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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ......... to.........
Commission file number: 000-22573
TAMBORIL CIGAR COMPANY
................................................................................
(Name of small business issuer in its charter)
Delaware 65-0774638
................................................................................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 S.W 3rd Avenue, Miami, FL 33129
...............................................................................
(Address of principal executive offices) (Zip Code)
(305) 860-9887
................................................................................
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
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None.
Name of each exchange on which registered:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common stock, par value $.0001 per share
................................................................................
(Title of class)
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 ...
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year.
$6,442,894
..............................................................................
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the closing sale price of the Company's
common stock on March 25, 1998 was:
$ 7,912,266.66.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has 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 a court.
Yes ... No ...
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
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5,929,457 Shares of Common Stock, Par Value $.0001 per share
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and III of this Annual Report on Form 10-KSB
incorporate by reference several Items from the Registrant's Prospectus dated
January 28, 1998 which was filed as part of the Registrant's Registration
Statement on Form SB-2 filed with the Commission on January 9, 1998 and which
was declared effective by the Commission on January 28, 1998 (the "Prospectus").
Items incorporated by reference to the Prospectus are specifically identified in
response to the applicable items of this Form 10-KSB.
Transitional Small Business Disclosure Format (check one):
Yes . . . No .X . .
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Part (A), "BUSINESS DEVELOPMENT" is incorporated by reference to Item 16 "THE
BUSINESS OF THE COMPANY -- (A) BUSINESS DEVELOPMENT" included in the
Registrant's Prospectus dated January 28, 1998 filed under Rule 424 as part of
its Registration Statement on Form SB-2 which was declared effective by the
Commission on January 28, 1998 (the "Prospectus").
(B) BUSINESS OF THE ISSUER.
PRODUCTS
The Company's product line now consists of 22 cigars of varying styles and
sizes which are sold to wholesale distributors for distribution to tobacconists
nationwide and which are sold at retail prices from $3.50 to $6.50 per cigar.
Premium cigars are generally defined as cigars that are hand-made from high
quality, natural leaf binder, long-filler and wrapper tobaccos and that retail
for $1 or more per cigar. The principal elements that determine the quality of
the cigar are the quality of the tobacco, the curing and aging process and the
skill of the hand-roller. The Company's binder and filler tobaccos are Cuban-
seed Piloto Cubano and Olor Dominicano varieties from the Tamboril region of the
Dominican Republic. These varieties of tobacco were introduced to the Dominican
Republic by immigrants who fled Cuba after the United States imposed a trade
embargo on all imports from Cuba in 1962. Many tobacco growers fled Cuba at
that time, taking with them seeds from what have always been considered the
world's finest cigar tobaccos and resettling in various areas of Latin America,
including the Dominican Republic. The Company's wrapper tobaccos are of two
varieties: Connecticut shade-grown (universally regarded as the world's finest
wrapper tobacco) and Sumatra leaf, a darker more spice-laden tobacco than the
Connecticut variety. These wrapper styles define the Company's products lines:
The CONNECTICUT COLLECTION, the SUMATRA COLLECTION, CORDOVA(TM) and FORE(TM).
Company employees in the Dominican Republic purchase whole-leaf tobacco,
which is then shipped to the Company's facilities in the town of Tamboril where
it is inspected, graded and re-graded. Tobacco that passes inspection is
sprayed with a white wine solution to enhance flavor, fermented, dried,
stripped, aged and hand-rolled into Tamboril cigars. In the rolling process,
binder tobacco is hand-wrapped around the filler tobacco to create a "bunch,"
which is then pressed into a mold to ensure uniformity of shape. Wrapper tobacco
is then hand-wrapped around the bunch to complete the cigar, which is then
banded and boxed for shipment. The Company also manufactures the boxes in which
Tamboril cigars are shipped at its factory in the Dominican Republic.
The Company's principal business strategy is to expand sales of the current
product line through increased sales, marketing and promotional activities
through existing distribution channels and expansion into new channels. See
"SALES AND MARKETING; DISTRIBUTION" below. The Company intends to become a
significant factor in the market for premium cigars by (i) continuing to
establish and extend the brand recognition of the Tamboril name, (ii)
establishing its
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reputation for uncompromising quality, (iii) focusing on hands-on customer
service to establish a loyal following among tobacconists and regional
distributors and (iv) expanding its product line and distribution channels to
cover other market segments. As product awareness of the Company's cigars grows,
the Company will seek to introduce additional cigar and non-cigar products to
capitalize on the status of the Tamboril name as a recognized luxury brand.
