<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 June 30, 1998
[ ] 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
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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)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
1
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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: 13,356,632 shares of Common
Stock, par value $.0001 per share
Transitional Small Business Disclosure Format (check one);
Yes ... No X..
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 39,189 $ 425,908
Accounts receivable -- Less allowance for doubtful
accounts of $ 43,536 and $ 102,000 at June 30, 1998
and December 31, 1997, respectively 198,111 1,424,668
Inventory 4,145,690 2,447,650
Advances to suppliers 322,893 1,098,326
Prepaid expenses and other current assets 39,616 69,112
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 4,745,499 5,465,664
- ---------------------------------------------------------------------------------------------------------------------
Property and equipment 1,404,661 1,173,552
Other assets 68,674 160,545
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,218,834 $6,799,761
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 860,078 -
Current maturities of long-term debt 207,252 7,252
Accounts payable 748,533 557,262
Accrued expenses and other current liabilities 338,224 240,716
Notes payable - stockholder 256,650 -
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 2,410,737 805,230
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt 23,194 225,534
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 2,433,931 1,030,764
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity
Series B 8% convertible preferred stock - $.0001
par value; $50 stated value; authorized 116,000
shares, issued and outstanding 53,120 and 56,000 5 6
shares
Common Stock - $.0001 par value; authorized
20,000,000 shares issued and outstanding
5,976,590 and 5,903,894 shares 598 590
Additional paid-in capital 6,169,138 6,160,465
Accumulated other comprehensive loss (428,927) (110,036)
Accumulated deficit (1,955,911) (282,028)
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 3,784,903 5,768,997
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,218,834 $6,799,761
=====================================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral
part of these statements.
3
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period Ended
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net sales $ 5,796 $1,750,989
Cost of goods sold 77,685 646,281
________________________________________________________________________
Gross profit (71,889) 1,104,708
________________________________________________________________________
Selling, general and administrative
expenses 681,146 577,761
________________________________________________________________________
Income (loss) from operations (753,035) 526,947
________________________________________________________________________
Interest expense 54,787 53,944
________________________________________________________________________
Net income (loss) before income taxes (807,822) 473,003
________________________________________________________________________
Provision for income taxes (22,534) --
________________________________________________________________________
Net income (loss) $(785,288) $ 473,003
________________________________________________________________________
Income (loss) per common share
Basic $ (0.15) $ 0.08
========================================================================
Weighted average number of common shares
used in computing income (loss)
per share
Basic 5,975,554 5,575,310
========================================================================
</TABLE>
The accompanying notes to the financial statements
are an integral part of these statements.
4
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net sales............................................................................................ $ 249,815 $2,538,988
Cost of goods sold................................................................................... 297,341 906,380
----------- ----------
Gross profit......................................................................................... (47,526) 1,632,608
----------- ----------
Selling, general and administrative expenses......................................................... 1,738,889 1,337,911
----------- ----------
Income (loss) from operations........................................................................ (1,786,415) 294,697
----------- ----------
Interest expense..................................................................................... 62,788 82,038
----------- ----------
Net income (loss) before income taxes................................................................ (1,849,203) 212,659
----------- ----------
Provision for income taxes........................................................................... (184,000) -
----------- ----------
Net income (loss).................................................................................... $(1,665,203) $ 212,659
----------- ----------
Income (loss) per common share
Basic.............................................................................................. $ (0.32) $ 0.04
=========== ==========
Weighted average number of common shares used in computing income (loss) per share
Basic.............................................................................................. 5,945,571 5,575,310
=========== ==========
The accompanying notes to the financial statements are an integral part of these statements.
