<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
[_] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------- --------------------------------
Commission file number 0-22573
-------
TAMBORIL CIGAR COMPANY
--------------------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 65-0774638
-------------------------- --------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2600 S.W. 3rd Avenue
Miami, FL 33129
--------------------------
(Address of principal executive offices)
(305) 860-9887
--------------------
(Issuer's telephone number)
1
<PAGE>
Not Applicable
--------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X
---
No ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes --- No ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 5,903,894 shares of Common
Stock, par value $.0001 per share
Transitional Small Business Disclosure Format (check one);
Yes --- No X
---
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
[To Come as 2nd Bite]
Item 2. Management's Discussion and Analysis or Plan of Operation.
The Company was incorporated and began start-up operations in April of
1996. In the period from the commencement of operations on April 15, 1997
through September 30, 1997, the Company was primarily engaged in locating a
site in the Dominican Republic at which to conduct manufacturing operations,
negotiating with tobacco growers to ensure supplies of quality tobacco,
recruiting employees and product development to establish the blends of
tobaccos and the curing and aging processes to create the
2
<PAGE>
Company's cigars. Sales for the three and nine month period ended September
30, 1996 totaled $94,119 and total expenditures were approximately $349,780,
resulting in net losses of $203,574 for the three-months and $302,780 for the
nine months ended September 30, 1996. Since the Company was barely
operational at that time, comparisons between the three month and nine month
periods ended September 30, 1996 and the three- and nine-month periods ended
September 30, 1997 are not appropriate and could, in fact, be misleading.
Due to the foregoing, the following information discusses the results of
operations, liquidity and capital resources and related matters for the three
months and nine months ended September 30, 1997 and compares such results to
those for the year ended December 31, 1997. All information relates to the
consolidated results and financial condition of the Company and its two
principal operating subsidiaries, Tamboril Cigar International, Inc. ("TCI")
and Tabacalera Tamboril, S.A. ("Tabacalera").
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Company was incorporated in April 1996 to commercialize the efforts of
its founders to establish a business to manufacture and distribute premium
cigars. The Company began operations on April 15, 1996 and commenced sales in
the fourth quarter of 1996. Sales of cigars bearing the Tamboril(TM) brand
name constituted 100% of the Company's sales for the period ended December
31, 1996. In April of 1997, the Company introduced its Cordova(TM) line of
cigars and in October 1997 introduced Fore!(TM), a golf-motif cigar. On July
7, 1997 the Company entered into a distribution agreement with Imports, a
Florida partnership ("Hubbard") pursuant to which Hubbard became the
exclusive U.S. distributor for the Company's products (the "Distribution
Agreement"). The Company intends focusing on manufacturing and marketing
activities, leaving virtually all day-to-day sales activities to Hubbard.
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 the Company believes that the demographic factors
underlying the growth in the cigar market since 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.
3
<PAGE>
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, TCI and Tabacalera for the period from
inception at April 15, 1996 through December 31, 1996 and for the three- and
nine-month periods ended September 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 consolidated
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 work with Hubbard 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. In addition, the Company has
introduced Cordova(TM) , which is a more moderate priced line 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 periods from inception to December 31, 1996 and January
1 through September 30, 1997 support management's views.
In the period from January 1 through July 7, 1997, the company sold its
products directly to retail tobacconists throughout the United States,
utilizing a sales force of five employees. On July 7, 1997 the Company
entered into the Distribution Agreement with Hubbard, pursuant to which
Hubbard was appointed exclusive distributor for the Company's products in the
United States through December 31, 2000 (the "Distribution Agreement"). Under
the Distribution Agreement, Hubbard must maintain certain minimum annual
purchases from the Company to continue to have the exclusive rights to
distribute the Company's cigars in the United States. These minimum amounts
are to be set each January for the upcoming calendar year. Management of the
Company believes that, although operating through a distributor such as
Hubbard will lower the Company's
4
<PAGE>
gross profit margins, it will enable the Company to more rapidly penetrate
its target market for premium cigars. In addition, the Company believes that
the Hubbard relationship will result in lower costs of sales, marketing and
promotion, resulting in significant gains in net profits.
Net sales for the three- and nine-month periods ended September 30, 1997
were $1,864,652 and $4,403,640, respectively. Sales to Hubbard in the three-
and nine-month periods ended September 30, 1997 accounted for approximately
$1,516,023 (81.3%) and $2,669,715 (60.6%) of total sales, respectively, in
those periods. Sales included initial sales of Cordova(TM), which was
introduced in April of 1997. There were no sales of Fore!(TM) in the period.
