockholders 2,700,000 725,000
- --------------------------------------------------------------------------------
Total liabilities 3,617,316 1,296,745
- --------------------------------------------------------------------------------
Equity
Common stock--$.0001 par value 557 557
Additional paid-in capital 936,253 936,253
Accumulated deficit (8,968) (221,627)
- --------------------------------------------------------------------------------
Stockholders' Equity 927,842 715,183
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,545,158 $2,011,928
================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-11
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS PERIOD ENDED
JUNE 30, 1997
-------------
<S> <C>
Net sales $1,750,989
Cost of goods sold 646,281
- --------------------------------------------------------------------------------
Gross profit 1,104,708
- --------------------------------------------------------------------------------
Selling, general and administrative expenses (738,261)
Proceeds from insurance (net of $69,890 cost of cigars lost) 160,500
- --------------------------------------------------------------------------------
Income from operations 526,947
- --------------------------------------------------------------------------------
Interest expense, net of $431 interest income 53,944
- --------------------------------------------------------------------------------
Income before income taxes 473,003
- --------------------------------------------------------------------------------
Income taxes:
Current 51,000
Deferred (51,000)
- --------------------------------------------------------------------------------
Net income 473,003
================================================================================
- --------------------------------------------------------------------------------
Net income per common share $ 0.08
================================================================================
Weighted average number of common shares outstanding 5,575,310
================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-12
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS PERIOD ENDED
JUNE 30, 1997
-------------
<S> <C>
Net sales $ 2,538,988
Cost of goods sold 906,380
- --------------------------------------------------------------------------------
Gross profit 1,632,608
- --------------------------------------------------------------------------------
Selling, general and administrative expenses (1,498,411)
Proceeds from insurance (net of $69,890 cost of cigars lost) 160,500
- --------------------------------------------------------------------------------
Operating Income 294,697
- --------------------------------------------------------------------------------
Interest expense, net of $768 interest income 82,038
- --------------------------------------------------------------------------------
Income before income taxes 212,659
- --------------------------------------------------------------------------------
Income taxes:
Current 51,000
Deferred (51,000)
- --------------------------------------------------------------------------------
Net income 212,659
================================================================================
- --------------------------------------------------------------------------------
Net income per common share $ 0.04
================================================================================
Weighted average number of common shares outstanding 5,575,310
================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-13
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT CAPITAL DEFICIT EQUITY
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 2,600,000 $260 $ (50) -- $ 210
Issuance of common stock
for professional services 25,000 2 4,998 -- 5,000
Issuance of common stock
for cash 2,833,338 283 998,717 -- 990,000
Issuance of common stock
in reverse acquisition 116,972 12 (58,412) -- (58,400)
Net loss -- -- -- $(221,627) (221,627)
- -------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,575,310 $557 $936,253 $(221,627) $ 715,183
- -------------------------------------------------------------------------------------------
Net income -- -- -- 212,659 212,659
- -------------------------------------------------------------------------------------------
Balance at June 30, 1997 5,575,310 $557 $936,253 $ (8,968) $ 927,842
- -------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-14
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR THE SIX MONTHS PERIOD ENDED JUNE 30, 1997
<S> <C>
Cash flows from operating activities:
Net income $ 212,659
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 28,365
Changes in operating assets and liabilities:
Increase in accounts receivable (1,414,240)
Increase in prepaid expenses and other current
assets (190,246)
Increase in inventory (672,948)
Increase in other assets (117,174)
Increase in accounts payable 135,085
Increase in accrued expenses and other current
liabilities 210,486
- --------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,808,013)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cash flows used in investing activity--purchase of property
and equipment (288,605)
- --------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable--stockholders 1,975,000
- --------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 1,975,000
- --------------------------------------------------------------------------------
NET DECREASE IN CASH (121,618)
- --------------------------------------------------------------------------------
Cash at beginning of the period 245,939
- --------------------------------------------------------------------------------
CASH AT END OF THE PERIOD $ 124,321
- --------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-15
<PAGE>
TAMBORIL CIGAR COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
GENERAL
- -------
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles applicable to interim financial
statements and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Tamboril Cigar Company (the "Company"), the
accompanying financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of June 30, 1997. Furthermore,
all adjustments were of a normal recurring nature.