</TABLE>
5
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Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX MONTH PERIOD ENDED June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Comprehensive income (loss) $ (1,984,094) $ 212,659
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 59,871 28,365
Provision for doubtful accounts 200,000 --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 1,026,557 (1,414,240)
(Increase) decrease in other current assets 29,496 (190,246)
Decrease in advances to suppliers 775,433
Increase in inventory (1,698,040) (672,948)
(Increase) decrease in other assets 91,871 (117,174)
Increase in accounts payable 191,271 135,085
Increase in accrued expenses and other current liabilities 97,508 210,486
_________________________________________________________________________________________________________________
Net cash used in operating activities (1,210,127) (1,808,013)
_________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________
Cash flows used in investing activity - purchase of property and equipment (290,980) (288,605)
_________________________________________________________________________________________________________________
Cash flows from financing activities:
Short term borrowings from bank 860,078 --
Proceeds from issuance of notes payable - stockholders 256,650 1,975,000
Repayment of long-term debt (2,340) --
________________________________________________________________________________________________________________
Cash provided by financing activities 1,114,388 1,975,000
________________________________________________________________________________________________________________
________________________________________________________________________________________________________________
Net decrease in cash (386,719) (121,618)
________________________________________________________________________________________________________________
Cash at beginning of the period 425,908 245,939
________________________________________________________________________________________________________________
Cash at end of the period $ 39,189 $ 124,321
________________________________________________________________________________________________________________
</TABLE>
The accompanying notes to the financial statements are an
integral part of these statements.
6
<PAGE>
<TABLE>
<CAPTION>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Changes in Equity
(UNAUDITED)
Series B Convertible
Comprehensive Preferred Stock Common Stock
Income (Loss) Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ - - $ - 5,575,310 $ 557
- ------------------------------------------------------------------------------------------------------
Net Loss $ - - - - -
- ------------------------------------------------------------------------------------------------------
Balance at June 30, 1997 $ - - $ - 5,575,310 $ 557
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ - 56,000 $ 6 5,903,894 $ 590
- ------------------------------------------------------------------------------------------------------
Net Loss (1,665,203) - - - -
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment (318,891) - - - -
Conversion of Series B 8%
convertible preferred stock. - (1,320) - 25,563 3
Dividend on 1320 shares of Series B
8% convertible preferred stock. - - - - -
Conversion of Series B 8%
convertible preferred stock. - (1,560) (1) 47,133 5
Dividend on 1560 shares of Series B
8% convertible preferred stock. - - - - -
- ------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ (1,984,094) 53,120 $ 5 5,976,590 $ 598
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-in Comprehensive Accumulated Stockholders
Capital Income (Loss) Deficit Equity
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ 936,253 $ - $ (221,627) $ 715,183
- ---------------------------------------------------------------------------------------------------
Net Loss - - 212,659 212,659
- ---------------------------------------------------------------------------------------------------
Balance at June 30 1997 $ 936,253 $ - $ (8,968) $ 927,842
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 6,160,465 $ (110,036) $ (282,028) $ 5,768,997
- ---------------------------------------------------------------------------------------------------
Net Loss - - (1,665,203) (1,665,203)
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment - (318,891) - (318,891)
Conversion of Series B 8% convertible
preferred stock. 3,552 - - 3,555
Dividend on 1320 shares of Series B
8% convertible preferred stock. - - (3,555) (3,555)
Conversion of Series B 8% convertible
preferred stock. 5,121 - - 5,125
Dividend on 1560 shares of Series B
8% convertible preferred stock. - - (5,125) (5,125)
- ---------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $ 6,169,138 $ (428,927) $ (1,955,911) $ 3,784,903
- ---------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 June 30, 1998. Furthermore,
all adjustments were of a normal recurring nature.
2. INVENTORY:
Inventory consists of the following:
June 30, 1998 December 31, 1997
Raw Materials $2,755,074 $1,729,092
Finished Goods 1,390,616 718,558
------------------------------------------------------------------------
$4,145,690 $2,447,650
========================================================================
As of June 30, 1998, approximately $ 3,876,000 of the Company's inventory is
located in the Dominican Republic.
3. SHORT-TERM BANK BORROWINGS
Effective March 3rd, 1998, the Company negotiated a credit agreement with the
Banco Popular Dominicano, which provides for advances up to Dominican Republic
("RD")$25,000,000 for the purchase of tobacco. Interest is based on the prime
rate in the Dominican Republic, 30 % at June 30, 1998, and is adjusted and
payable monthly. As of June 30, 1998, the Company had borrowed RD $ 13,185,000
at an average rate of 28%. Borrowing under the agreement is secured by tobacco
inventories. Under the agreement, the Company had approximately RD $11,815,000
in unused available lines of credit at June 30, 1998.