Sales of Fore!(TM) are expected to begin to have an impact in the fourth
quarter of 1997. The Distribution Agreement is expected to contribute
approximately $5,000,000 in total to sales in calendar 1997, of which
$2,669,715 have occurred as of September 30, 1997.
The Company is currently building a second manufacturing facility to
increase capacity from approximately 300,000 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 partial year results
reflected in the financial statements for the periods from April 15, 1996
through December 31, 1996 and January 1, 1997 through September 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%. Costs of goods sold during the three- and nine-month
periods ended September 30, 1997 were $892,688 and $1,799,068 or 48% and 41%
of sales, respectively. Accordingly, gross profits for the three- and nine-
month periods ended September 30, 1997 were $971,964 (52% of sales) and
$2,604,572 (59% of sales), respectively. Management of the Company believes
these percentage levels of gross profit compare favorably with industry
norms, but that the pricing to Hubbard under the Distribution Agreement and
the introduction of new products aimed at lower-priced market niches will
result in lower gross profits percentages in the future.
Selling, general and administrative expenses from April 15, 1996 through
December 31, 1996 totaled $1,034,386, or 73.16% of sales, representing the
costs of establishing the Company infrastructure. These levels should decline
substantially as a percentage of total revenues as the Company's operations
in manufacturing and sales expand. The Company spent approximately $120,000
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
5
<PAGE>
according to plan. Selling, general and administrative expenses in the three-
and nine-month periods ended September 30, 1997 totaled $541,325 (29% of
sales) and $2,039,736 (46% of sales), respectively. The lower percentage over
the three months compared with the nine months is attributable to Hubbard's
taking over much of the sales function since the execution of the
Distribution Agreement. Management believes that this percentage will
stabilize over the next few quarters as Company advertising levels will
increase to support expanded sales efforts by Hubbard.
The Company experienced a loss from operations from April 15, 1996 through
December 31, 1996 of $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. The
Company incurred additional debt of approximately $1,975,000 and related
interest expenses since December 31, 1996 and net interest expense was
$163,516 for the nine months ended September 30, 1997. The Company's entire
debt was recapitalized on September 30, 1997.
Income from operations for the three- and nine-month periods ended
September 30, 1997 was $430,639 and $725,336, respectively. Interest expense
for the three- and nine-month periods was $81,478 and $163,516 respectively,
resulting in net income for the periods of $223,161 and $435,820. Interest
expense in future periods will be decreased by approximately $60,000 per
quarter due to the recapitalization of certain debt of the Company as of
September 30, 1997, but will be increased by approximately $5,000 per quarter
by virtue of the Company's 8% Convertible Debentures issued in connection
with a $3,000,000 financing completed on September 23, 1997. See "LIQUIDITY
AND CAPITAL RESOURCES." While the Company has been able to generate net
profits in the past three quarters, the Company is still in the early stages
of its development and there can be no assurance that the Company's products
will attain sufficient market acceptance or that expenses will stabilize at
levels that will result in profits in the future.
Liquidity And Capital Resources
The Company had negative cash flows from operating activities of
$1,410,528 for the period from April 15, 1996 to December 31, 1996. Cash
inflows from financing activities during 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. The Company incurred
additional debt of approximately $1,975,000 in the period from December 31,
1996 to support continued construction of its second manufacturing facility
in the Dominican Republic and advanced construction costs for Tamboril at the
Park. On September 30, 1997, a total of $1,984,681.44 in aggregate principal
and interest of the Company's debt was recapitalized
6
<PAGE>
by the issuance of 328,584 shares of Common Stock and 328,584 five-year
warrants to purchase shares of Common Stock at an exercise price of $5.89 per
Share. This recapitalization will materially increase the Company's cash
available for operations. The Company also repaid an additional $1,149,935 in
principal and accrued interest on its outstanding debt on September 30, 1997.
From January 1 through September 30, 1997, the Company had negative cash
flow from operations of $1,526,270, namely due to significant increases in
accounts receivable ($818,000), inventory ($1,340,000) and advances on
tobacco purchases ($436,000), all attributable to the Company's increased
sales, primarily due to the Distribution Agreement. These were offset by
operating income of $430,639 for the three month, and $725,336 for the nine
months, ended September 30, 1997. Net interest expense of $81,478 for the
three months, and $163,516 for the nine months, ended September 30, 1997,
resulted in pretax income of $349,161 for the three months, and $561,820 for
the nine months, ended September 30, 1997.
