<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB/A
(Amendment No. 2)
(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
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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)
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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
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PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.
To come as second bit.
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, 1996
through September 30, 1996, 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 Company's cigars.
Sales for the three and nine month periods ended September 30, 1996 totaled
$94,119 and total expenses were approximately $297,693 and $396,899,
respectively, 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, 1996. 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
Hubbard Imports, a Florida partnership ("Hubbard") pursuant to which Hubbard
became the exclusive U.S. distributor for the Company's products (the
"Distribution Agreement").
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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 1992. 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.
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 to increase sales of these two product lines by
increasing the number of retail tobacconists to whom the products are
distributed and by opening additional distribution
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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 ensuing calendar year.
Management of the Company believes that, although operating through a
distributor such as Hubbard will lower the Company's 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
$1,516,023 (81%) and $2,669,715 (61%) 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.
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Cost of goods sold in the period from April 15, 1996 through December 31,
1996 amounted to $573,687 or 41% of sales, leaving gross profits of
$840,128, or 59%. 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% 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 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 obtained additional loans of approximately $1,975,000 since
December 31, 1996. Net interest expense was $163,516 for the nine months
ended September 30, 1997. The Company's loans were 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
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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
growth 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,
consisting of $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. During that period the
Company purchased property and equipment totaling $384,122. 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, through September 30, 1997 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 in aggregate principal and interest of the Company's debt was
recapitalized 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 decrease
the Company's debt service requirements and, thus, 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 described below in "RECENT SALES OF
UNREGISTERED SECURITIES" and the recapitalization of the Company's debt.
Cash flows used for investing activities during the nine month 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.
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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 remainder 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 require
the Purchasers to provide 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
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 increases 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
8
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United States. Federal law has required warning labels on cigarettes since
1965, though no such warnings have been required for cigars. Recent federal
law enacted by Congress has required states applying for certain federal
grants for substance abuse programs to adopt a minimum age of 18 for
purchase of tobacco products and to establish elaborate enforcement programs
to support this requirement. Legislation proposed but not enacted by
Congress has sought to impose (1) bans on advertising of tobacco products or
on the deductibility of such advertising expenses for federal tax purposes,
(2) additional labeling, warnings or listings of additives, (3) preemption
of state law to impose civil liabilities on manufacturers and distributors
of tobacco products, (4) reimbursement to the federal government for health
care costs incurred in connection with tobacco-related conditions and (5)
regulation of tobacco products by the Food and Drug Administration as a
possibly addictive "drug." Moreover, the Environmental Protection Agency
has concluded that widespread exposure to so-called "secondary smoke" may
present a serious and substantial public health concern. The impact of this
finding and the EPA's authority to regulate "secondary smoke" are the
subject of ongoing litigation.
Many states and local governments have passed statutes or ordinances
severely limiting the types of establishments (such as restaurants and
office buildings), and the areas within such establishments, in which
persons may smoke.
The Company cannot predict the outcome of these legislative and regulatory
initiatives in the future. Presumably, the trend toward increased
regulation will continue at all levels. Depending on these outcomes, there
may be a materially adverse effect on the tobacco products industry in
general and the Company in particular.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking
statements contained in this Form 10-QSB are subject to certain risks and
uncertainties. Actual results could differ materially from current
expectations. Among the factors that could affect the Company's actual
results and could cause results to differ from those contained in the
forward-looking statements contained herein is the Company's ability to
implement its business strategy successfully, which will 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.
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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
January 8, 1998 /s/ Anthony Markofsky
---------------------------------
Anthony Markofsky
President and Chief Executive
Officer
January 8, 1998 /s/ Pedro J. Mirones
---------------------------------
Pedro J. Mirones
Vice President, Chief Financial
Officer and Principal Accounting
Officer
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TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $1,679,664 $ 245,939
Accounts receivable, net of allowance for doubtful
accounts of $65,000 and $15,000, respectively 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
Other assets 203,049 103,550
- -----------------------------------------------------------------------------------------
Total Assets $6,619,880 $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 8% 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 5,347,562 936,253
Retained earnings (Deficit) 214,193 (221,627)
- -----------------------------------------------------------------------------------------
Stockholders' Equity 5,562,351 715,183
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,619,880 $2,011,928
=========================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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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 $1,112 and $536 interest income 81,478 7,589
- ---------------------------------------------------------------------------------------------
Income before income taxes 349,161 (203,574)
- ---------------------------------------------------------------------------------------------
Income taxes 126,000 -
- ---------------------------------------------------------------------------------------------
Net Income (loss) $223,161 $(203,574)
=============================================================================================
- ---------------------------------------------------------------------------------------------
Net income (loss) 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.
12
<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 (loss) 435,820 (302,780)
===========================================================================================================
Net income (loss) 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.
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TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
SERIES B 8% 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 8%
Convertible Preferred Stock, net of expenses 56,000 6 2,426,661 2,426,667
Net Income - - - 435,820 435,820
- ---------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,903,894 $ 590 56,000 $ 6 $5,347,562 $ 214,193 $5,562,351
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
14
<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>
Cash Flows from Operating Activities
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 PROVIDED BY (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 (965,319) -
Proceeds from issuance of common stock - 875,210
Proceeds from issuance of Series B convertible preferred stock 2,426,667 -
Proceeds from issuance of Debentures 200,000 -
Deferred debt issuance costs (26,717) -
- ---------------------------------------------------------------------------------------------------------------------------------
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.
15
<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.
16
<PAGE>
2. 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.
3. 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.
17
<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).
18
<PAGE>
On July 1, 1997, the Company entered into a distribution agreement with Hubbard
Imports. Part of the compensation to Hubbard under the agreement was the
issuance by the Company of 200,000 warrants to purchase shares of common stock
of the Company at an exercise price of $5.85. The issuance of these Warrants to
Hubbard was made contingent upon Hubbard and the Company entering into a second
agreement relative to the manufacturing by the Company of private label cigars
under the brand name Hamilton Reserve TM (the "Cigar Production Agreement"). The
Company and Hubbard entered into the Cigar Production Agreement on October 1,
1997. Accordingly, on October 1, 1997, the Company recorded a charge to
operations of $184,000 for the issuance of these warrants ($0.92 per warrant).
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:
- ----------------------------------
19
<PAGE>
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.
8. MAJOR CUSTOMERS
During the quarter ended September 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 period ended
September 30, 1997 amounted to $2,669,715 (61% 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.
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