8
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4. LONG-TERM DEBT
At June 30, 1998 and at December 31, 1997, long-term debt consist of the
following:
<TABLE>
<CAPTION>
June 30, 1998 December ,31 1997
------------- -----------------
<S> <C> <C>
Loan payable to a bank in monthly
installments of $839 through December
2001, including interest at 9.35% per annum. $ 30,446 $ 32,786
8% convertible debenture due
September 1999 ("Debentures"). 200,000 200,000
-------------------------------------------------------------------------------------------------------------------------
230,446 232,786
Less: Current portion 207,252 7,252
-------------------------------------------------------------------------------------------------------------------------
$ 23,194 $225,534
=========================================================================================================================
</TABLE>
On September 22, 1997, the Company entered into a Convertible Debenture and
Convertible Preferred Stock Purchase Agreement ("Agreement") with several
purchasers (See Note 7) pursuant to which the Company agreed to sell up to an
aggregate of $200,000 of the Company's 8 % Convertible Debentures. On September
23, 1997, Company's sold $200,000 of the 8 % Convertible Debentures. The
Debentures are convertible prior to maturity, into shares of the Company's
common stock. Interest, which is payable quarterly, is currently in arrears.
Under the terms of the Agreement, the Company's failure to pay interest on
December 31, 1997, March 31,1998 and June 30, 1998 constitute an event of
default. In an event of default, the holders of the Debentures have the right
to declare the Debentures, including accrued interest and an adjustment amount
as defined under the Agreement, payable on demand. Additionally, in the case of
an event of default, the interest rate is increased to 16% from the prior level
of 8%. Based on the default, the Debentures have been classified as current in
the June 30, 1998 balance sheet.
5. NOTES PAYABLE - STOCKHOLDER
As of June 30, 1998, Notes payable stockholder consists of the following:
Note payable - Jenadosa Holdings Limited
Due on demand - bearing interest at 10% per annum $100,000
Due on demand - bearing interest at 10% per annum 100,000
Due on demand - bearing interest at 10% per annum 56,650
-----------------------------------------------------------------------
$256,650
=======================================================================
9
<PAGE>
6. MAJOR CUSTOMER
On July 7, 1997, the Company entered into a distribution agreement (the
"Distribution Agreement") and on October 1, 1997 entered into a Cigar Production
Agreement (the "Production Agreement") with Hubbard Imports ("Hubbard"), a
Florida partnership. Under the terms of the Distribution Agreement, Hubbard
became the exclusive distributor in the United States for the Company's
products. On March 20, 1998 the Company informed Hubbard of the Company's
intention to terminate both the distribution and the Production Agreement. In
June 1998, an agreement was reached with Hubbard Imports pursuant to which, the
Company will exchange approximately $660,000 of the Hamilton House Select (TM)
cigars that it has in inventory for an equal dollar amount of Tamboril (TM)
cigars held by Hubbard Imports. Additionally, Hubbard paid approximately
$226,000 of its previous indebtedness to the Company and will pay the remaining
approximately $148,000 no later than December 31, 1998.
From the commencement of the agreement until December 31, 1997, substantially
all of the Company's sales were made to Hubbard. During the six months ended
June 30, 1998 sales of approximately $8,000 were made to Hubbard. Approximately
$148,000 (75%) of the Company's receivables as of June 30, 1998 is due from
Hubbard.
7. STOCKHOLDERS' EQUITY
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 up to an aggregate of $200,000 of the
Company's Debentures and $5,800,000 stated amount of the Company's Series B 8%
convertible preferred stock (the "Series B Preferred Stock"). 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. At June 30, 1998
dividends in arrears were approximately $272,000.
Dividends, which are payable quarterly, are currently in arrears. Under the
terms of the Series B Preferred Stock and the Purchase Agreement, the Company's
failure to pay dividends on December 31, 1997, March 31, 1998 and June 30, 1998
constitute an event of default. In an event of default, the Series B 8%
Preferred Stock dividend rate increases to 16% from 8%. Additionally, in an
event of default, the Company is required to pay liquidated damages in an amount
equal to 1% of the stated amount outstanding as of the date of default and on
each anniversary thereafter. Based on the default, Selling, general and
administrative expenses have been charged $163,800 of expenses related to the
liquidated damages under the Purchase Agreement.
On February 19, 1998, the Company issued 25,563 shares of the Company's common
stock in a conversion of 1,320 shares of the Series B Preferred Stock, including
$3,555 of accrued dividends on those 1,320 shares.
On April 2, 1998, the Company issued 47,133 shares of the Company's common stock
in a conversion of 1,560 shares of the Series B Preferred Stock, including
$5,125 of accrued dividends on those 1,560 shares.