Net cash inflows from financing activities during the nine months ended
September 30, 1997 was $3,475,852, representing approximately $2,600,000 in
net proceeds of the Private Offering and the recapitalization of the
Company's debt. Cash flows used for investing activities during the nine
months period ended September 30, 1997 amounted to $515,857, representing
capital expenditures related to the construction of the Company's second
manufacturing facility in the Dominican Republic. Capital expenditures for
the remainder of 1997 are expected to approximate $300,000.
As of September 30, 1997, cash on hand was $1,679,664. The cash on hand as
of September 30, 1997 is expected to be sufficient to finance the Company's
anticipated capital expenditures, increases in working capital requirements,
and its financing of tobacco growers for the reminder of 1997. The Company
has no lines of credit or similar arrangements with banks or other
traditional lending services.
The Company plans to use the remaining proceeds from the sale of Series B
Shares and Convertible Debentures to support expansion of manufacturing and
sales and marketing activities. The Company will most likely seek to acquire
the additional up to $3,000,000 available under the Purchase Agreement to
support expansion including additional inventory and increased marketing
expenditures. 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 the Company will meet the conditions to such additional
sales set forth in the Purchase Agreement or that equity capital will be
otherwise available to the Company on acceptable terms or at all.
Inflation
7
<PAGE>
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.
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.
8
<PAGE>
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.
PART II--OTHER INFORMATION
Item 1. 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
9
<PAGE>
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 330,000 and
1,170,000 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 has answered, denying Carlin's assertions, asserting
several affirmative defenses and has asserted counterclaims totaling in
excess of $1,000,000. The case has been set for discovery. 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. The Company intends to
vigorously defend itself against all claims made in the Carlin Action.
Item 2. Changes in Securities and Use of Proceeds
(b) On September 23, 1997 the Company entered into the Purchase Agreement
discussed in Item 3 below. Pursuant to the Purchase Agreement, the Company
issued 56,000 Series B Shares. The Series B Shares have a cumulative dividend
equal to eight percent of the stated amount thereof, which is $50,000 per
Series B Share, per annum. Such dividend is prior to any dividends to be
issued with respect to the Common Stock. In addition, the holders of the
Series B Shares have a liquidation preference entitling then to receive
distributions of the proceeds of any liquidation, dissolution or winding up
of the Company up to the stated amount of, plus any accumulated but unpaid
dividends on, the Series B Shares, prior to the payment of any amounts to the
holders of the Common Stock in respect of such liquidation, dissolution or
winding up.
The Purchase Agreement also contains certain restrictive covenants
prohibiting the Company from taking certain actions or entering into certain
transactions without the prior
10
<PAGE>
consent of a majority in interest of the holders of the Series B Shares sol
long as any Series B Shares are outstanding. Among the types of transactions
so prohibited include sales of assets of the Company or mergers,
consolidations or similar transactions. The effect of such provisions may be
to prevent the Company from entering into extraordinary transactions that
could otherwise result in the holders of Common Stock from receiving a
premium for their shares. Additionally, the Purchase Agreement restricts the
incurrence or repayment of certain debt and payments to affiliates of the
Company without such prior consent of the holders of the Series B Shares.
(c) 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 sold 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, 1997, 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
11
<PAGE>
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.
On September 22, 1997 the Company entered into the Purchase Agreement with
Infinity Emerging Opportunities Limited, Summit Capital Limited and Glacier
Capital Limited (the "Purchasers") and the Registration Rights Agreement with
the Purchasers, Refco Securities, Inc. (the "Placement Agent") and Brown
Simpson, LLC. Pursuant to the Purchase Agreement, the Company issued $200,000
aggregate face amount of Convertible Debentures, $2,800,000 aggregate stated
amount of Series B Shares and 105,000 Warrants to the Purchasers. An
aggregate of 120,000 Warrants were issued to the Placement Agent and Brown
Simpson. The issuance of the Convertible Debentures, the Series B Shares and
the Warrants were exempt from registration pursuant to the exemptions from
registration available under Sections 4(2) and 4(6) of the Securities Act and
Rule 506 of Regulation D thereunder. The Company received gross proceeds of
$3,000,000 and net proceeds (after fees and expenses) of approximately
$2,600,000.