PRINCIPAL BUSINESS ACTIVITY
- ---------------------------
Tamboril Cigar Company is a manufacturer and distributor of handmade cigars.
The tobacco is purchased and the cigars are manufactured at facilities in the
Dominican Republic and sold to retail tobacconists throughout the United States.
The accompanying consolidated financial statements include the accounts of
Tamboril Cigar Company (formerly known as Idaho Leadville Mines Co.), Tamboril
Cigar International, Inc. ( formerly known as Tamboril Cigar Company), and
Tamboril Cigar Company's wholly owned and majority-owned subsidiaries,
Diversified Tobacco Company and Tabacalera Tamboril S.A. (collectively the
"Company"). All intercompany transactions and balances have been eliminated in
consolidation.
On October 23, 1996, Idaho Leadville Mines Co. acquired all of the outstanding
common stock of Tamboril Cigar Company. For accounting purposes the acquisition
has been treated as a recapitalization of Tamboril Cigar Company with Tamboril
Cigar Company as the acquirer (reverse acquisition).
Tamboril Cigar Company changed its name to Tamboril Cigar International Inc. and
Idaho Leadville Mines Co. reincorporated in the state of Delaware by merging
into a newly formed Delaware company called Tamboril Cigar Company.
ACCOUNTING POLICIES
- --------------------
Revenue from the sale of products is recognized at the date of shipment to
customers.
Depreciation of property and equipment is provided for by the straight-line
method over the estimated useful lives of the respective assets. Amortization
of leasehold improvements is provided for over the related lease term.
Approximately $523,546 of the Company's property plant and equipment (net of
$30,528 accumulated depreciation) is located in the Dominican Republic.
F-16
<PAGE>
The Company maintains cash balances in bank accounts, which, at times, may
exceed federally insured limits. It has not experienced any losses to date
resulting from this policy.
Inventory is stated at the lower of cost (first-in, first-out method) or market.
In accordance with generally recognized industry practice, all 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. Approximately $1,427,573 of the Company's inventory is located in the
Dominican Republic.
Income (loss) per share is calculated based upon the weighted average number of
shares of common stock outstanding during the year.
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying consolidated financial statements.
The Company and the cigar industry in general have 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 future
shortages will not have an adverse effect on the Company.
Based on the borrowing rates currently available for loans with similar terms
and average maturities, the fair value of the notes payable and notes payable
stockholders approximates the carrying amount.
Costs incurred for producing and communicating advertising are expensed as
incurred and are included in selling, general and administrative expenses in the
accompanying consolidated statement of operations
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates by management affecting
reported amounts of assets and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates.
SEASONALITY
- -----------
The results of operations for the six months period ended June 30, 1997 are not
indicative of the results to be expected for the entire year because the
Company's operations are seasonal.
F-17
<PAGE>
NOTES PAYABLE:
- --------------
<TABLE>
<S> <C>
Notes payable consist of the following:
Note payable--Highgate Resources Ltd:
Due April 1998 bearing interest at 10% per annum $ 50,000
Note payable--Alphacom Data Security Services Ltd.:
Due October 1998 bearing interest at 10% per annum 200,000
$ 250,000
NOTES PAYABLE STOCKHOLDERS:
- ---------------------------
Notes payable--stockholders consist of the following:
Notes payable--Jenadosa Holdings Limited:
Due August 1998 bearing interest at 10% per annum $ 75,000
Due September 1998 bearing interest at 10% per annum 100,000
Notes payable--South Edge International Inc. :
Due August 1998 bearing interest at 10% per annum 200,000
Notes payable--Shangri La Investments Ltd.:
Due October 1998 bearing interest at 10 % per annum 150,000
Due December 1998 bearing interest at 10% per annum 200,000
Notes payable--Tradewinds Investments Ltd.:
Due January 1998 bearing interest at 10% per annum 300,000
Due March 1998 bearing interest at 10% per annum 375,000
Due April 1998 bearing interest at 10% per annum 500,000
Due May 1998 bearing interest at 10% per annum 50,000
Due June 1998 bearing interest at 10% per annum 300,000
Notes payable--Effingham Investments Limited:
Due May 1998 bearing interest at 10% per annum 250,000
Due June 1998 bearing interest at 10% per annum 200,000
$2,700,000
</TABLE>
F-18
<PAGE>
INFORMATION ABOUT MAJOR CUSTOMER
- --------------------------------
During the quarter ended June 30, 1997, the Company entered into a Distribution
Agreement with Hubbard Imports. Under the terms of the Distribution Agreement,
the Company is expected to sell approximately $5,000,000 of cigars to Hubbard
during the year 1997. Sales to Hubbard for the six month period ended June 30,
1997 amounted to $1,153,692 (45.4% of total sales).