10
<PAGE>
8. SUBSEQUENT EVENTS
On July 28, 1998, the Company entered into a credit agreement with the Banco
Gerencial and Fiduciario which provides for advances up to RD$ 6,000,000.
Interest is based on the prime rate in the Dominican Republic and is adjusted
and payable monthly. Borrowing under such agreement is payable on demand and is
secured by the factory building in the Dominican Republic.
On August 5, 1998, the Company issued an aggregate of 7,380,042 shares of its
common stock, par value $.0001 per share to Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited pursuant to a
conversion of $331,550 aggregate stated amount of the Company's Series B
Convertible Preferred Stock and $37,944 in accrued dividends on such shares. The
shares of common stock issued to the investors represent 56% of the issued and
outstanding common stock of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion relates to the consolidated results of operations
and financial condition of the Company and its two principal operating
subsidiaries, Tamboril Cigar International Inc. ("TCI") and Tabacalera Tamboril
S.A.("Tabacalera").
Tamboril Cigar Company (the "Company") previously entered into a
Distribution Agreement dated July 7, 1997 (the "Distribution Agreement") and a
Cigar Production Agreement dated October 1, 1997 (the "Production Agreement")
(the Distribution Agreement and the Production Agreement being sometimes
referred to herein as the "Agreements") with Hubbard Imports, a Florida
partnership ("Hubbard"). Under the Distribution Agreement, the Company appointed
Hubbard as exclusive distributor in the United States for the Company's
Tamboril/TM/, Cordova/TM/ and Fore/TM/ cigar products. Under the Production
Agreement, the Company agreed to manufacture for Hubbard a line of Hamilton
House Select/TM/ cigars. Both the Distribution Agreement and the Production
Agreement provided for minimum purchase commitments from Hubbard in 1997 and
stated that Hubbard would, in January of each year beginning with 1998,
undertake to purchase a mutually agreed upon number of cigars in the calendar
year beginning that January.
In January of 1998, Hubbard failed to agree to minimum purchase
requirements under the Distribution Agreement and the Production Agreement.
Hubbard has not ordered any cigars from the Company since December 31, 1997 and,
given the course of events since that date it is very unlikely that they will do
so. The failure of Hubbard to abide by its prior agreements and its failure to
notify the Company of various deficiencies in Hubbard's inventory controls and
sales reporting systems resulted in an abrupt, unanticipated disruption of the
Company's sales and distribution. These disruptions have had a material adverse
impact on the Company's sales and profitability in the six month period ended
June 30, 1998, and will have a similar impact on the Company's business during
the remainder of the year 1998. The Company has undertaken efforts to
ameliorate the effects of these developments by attempting to forge distribution
agreements with regional distributors across the United States and in Europe.
The results of the Company's efforts in this regard to date are discussed below
under the caption "RESULTS OF OPERATIONS" and the material adverse impact of
these developments on the Company's cash flow and the need to seek alternative
sources of liquidity while the Company revamps its distribution organization are
discussed under the heading "LIQUIDITY AND CAPITAL RESOURCES."
The negative impact of the Hubbard situation was further exacerbated by
developments in the overall market for cigars. During the first quarter of
1998, the market for sales in the United States of premium cigars has been
negatively impacted by excess inventories at the wholesale and retail levels.
The Company has been particularly impacted by this excess inventory since its
brands are relatively new and have limited brand recognition. It is anticipated
that higher than normal inventory levels will negatively impact the sales and
profits of the Company for the remainder of 1998. Management of the Company
believes that the demographic factors underlying the growth in the cigar market
since 1993 will contribute to reverse this inventory imbalance and that normal
order levels will be reestablished during 1998. While the Company has taken,
and will continue to take, measures calculated to counteract the effects of
these developments, there can be no assurance that the Company will be able to
recover from this excess inventory situation and generate sufficient revenues
and cash flow to maintain operations.
11
<PAGE>
As previously stated, the loss of Hubbard as a distributor will negatively
impact the Company's sales, profits or loss, and liquidity for at least the
remainder of 1998. In light of the termination of Hubbard, the Company has
aggressively recruited local and regional distributors to distribute the
Company's cigars. Negotiations are underway in over twenty states and management
of the Company believes that potential distributors have been very receptive to
the Company's products and pricing policies. Management is aggressively seeking
to finalize such arrangements, though few have been concluded.