In October of 1997 the Company introduced a moderately priced line of
cigars under the brand name "CORDOVA(TM)". The Cordova(TM) brand is made of
Sumatran wrapper and Dominican filler and binder tobaccos, is treated with cocoa
for a milder, somewhat sweeter smoke than the Company's other cigars and is
available in eight sizes. Cordova(TM) is being positioned through marketing and
pricing as an entry-level cigar for the new cigar smoker. This line will be
positioned to appeal to a broader market and will be intended to enable the
Company to expand its distribution channels to retailers in several distribution
channels that have not before been exploited by the Company, including fine
restaurants, hotel gift shops and executive gift programs.
In early 1998 the Company also introduced a golf-theme novelty line of
cigar under the brand name "FORE(TM)". Fore(TM) cigars are displayed in a unique
30-cigar package, are sold in a novelty plastic tube with a golf-ball shaped cap
and are available in one size only. The Fore(TM) cigar is targeted towards
country club pro shops and golf equipment and accessories shops throughout North
America.
The Company is planning to introduce innovative packaging to assist its
move into mass merchandising channels for certain of its cigar products.
The Company's believes that its products are well-positioned to take
advantage of the significant growth in the market for premium cigars over the
past few years. Retail sales of cigars of all categories have risen
dramatically since 1993, both in terms of numbers of cigars and total dollar
sales. Even in this strong market, sales of premium cigars have grown
significantly faster than the cigar market as a whole. The number of premium
cigars sold in the United States has grown over 64% from 1992 to more than
176,000,000 cigars in 1995. Industry experts have estimated that premium cigar
imports in the first half of 1996 grew 48.6% over 1995's totals to just over
115,000,000 cigars. Total dollar sales of cigars have expanded even more
dramatically as prices have continued to rise significantly. Total dollar sales
of all cigars in the U.S. were in excess of $1 Billion in 1995. Premium
cigars, the market segment the Company's products are intended to penetrate,
constituted just over 4% of the number of cigars sold, but accounted for a
significantly larger percentage of total dollar sales.
The rapid growth in the cigar market led to significant back orders across
the entire industry in 1996 and early 1997 as existing inventories were
insufficient to meet demand. However, in response to this order imbalance, many
manufacturers expanded capacity and flooded their distribution channels with
product, so that there was a backlash in late 1997 that has carried over in
early 1998. Industry-wide sales growth has slowed somewhat and distributors have
found themselves with excess inventory. This has continued to result in higher
than usual inventory levels throughout the industry in the first quarter of
1998. The Company has
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not been immune to these industry-wide developments and Hubbard Imports, which
was the Company's exclusive distributor for the United States market until
recently, has experienced higher than commercially viable inventory levels and
slowing sales of the Company's products. The Company believes that some of these
problems are particular to Hubbard, rather than the industry generally and the
Company has taken steps to focus Hubbard's role to those states in which it is
strongest and those national accounts with which it has relationships. In the
remaining states and remaining national accounts, the Company is re-asserting
control over the future distribution of its products. See "SALES AND
MARKETING; DISTRIBUTION" below.
Despite what it perceives to be a short-term slowing of sales growth,
management of the Company believes the increased popularity of cigar smoking in
the United States is due to certain demographic and social trends that should
continue for at least the next few years. The Company believes that the
principal changes that have contributed to growth in the cigar market are (1)
the emergence of an expanding base of younger new cigar smokers, both male and
female, (2) increasing popularity of cigars among celebrities who are viewed as
trend-setters, (3) increased media interest, especially the successful launch
and continued popularity of Cigar Aficionado magazine, (4) promotion of "cigar
friendly" restaurants and nightclubs and (5) the increase in the population of
people over 50 years of age, a group that has traditionally been viewed as
consuming more luxury goods, including cigars, than other demographic groups.
SALES AND MARKETING; DISTRIBUTION
The Company's sales and marketing efforts are conducted from its
headquarters in Miami, Florida. The initial focus of the Company's sales
efforts in 1996 and early 1997 was the establishment of positive relationships
with premium tobacconists nationwide, with a strong emphasis on added-value to
the retailer through superior customer service, promotional events and
supporting point of sales. In that initial effort, the Company's products were
introduced into over 500 retail outlets throughout the United States.
On July 7, 1997, the Company entered into a distribution agreement (the
"Distribution Agreement") with Hubbard Imports, a Florida partnership
("Hubbard") that appointed Hubbard as the Company's exclusive distributor for
the United States market. On October 1, 1997 the Company and Hubbard entered
into a Cigar Production Agreement pursuant to which the Company agreed to
manufacture specially for Hubbard a line of Hamilton Select(TM) cigars and
Hubbard agreed to purchase a minimum quantity of Hamilton Select(TM)'s from the
Company. The strategy behind these agreements was for the Company to focus its
efforts on expanding its manufacturing operations and to rely upon Hubbard for
sales and marketing of the Company's products.