Hubbard will be the exclusive importer of the Company's brands into the United
States through December 31, 2000. Annual minimum sales commitments will be set
by mutual agreement on a yearly basis.
LITIGATION
- ----------
By letter agreement dated January 21, 1997 (the "Agreement"), the Company
appointed Carlin Equities Corp. ("Carlin"), as exclusive placement agent in
connection with a contemplated offering of approximately 1.4 million shares of
the Company's common stock at $7.00 per share (the "Proposed Offering").
Pursuant to the Agreement, the Company was to provide a confidential offering
memorandum in form and substance satisfactory to Carlin. During the period
January 21, 1997 through April 30, 1997, various meeting took place between
Carlin and the Company and their respective counsel, and documents and
correspondence were exchanged. The Company provided Carlin and its counsel with
several drafts of a confidential offering memorandum and related documents
drafted to the specifications of Carlin and its counsel. Carlin and its counsel
repeatedly and, in the opinion of the Company, unreasonably rejected these
documents. In light of these developments and the fact that Carlin had not
introduced the Company to prospective investors, the Company concluded that
Carlin had abandoned the Proposed Offering. The Company then decided not to go
forward with the Proposed Offering. On April 30, 1997, the Company released an
offering memorandum in connection with a new and substantively different
offering contemplated by the Company, of between approximately .33 and 1.17
million shares of preferred stock at $6.00 per share (the "New Offering").
Carlin was advised by letter of May 2, 1997 that the Company decided not to go
forward with the Proposed Offering and was instead proceeding on its own to
pursue the New Offering.
By letter of May 13, 1997, Carlin advised the Company that Carlin believes it is
entitled to certain compensation and costs if the Company completes the New
Offering. In early July, 1997, Carlin commenced an action in the United States
District Court, Southern District of New York, styled Carlin Equities Corp. v.
------------------------
Tamboril Cigar Company, Docket No. 97 Civ. 4988 (the "Carlin Action"), for
- ----------------------
breach of contract seeking compensation for various fees and commissions, and in
lieu of the issuance of warrants to purchase the Company's stock, with total
damages of an unspecified amount but of at least $1,680,000. The Company
believes that Carlin's claims lack merit since the Agreement terminated before
the Company incurred any obligation to Carlin, Carlin abandoned the Proposed
Offering, and Carlin failed to satisfy conditions precedent to its rights to
receive fees and other compensation. On July 16, 1997, the Company requested
that the Carlin Action be voluntarily dismissed. Carlin agreed to take this
request under advisement. By August 5, 1997, no decision on this request had
been received by the Company nor had the Company been served with a Summons and
Complaint in the Carlin Action. The Company intends to vigorously defend itself
against all claims made in the Carlin Action.
INCOME TAXES
- ------------
As of June 30, 1997 the Company has a net operating loss carryforward for both
financial reporting and income tax purposes of approximately $10,000 available
to offset future income through 2011.
WORKING CAPITAL
- ---------------
The Company has no lines of credit or similar arrangements with banks or other
traditional lending institutions. The Company has utilized its sales of capital
stock and proceeds of loans evidenced by promissory notes from investors, and
shareholders and advances from a related party to fund its negative cash flow
from operations and its increased commitments to complete its manufacturing
facility in the Dominican Republic.
The Company plans to seek a capital infusion of from $2 million to $7 million in
equity capital to retire debt and support expansion of manufacturing (including
additional purchases of tobacco) and sales and marketing activities. There can
be no assurance that equity capital will be available to the Company on
acceptable terms at all.
F-19