Based on its initial negotiations, management of the Company believes that
the distribution arrangements it will be able to put into place will be at least
as advantageous to the Company as were the Hubbard arrangements, though it will
take several months at a minimum to complete these arrangements and to begin to
process substantial orders. Even if the Company is successful, the delays in
building sales and the ongoing expenses of operations will result in substantial
losses during this period.
If, however, the Company were unable to establish satisfactory distribution
arrangements, the ability of the Company to generate sales would be materially
negatively impacted. The absence of sales and associated cash flow would
materially negatively impact the Company's liquidity and its ability to pay its
expenses as they come due. The Company is exploring other sources of capital to
fund its operations while it revamps its sales organization, though there can be
no assurance that the Company will be successful in obtaining such financing on
acceptable terms or at all. If such financing were necessary and if the Company
were unsuccessful in obtaining such financing, the failure of the Company to
obtain such financing would impair its ability to continue as a going concern.
The Company has obtained alternative sources of financing to augment its
liquidity including lines of credit of approximately $1,800,000 (for use to
finance tobacco purchases) and has negotiated a credit agreement of
approximately $400,000 on real property owned outright by the Company in the
Dominican Republic.
RESULTS OF OPERATIONS FOR THE THREE-MONTH AND THE SIX-MONTH PERIOD ENDED JUNE
30, 1998 AS COMPARED TO THE THREE-MONTH PERIOD AND THE SIX-MONTH PERIOD ENDED
JUNE 30, 1997
Net sales for the three months and six months ended June 30, 1998 were $5,796
and $249,815, respectively, which represented a decline of $1,745,193 and
$2,289,173, from sales of $1,750,989 and $2,538,988 in the three months and six
months ended June 30, 1997. In the six months ended June 30, 1997, the Company
was distributing its cigars through retail tobacconists and regional
distributors that had been organized by the Company's in-house sales and
marketing staff. Upon entering into the Distribution Agreement with Hubbard,
Hubbard was named the Company's exclusive United States distributor and the
Company, accordingly, discontinued all direct sales efforts. Upon the unexpected
cessation of cigar purchases by Hubbard and the resulting termination of the
Distribution Agreement, the Company was left with no distribution for its
products. The sales of $249,815 in the six months ended June 30, 1998 represent
the Company's efforts since the month of March to begin to reestablish a
distribution network of retail tobacconists and regional distributors under the
direction of Company staff. In an effort to provide support for the new
distributors, the Company has allowed the distributors to return slow moving
12
<PAGE>
merchandise and replaced such merchandise with other types of merchandise.
Additionally, the Company has reduced its selling prices to achieve more
favorable price points to the distributors, in conjunction with such price
reduction, the Company has provided its distributors with a floor plan
protection that will allow the distributors to move its cigars inventories.
To date, the Company has received purchase orders from approximately 15 new
distributors, representing a geographic area of 26 states. Management of the
Company believes that the new distributors will provide substantially more sales
and inventory controls than did Hubbard and that the terms of the arrangements
with such distributors will be more beneficial to the Company in terms of
pricing structure and point-of-sale support, though there can be no assurance
that this will be the case. Management of the Company believes that it will
take at least six months before the Company will be able to arrange sufficient
distribution programs to return sales to the levels experienced in the latter
months of 1997. There can, of course, be no assurance that the Company will be
successful in returning sales to those levels, or that sales will be sufficient
to cover the Company's expenses.
Gross profit loss for the three months and six months ended June 30, 1998 were
$71,889 and $47,526, respectively, compared to gross profit of $1,104,708 and
$1,632,608 in the comparable periods of the prior year. This significant
reduction was due primarily to the fact that with the low level of sales, cost
of goods sold increased disproportionately due to under absorption of overhead,
increased levels of promotional merchandise provided to distributors, increased
levels of returned merchandise and the floor plan protection plan provided to
distributors.
Selling, general and administrative expense in the three months and six months
ended March 31, 1998 were $681,146 and $1,738,889, respectively, up 18% and 30%
from $577,761 and $1,337,911 in the three months and six months ended June 30,
1997. This increase was due primarily to costs of approximately $28,000 per
month for "liquidated damages" due to events of default under the Company's
Series B Convertible Preferred Shares, see "Item 3. Defaults Upon Senior
Securities," increased bad debt write-offs and increased professional and
consulting fees.