On September 30, 1997, the Company agreed with various lenders to
recapitalize the unpaid principal and interest of loans from such lenders by
issuing shares of its Common Stock and warrants to purchase Common Stock to
such Lenders is full satisfaction of the Company's debts. In connection with
such recapitalization the Company has issued 328,584 shares of Common Stock
and 328,584 Warrants exercisable for a period of five years expiring
September 30, 2002 at an exercise price of $5.89 per share. The value per
share was determined by reference to the average per share market value for
the five trading days preceding September 23, 1997 at $4.71 per share and the
warrants were valued at $1.33 per warrant pursuant to the Black-Scholes
Method. Accordingly, one share of Common Stock and one warrant were issued
for each $6.04 of outstanding principal and interest on the debt. The Lenders
are all sophisticated, institutional accredited investors and the shares and
warrants are "restricted securities" as defined in Rule 144 under the
Securities Act. The issuance of these Shares and warrants were made in
reliance upon the exemptions in Sections 4(2) and 4(6) of the Securities Act
and Regulation D thereunder. The Company has agreed to grant certain
"piggyback" registration rights to register the shares of Common Stock issued
to the Lenders and issuable under their warrants in the first registration
statement filed by the Company other than this Registration Statement.
Item 4. Submission of Matters to a Vote of Security Holders
12
<PAGE>
The Company amended and restated its Certificate of Incorporation on April
30, 1997 to include the authorization of the Board of Directors to authorize
and issue up to an aggregate of five million (5,000,000) one or more classes
or series of preferred stock with the designations, rights, privileges,
conditions, restrictions, powers, preferences and other terms of any such
series or class to be determined by the Board of Directors pursuant to a duly
adopted resolution of the Board. This amendment was authorized by the
shareholders of the Company pursuant to a written consent of shareholders
holding an aggregate number shares of Common Stock constituting a majority of
the then issued and outstanding Common Stock pursuant to Section 228 of the
Delaware General Corporation Law. Pursuant to that authorization, the Board
of Directors authorized up to 1,500,000 shares of Series A Preferred Stock.
Pursuant to further resolution of the board, the Series A Preferred Stock was
canceled prior to the issuance of any Series A Shares and the Series B Shares
were authorized.
Item 5. Other Information.
(a) On October 1, 1997, the Company entered into a Cigar Production
Agreement with Hubbard pursuant to which the Company will manufacture the
Hamilton House Selection(TM) brand of cigars for Hubbard through the year
2000, with multiple options for Hubbard to renew thereafter. The Hamilton
House Selection(TM) brand was created by George Hamilton and is distributed
by Hubbard throughout the world. Under the Production Agreement, Tamboril
will produce and deliver a minimum of 800,000 Hamilton House Selection(TM)
cigars by the end of 1997, and over 320,000 cigars have already been shipped
under the Production Agreement.
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
2.1 Acquisition Agreement and Plan of
Reorganization dated as of October 23, 1996 by
and between Idaho
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Convertible Debenture and Convertible Preferred
Stock Purchase Agreement dated as of September
22, 1997 among Tamboril Cigar Company, Infinity
Emerging Opportunities Limited, Summit Capital
Limited and Glacier Capital Limited, together
with all Schedules and Exhibits thereto (the
"Purchase Agreement").**
4.2 Form of 8% Convertible Debenture**
4.3 Certificate of Designation of the Company's
Series B Preferred Stock**
4.4 Form of Warrant Certificate**
4.5 Registration Rights Agreement dated as of
September 22, 1997 among the Company, the
Purchasers and the Placement Agents**
5 Opinion of Kaplan Gottbetter & Levenson, LLP
dated September 23, 1997
10 Distribution Agreement between the Company and
Hubbard Imports*
21 Subsidiaries of the Company*
23.1 Consent of Goldstein Golub Kessler & Co., PC,
independent certified public accounts
23.2 Consent of Kaplan Gottbetter & Levenson, LLP,
counsel to registrant
99 Press release dated October 1, 1997**
</TABLE>
14
<PAGE>
* Incorporated by reference to the Registrant's Registration Statement on
Form 10-SB filed with the Commission on May 15, 1997, as amended.
** Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on October 1, 1997.
(b) On September 30, 1997 the Company filed a Current Report on Form 8-K
with respect to the execution of the Purchase Agreement and related
documentation and the issuance of the Convertible Debentures, the Series B
Shares and the Warrants thereunder.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TAMBORIL CIGAR COMPANY
November 13, 1997 --------------------------
Anthony Markofsky
President and Chief Executive
Officer
November 13, 1997 --------------------------
Pedro J. Mirones
Vice President, Chief Financial
Officer and Principal Accounting
Officer
16
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
JUNE 19, 1997 JUNE 18, 1997
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $1,679,664 $ 245,939
Accounts receivable 1,094,132 275,696
Inventory 2,153,680 813,938
Advances to tobacco growers 617,451 181,588
Prepaid expenses and other current assets 43,334 31,419
- -----------------------------------------------------------------------------------------
Total Current Assets 5,588,261 1,548,580
- -----------------------------------------------------------------------------------------
Property and equipment 828,570 359,798
Deferred debt issue costs 395,157 -
Other assets 181,225 103,550
- -----------------------------------------------------------------------------------------
Total Assets $6,993,213 $2,011,928
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 422,087 122,308
Accrued expenses and other current liabilities 435,442 65,658
Due to related party - 133,779
- -----------------------------------------------------------------------------------------
Total Current Liabilities 857,529 321,745
- -----------------------------------------------------------------------------------------
Notes Payable - 250,000
Notes Payable Stockholders - 725,000
Debentures 200,000
- -----------------------------------------------------------------------------------------
Total Liabilities 1,057,529 1,296,745
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
Series B Convertible preferred stock-$0.0001 par value;
$50.00 stated value; authorized 116,000 shares, issued
56,000 shares 6 -
Common stock--$.0001 par value; authorized 20,000,000
shares, issued 5,903,894 in 1997 and 5,575,310 in 1996 590 557
Additional paid-in capital 5,720,895 936,253
Retained earnings (Deficit) 214,193 (221,627)
- -----------------------------------------------------------------------------------------
Stockholders' Equity 5,935,684 715,183
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,993,213 $2,011,928
=========================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
17
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Net sales $1,864,652 $ 94,119
Cost of goods sold 892,688 39,530
- ---------------------------------------------------------------------------------------------
Gross profit 971,964 54,589
- ---------------------------------------------------------------------------------------------
Selling, general and administrative expenses (541,325) (250,574)
- ---------------------------------------------------------------------------------------------
Operating income 430,639 (195,985)
- ---------------------------------------------------------------------------------------------
Interest expense, net of $1,449 and $536 interest income 81,478 7,589
- ---------------------------------------------------------------------------------------------
Income before income taxes 349,161 (203,574)
- ---------------------------------------------------------------------------------------------
Income taxes 126,000 -
- ---------------------------------------------------------------------------------------------
Net Income $223,161 $(203,574)
=============================================================================================
- ---------------------------------------------------------------------------------------------
Net income per common share $0.04 ($0.04)
=============================================================================================
Weighted average number of common shares outstanding 5,578,843 5,090,000
=============================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
18
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS PERIOD ENDED
September 30, September 30,
1997 1996
-------------- -------------
<S> <C> <C>
Net sales $4,403,640 $ 94,119
Cost of goods sold 1,799,068 39,530
- -----------------------------------------------------------------------------------------------------------
Gross profit 2,604,572 54,589
- -----------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses (2,039,736) (349,780)
Proceeds from insurance (net of $69,890 cost of cigars lost). 160,500 -
- -----------------------------------------------------------------------------------------------------------
Operating income 725,336 (295,191)
- -----------------------------------------------------------------------------------------------------------
Interest expense, net of $1,880 and $536 interest income 163,516 7,589
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 561,820 (302,780)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Income taxes 126,000 -
Net Income 435,820 (302,780)
===========================================================================================================
Net income per common share $0.08 ($0.06)
===========================================================================================================
Weighted average number of common shares outstanding 5,576,509 5,090,000
===========================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
19
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
SERIES B CONVERTIBLE ADDITIONAL EARNINGS