Loss from operations in the three months and six months ended June 30, 1998 were
$753,035 and $1,786,415, as compared to Income from operations of $526,947 and
$294,697 in the three months and six months ended June 30, 1997. This was
occasioned by the lack of sales due to the cessation of purchases from the
Company by Hubbard. Increased expenditure levels in anticipation of continued
sales from Hubbard, as well as the extreme reduction in gross profit percentage
due to discounted sales, increased returns of merchandise, increased promotional
efforts and increased unit costs.
The Company's interest expense for the three months and six months ended June
30, 1998 were $54,747 and $62,788, respectively as compared to $53,944 and
$82,038 for the three-months and six months ended June 30, 1997. Interest
expense in subsequent quarters will increase, as the Company intends to borrow
to finance tobacco purchases and to obtain a credit facility secured by its
production facilities in the Dominican Republic as a result of the
unavailability of sufficient revenues to fund these activities. See "LIQUIDITY
AND CAPITAL RESOURCES."
Net loss in the three months and six months ended June 30, 1998 were $785,288
and $1,665,203, respectively as compared to net income of $473,003 and $212,659
13
<PAGE>
in the three months and six months ended June 30, 1997. The substantial decrease
in sales in the quarter was the primary reason for the increase in the net loss.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, cash on hand was $39,189, which if not augmented
would suffice to fund the Company's operations for approximately one week. The
Company obtained loans aggregating approximately $1,117,000 in the six months
ended June 30, 1998, consisting of approximately $860,000, under a line of
credit in the Dominican Republic dedicated to tobacco purchases and $257,000
from Jenadosa Holdings Limited, a shareholder of the Company. Without these
loans, the Company would not have been able to meet its obligations as they
came due. The Company's cash position has been materially negatively impacted
by the sudden cessation of purchases from the Company by Hubbard.
The Company's line of credit in the Dominican Republic is for approximately
$1,800,000, which may only be used for tobacco purchases. Borrowings to date
under the line of credit total approximately $860,000. Interest on the line of
credit is at prime in the Dominican Republic, which is currently thirty percent
(30%) per annum. The Company has also obtained a credit facility of
approximately $400,000 on its Dominican building, which is currently owned free
and clear of any liens. Management intends to explore sales of aged tobacco from
excess inventories to other manufacturers to enhance liquidity. Management's
goals in such sales are to raise approximately $400,000 to $500,000. There can
be no assurance that management will be successful in locating buyers at prices
advantageous to the Company or at all. Failure to do so would further exacerbate
the Company's current liquidity crisis.
From its inception in April of 1996, the Company's cash used in operations has
exceeded its cash generated from operations as the Company has increased
inventories and staff in the effort to establish the Company's brands and
achieve initial market penetration. The Company has financed these expanding
operations from its financing activities, which have included loans, sales of
common stock and a $3 million financing completed in September 23, 1997 which
consisted of an institutional placement of convertible debentures and
convertible preferred stock.
The Company had negative cash flows from operations of $1,210,127 in the
six months ended June 30, 1998, which is lower than the negative cash
flows from operations of $1,808,013 in the first six months of 1997. The
principal causes of this negative cash flow were large increases in inventory of
$1,698,040 and a net loss of $1,665,203. Cash inflows from financing activities
during the six months ended June 30, 1998 totaled approximately $1,114,000
representing $860,000 in borrowings under the line of credit and $257,000 in
loans from a stockholder. Cash inflows in the six months ended June 30, 1997
consisted of $1,975,000, representing the proceeds of sales of notes to
investors.
Cash on hand at June 30, 1998 was $39,189, compared with $124,321 on June
30,1997. The Company intends to meet its cash needs in the three-month period
to end on September 30, 1998 through sales to new distributors, sales of its
excess inventory of aged tobacco and additional borrowings.
The Company is currently in default of certain terms of the Purchase
Agreement pursuant to which the $3 million financing was completed. See "Item
14
<PAGE>
3. Defaults Upon Senior Securities." The effect of such default is to increase
the interest rate on the $200,000 principal amount of convertible debentures
from 8% to 16%, to increase the dividend rate on the $2.8 million stated amount
of convertible preferred stock from 8% to 16% and to require the Company to pay
the Purchasers under the Purchase Agreement "liquidated damages" in an amount
equal to 1% of the aggregate stated amount of the Series B Shares issued and
outstanding for each month in which the Company remains in default.
On August 5, 1998, the Company issued an aggregate of 7,380,042 shares of its
common stock to Infinity Emerging Opportunities Limited, Summit Capital Limited
and Glacier Capital Limited pursuant to a conversion of $331,550 aggregate
stated amount of the Company's Series B Convertible Preferred Stock and $37,944
in accrued dividends on such shares. The shares of common stock issued to
investors represent 56% of the issued and outstanding common stock of the
Company.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1998, the Company entered into a settlement agreement with
Hubbard Imports, which was formerly a distributor of the Company's cigars.
Pursuant to the settlement agreement with Hubbard, the parties agreed that the
Distribution Agreement and the Cigar Production Agreement between the parties
are terminated. Hubbard agreed to pay the Company the sum of $373,920 in
respect of prior invoices. Payment of $225,721 has been paid, with the
remainder due on or before December 15, 1998. Hubbard agreed not to contest the
Company's previous cancellation of certain common stock purchase warrants that
had been issued to Hubbard, and the parties exchanged mutual releases.
On July 15, 1998, the Company obtained a favorable jury verdict in the case
of Carlin Equities Corporation v. Tamboril Cigar Company. In the case, which
-----------------------------------------------------
was tried in the United Stated District Court for the Southern District of New
York, Carlin instituted legal action in July 1997 alleging that it was entitled
to approximately $1,680,000 plus certain common stock purchase warrants in
respect of fees under an agreement in which Carlin was to serve as placement
agent for the Company in connection with a proposed private placement financing.
Carlin did not raise any capital for the Company, and the Company sought
financing elsewhere. The jury found that the Company did not owe Carlin any
commission on the financing it did obtain. Furthermore, the jury found that
Carlin breached the agreement by failing to perform its obligations to the
Company. Even though the jury found for the Company on its counterclaim that
Carlin breached the agreement, no damages were awarded to the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
15
<PAGE>
(c) On August 5, 1998, the Company issued an aggregate of 7,380,042 shares of
its common stock, par value $.0001 per share, to Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited pursuant to a
conversion of $331,550 aggregate stated amount of the Company's Series B
Convertible Preferred Stock (the "Series B Shares") and $37,944.06 in accrued
dividends on such Series B Shares. Infinity, Summit and Glacier invested
$3,000,000 in the aggregate in the Company's placement of Series B Shares and 8%
Convertible Debentures (the "Debentures") that was completed in September of
1997. The shares of common stock issued to the investors pursuant to the current
conversions represent 56% of the issued and outstanding common stock of the
Company (post-issuance), with 13,356,632 shares outstanding after the
conversions. To date, Infinity, Summit and Glacier have converted an aggregate
of $475,550 of stated amount of the Series B Shares, together with the
associated dividends. The remaining stated amount of Series B Shares outstanding
is $2,324,450 and the $200,000 principal amount of Debentures remains
outstanding.
Of the 7,380,042 shares, 5,252,738 shares were issued without registration
under the Securities Act of 1933, as amended (the "Act"). These shares were
issued pursuant to Section 4(2) of the Act by reason of the issuance of such
shares being a transaction by an issuer not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company remains in default of its $200,000 face amount of the
Company's 8% Convertible Debentures due September 22, 1999 and $2,800,000
aggregate stated amount of the Company's Series B Convertible Preferred Stock,
as previously disclosed in the Company's Form 10-QSB for the quarterly period
ended March 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
On August 4, 1998, Tom Knudson resigned as a member of the Board of
Directors of the Company.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 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 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**
17
<PAGE>
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**
99.1 Press release dated August 11, 1998
99.2 Press release dated August 17, 1998
* 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) None.
18
<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
August 24, 1998 /s/ Anthony Markofsky
---------------------------------------
Anthony Markofsky
President and Chief Executive
Officer
August 24, 1998 /s/ Pedro J. Mirones
-----------------------------------------
Pedro J. Mirones
Vice President, Chief Financial
Officer and Principal Accounting
Officer
19
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Page 1 of 3
CRL CORRECT: TANBORIL CIGAR SETTLES DISPUTE WITH HUBBARD IMPORTS
July 17 1998 17:12
(The following is a reformatted version of a press release issued
by Tamboril Cigar Co.)