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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 2,465,000 247 869,753 - $ 870,000
Net Loss - - - (302,780) $ (302,780)
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 5,090,000 $ 509 $ - $ - $ 874,701 $(302,780) $ 572,430
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,575,310 $ 557 $ - $ - $ 936,253 $(221,627) $ 715,183
- ---------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock
in connection with a
re-capitalization of Notes
Payable and Notes Payable
Stockholders 328,584 33 1,984,648 1,984,681
Issuance of Series B
Convertible Preferred Stock 56,000 6 2,799,994 2,800,000
Net Income - - - 435,820 435,820
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,903,894 $ 590 56,000 $ 6 $5,720,895 $ 214,193 $5,935,684
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
20
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS PERIOD ENDED
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Net income (loss) $ 435,820 $ (302,780)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 51,978 18,000
Changes in operating assets and liabilities:
Increase in accounts receivable (818,436) (92,855)
Increase in prepaid expenses and other current assets (11,915) (3,656)
Increase in inventory (1,339,742) (830,645)
Increase in other assets (77,675) (59,427)
Increase in advances to tobacco farmers (435,863) -
Increase in accounts payable 299,779 20,240
Increase in accrued expenses and other current liabilities 369,784 70,647
- ---------------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES (1,526,270) (1,180,476)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activity:
Purchase of property plant and equipment (515,857) (221,396)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (515,857) (221,396)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 150,000
Proceeds from issuance of notes payable - stockholders 1,975,000 281,273
Proceeds (repayments) of loans by related party (133,779) 106,744
Repayment of notes payable (250,000) -
Repayment of notes payable - stockholders ( 2,700,000) -
Proceeds from issuance of common stock 1,984,681 875,210
Proceeds from issuance of Series B convertible preferred stock 2,800,000 -
Proceeds from issuance of Debentures 200,000 -
Deferred debt issuance costs (400,050) -
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,475,852 1,413,227
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,433,725 11,355
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at beginning of the period 245,939 -
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF THE PERIOD $ 1,679,664 $ 11,355
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 September 30, 1997.
Furthermore, all adjustments were of a normal recurring nature.
2. PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES:
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 distributors and retail tobacconists throughout
the United States. 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 nine-month
and the three-month periods ended September 30, 1997 amounted to $ 2,669,715 and
$ 1,516,023 (61 % and 82 % 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.
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 re-capitalization of Tamboril Cigar Company with Tamboril
Cigar Company as the acquirer (reverse acquisition).
<PAGE>
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 and debt issue costs are provided for over the related
lease or debt 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
inventories 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.
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.
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.
<PAGE>
3. INVENTORY:
- --------------
Inventory consists of the following:
<TABLE>
September 30, December 31,
1997 1996
<S> <C> <C>
Raw Materials $1,185,212 $454,789
Finished Goods 968,468 359,149
---------- --------
$2,153,680 $813,938
========== ========
</TABLE>
As of September 30, 1997, approximately $ 2,145,854 of the Company's inventory
is located in the Dominican Republic.
4. PROPERTY AND EQUIPMENT:
- ---------------------------
Property and equipment, at cost, consists of the following:
<TABLE>
September 30, December 31, Estimated
1997 1996 Useful Life
<S> <C> <C> <C>
Machinery and equipment 378,491 $176,821 5 to 7 years
Land 98,074 97,691
Buildings and building improvements 4,234 41,206 20 years
Furniture and fixtures 25,053 16,194 5 years
Computers 9,530 11,118 5 years
Leasehold improvements 73,945 41,092 Term of lease
Construction in progress 310,652
-------- --------
899,979 384,122
Less accumulated depreciation 71,409 24,324
-------- --------
$828,570 $359,798
======== ========
</TABLE>
Approximately $ 737,962 of the Company's property and equipment, net of $ 43,287
accumulated depreciation, is located in the Dominican Republic.
<PAGE>
4. LONG-TERM DEBT:
- -------------------
Long-term debt consists of the following:
<TABLE>
September 30, December 31,
1997 1996
<S> <C> <C>
Notes payable
Due April 1998 - interest at 10 % per annum $50,000
Due October 1998 - interest at 10% per annum 200,000
--------
250,000
Notes payable - Stockholders
Due August 1998 - interest at 10 % per annum 275,000
Due September 1998 - interest at 10 % per annum 100,000
Due October 1998 - interest at 10 % per annum 150,000
Due December 1998 - interest at 10 % per annum 200,000
--------
725,000
8 % Convertible Debentures
Due September 1998 $200,000
-------- --------
$200,000 $975,000
======== ========
</TABLE>
On September 23, 1997, the Company sold $ 200,000 face amount of its 8 %
Convertible Debentures (" Debentures"), such Debentures mature on September of
1999, and are convertible prior to maturity into shares of the Company's Common
Stock. (See Note 5).