TAMBORIL CIGAR COMPANY ANNOUNCES SETTLEMENT OF DISPUTE WITH
HUBBARD IMPORTS; FAVORABLE JURY VERDICT IN CARLIN EQUITIES
LITIGATION
Miami, FL - TAMBORIL CIGAR COMPANY (NASD OTC Bulletin Board
Symbol SMKE) today announced that it has previously entered into
a settlement agreement with Hubbard Imports, which was formerly a
distributor of Tamboril's cigars. Pursuant to the settlement
agreement, the parties agreed that the Distribution Agreement and
the Cigar Production Agreement between the parties are
terminated. Hubbard agreed to pay Tamboril the sum of $373,920 in
respect of prior invoices. Payment of $225,721 has been paid,
with the remainder due on or before December 15, 1998. Hubbard
agreed not to contest Tamboril's previous cancellation of certain
common stock purchase warrants that had been issued to Hubbard,
and the parties exchanged mutual releases.
Tamboril also announced that it had received a favorable
[LETTERHEAD HERE]
<PAGE>
Story 10 / 20: 99 <GO> for list of story options. Equity C N
Page 2 of 3
jury verdict in the case of Carlin Equities Corporation v. Tamboril Cigar
Company. In the case, which was tried in the United States District Court for
the Southern District of New York, Carlin instituted legal action in July 1997
alleging that it was entitled to approximately $1,680,000 plus certain common
stock purchase warrants in respect of fees under an agreement in which Carlin
was to serve as placement agent for Tamboril in connection with a proposed
private placement financing. Carlin did not raise any capital for Tamboril, and
the Company sought financing elsewhere. The jury found that Tamboril did not owe
Carlin any commission on the financing it did obtain. Furthermore, the jury
found that Carlin breached the agreement by failing to perform its obligations
to Tamboril. Even though the jury found for Tamboril on its counterclaim that
Carlin breached the agreement, no damages were awarded to Tamboril. Paul R.
Levenson of Kaplan Gottbetter & Levenson, LLP, lead trial counsel for Tamboril,
stated: "We were very pleased to have successfully defended this suit. We had
great confidence all along in the propriety of the Company's actions and feel
that the jury's verdict bears this out."
The Tamboril Cigar Company manufactures and distributes premium,
hand-rolled cigars under the Tamboril, Cordova and FORE! brand names. Its
manufacturing facilities are located in the
[LETTERHEAD HERE]
<PAGE>
NEWS RELEASE
TAMBORIL CIGAR COMPANY
AUGUST 17, 1998
FOR IMMEDIATE RELEASE
- ---------------------
TAMBORIL CIGAR COMPANY ANNOUNCES ISSUANCE OF 7,380,042 SHARES OF COMMON STOCK IN
CONVERSION OF PREFERRED STOCK
Miami, FL--TAMBORIL CIGAR COMPANY (NASD OTC Bulletin Board Symbol SMKE) today
announced that on August 5, 1998 it issued an aggregate of 7,380,042 shares of
its common stock, par value $.0001 per share, to Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited pursuant to a
conversion of $994,650 aggregate stated amount of Tamboril's Series B
Convertible Preferred Stock (the "Series B Shares") and $113,832.18 in accrued
dividends on such Series B Shares. Infinity, Summit and Glacier invested
$3,000,000 in the aggregate in Tamboril's placement of Series B Shares and 8%
Convertible Debentures (the "Debentures") that was completed in September of
1997. The shares of common stock issued to the investors pursuant to the current
conversions represent 56% of the issued and outstanding common stock of Tamboril
(post-issuance), with 13,028,056 shares outstanding after the conversions. To
date, Infinity, Summit and Glacier have converted an aggregate of $1,138,650 of
stated amount of the Series B Shares, together with the associated dividends.
The remaining stated amount of Series B Shares outstanding is $1,661,350 and the
$200,000 principal amount of Debentures remains outstanding.
The Tamboril Cigar Company manufactures and distributes premium, hand-rolled
cigars under the Tamboril/TM/, Cordova/TM/ and FORE!/TM/ brand names. Its
manufacturing facilities are located in the Dominican Republic and its
headquarters and U.S. sales offices are located in Miami, Florida. The Tamboril
Cigar Company's common stock trades on the NASD OTC Bulletin Board under the
trading symbol SMKE. For further information please contact the Company's
Investor Relations at 1-800-227-5409.