On September 30, 1997, the Company reached an agreement with the holders of the
Company's Notes Payable and Notes Payable - Shareholders, by which the Company
repaid an aggregate of $1,150,000 of its outstanding notes payable and accrued
interest. The remaining notes payable in an aggregate amount $1,984,681 were
exchanged for 328,584 shares of its common stock and 328,584 warrants to
purchase its common stock (See Note 5).
5. STOCKHOLDERS' EQUITY:
- -------------------------
On April 16, 1996, the Company issued 25,000 shares of common stock 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 2).
<PAGE>
On July 1, 1997, the Company entered into a distribution agreement with Hubbard
Imports, as part as Hubbard compensation under the agreement, the Company issued
200,000 warrants to purchase shares of common stock of the Company at an
exercise price of $5.85.
On September 22, 1997, the Company entered into a Convertible Debenture and
Convertible Preferred Stock Purchase Agreement with several purchasers, pursuant
to which the Company agreed to sell and the purchasers agreed to buy, up to an
aggregate of $200,000 face amount of the Company's 8% Convertible Debentures
(the "Debentures") and $5,800,000 stated amount of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred Stock"). In connection with
the authorization of the Series B Convertible Preferred Stock, the Company
cancelled its previously authorized Series A Preferred Stock, of which no shares
were ever issued.
On September 23, 1997, the Company sold $200,000 face amount of the Debentures
and 56,000 shares ($2,800,000 stated amount) of the Series B Preferred Stock and
issued a total of 225,000 warrants to purchase shares of its Common Stock at an
exercise price of $5.89 per share.
On September 30, 1997 the Company issued 328,584 shares of its common stock and
328,584 warrants to purchase its common stock in exchange for $ 1,984,681 of its
Notes Payable and Notes Payable to Stockholders.
The Debentures are convertible into shares of the Company's common stock at the
lowest of $4.71 per share, or 77 1/2% of the average per share market value for
the five trading days immediately preceding the conversion date.
The Series B Preferred Stock are convertible at their stated value into shares
of the Company's common stock at the lowest of $4.71 per share, or 77 1/2% of
the average per share market value for the five trading days immediately
preceding the conversion date. The Series B Preferred Stock pay a cumulative
dividend of eight percent and have the right to receive dividends and a
preference upon liquidation superior to the rights of holders of common stock.
The Warrants are exercisable at any time up to the fifth anniversary of their
issuance. The Warrants are exercisable at an exercise price of $5.89 and $5.85
per share.
6. COMMITMENTS AND CONTINGENCIES:
- ----------------------------------
The Company has entered into non-cancelable 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:
<PAGE>
Year ending December 31,
1998 $93,000
1999 99,000
2000 99,000
2001 25,000
As of September 30, 1997 the Company has entered into firm financing and
purchase agreements with several tobacco growers in the Dominican Republic.
Under the terms of such agreements, the Company will advance to the growers
financing for the planting and harvesting of the tobacco and the growers will
sell their tobacco exclusively to the Company. As of September 30, 1997 the
Company has advanced $ 617,451 and has committed to advance an additional
$1,300,000, to purchase approximately $4,000,000 of tobacco.
In early July, 1997, Carlin Equities Corporation commenced an action in the
United States District Court, Southern District of New York, captioned 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
common stock of an unspecified amount but at least $1,680,000. Although the
Company believes that Carlin's claim lack merit and intends to vigorously defend
itself against all claims made by in the Carlin Action, there can be no
assurance that the Company will prevail in the litigation.
7. EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the average
number of common shares and common stock equivalents outstanding during the
year. The weighted average number of common shares outstanding during the
nine-month and the three-month periods ended September 30, 1997 were
approximately 5,576,509 and 5,578,843, respectively. The number of common shares
outstanding during the nine-month and the three-months periods ended September
30, 1996 were 5,090,000, which represents the number of shares outstanding as of
September 30, 1996.
Common stock equivalents are the net additional number of shares which would be
issuable upon the conversion of the Debentures or the Convertible Preferred
Stock or upon the exercise of the Warrants (See Note 5) assuming that the
Company reinvested the proceeds to purchase additional shares at market value.
Common stock equivalents had no material effect on the computation of earnings
per share for the three-month and the nine-month period ended September 30,
1997. No common stock equivalents were outstanding as of September 30, 1996.