Substantially all of the Company's sales for the period from July 7, 1997
through December 31, 1997, and approximately 79% of the Company's sales for the
year ended December 31, 1997, resulted from purchases from the Company by
Hubbard under the Distribution Agreement and the Cigar Production Agreement.
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The Distribution Agreement provided that annual minimum purchase
commitments from Hubbard would be set by mutual agreement of Hubbard and the
Company in January of each year for the upcoming year. As of March 20, 1998
Hubbard had not yet agreed to its minimum commitments for 1998, though the
Company and Hubbard continued to negotiate in this regard. Like many other
distributors of cigars, Hubbard is currently carrying higher than standard
levels of inventory of cigars and new orders have been delayed until inventory
levels have been reduced to more standard levels. Accordingly, Hubbard made no
purchase commitments for 1998 and has purchased no cigars from the Company since
December 31, 1997.
On March 20, 1997, the Company gave Hubbard written notice of the Company's
intention to terminate both the Distribution Agreement and the Cigar Production
Agreement. On March 24, 1998, the Company and Hubbard agreed in principle that
the Distribution Agreement and the Cigar Production Agreement had been canceled,
arrived at a settlement of the outstanding issues under those agreements and
established a new working arrangement whereby Hubbard would continue to
distribute the Company's cigars on a limited basis. The Company and Hubbard have
not reduced this agreement in principle to a written agreement but negotiations
are under way to do so. Management of the Company believes that the Company's
relationship with Hubbard will be reformed along the lines of the agreement in
principle, though there can be no assurance that this would be the case. Failure
to enter into binding settlement could lead to litigation, resulting in expense
to the Company, delays in receiving funds due and owing from Hubbard and delay
the Company's efforts to reorganize its distribution system.
Under the agreement in principle, Hubbard's territory (which was formerly
the entire United States) has been reduced to the states of California, Florida,
Hawaii, Kentucky, Pennsylvania and South Carolina. Hubbard will also be
permitted to continue to service any national accounts whom they were servicing
as of March 24, 1998. The Company will be free to sell directly or through
other distributors in all other territories and to all other national accounts.
In addition, Hubbard and the Company will jointly approach all sub-distributors
of Hubbard in the remaining 36 states in which Hubbard distributes products to
ease the transition. The Company will be free to deal with these sub-
distributors or any other potential distributors in those states.
Management of the Company did not fully anticipate the difficulties
subsequently encountered with Hubbard due to the paucity of inventory controls
and sales reporting information forthcoming from Hubbard from July 1997 through
March 1998. Since learning of Hubbard's inventory surpluses in March of 1998,
the Company has moved quickly to approach alternative distributors of the
Company's products. The disruption of sales and distribution activity
occasioned by the Hubbard inventory imbalances will result in depressed sales of
the Company's products during the first calendar quarter of 1998. The Company
is working to re-establish independent distribution in the 44 states that will
not be reserved to Hubbard going forward and to assist Hubbard in selling the
Company's products in the six remaining Hubbard states so that inventories of
the Company's products are reduced to commercially viable levels and Hubbard
will begin re-ordering product from the Company. Management of the Company has
estimated that it will take from 4 to 6 months for the situation in the Hubbard
states to stabilize and for significant orders from Hubbard to commence once
again. There can, however, be no assurance that Hubbard will be successful in
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reducing such inventories or that Hubbard will not choose to sell the Company's
cigars at deep discounts in the Hubbard states, further depressing the market
for the Company's products in those states.
The reduced sales targets for the Hubbard states and the need to establish
new, or re-establish old, distribution channels in the remaining states, will
result in reduced sales for the Company in the first quarter of 1998 and perhaps
in the second quarter as well. Moreover, the need for the Company to distribute
directly or to support additional local or regional distributors will result in
additional sales expenses that were not contemplated when Hubbard was the sole
distributor for the United States market. The combined effect of these
developments will be to strain the Company's liquidity, as cash inflows will be
slowed and cash expenditures will be accelerated. The Company has taken several
steps to alleviate this situation. See "MANAGEMENTS DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION -- Liquidity and Capital Resources," below.
Management of the Company believes, given the Hubbard experience, that
establishing closer Company control over distribution, including inventory
controls and sales reporting functions, will better enable the Company to
allocate sales and marketing resources and help to capitalize on the excitement
generated by the Company's Tamboril(TM), Cordova(TM) and FORE(TM) product
lines.
The Company continues to advertise and promote its products through a
series of full-page, four-color ads in the major cigar publications such as
Cigar Aficionado, Smoke, Tobacconist and Smoke Shop, as well as several regional
cigar magazines, installation of in-store point-of-sale displays at major
upscale tobacconist shops and a nationwide series of cigar tastings to be co-
sponsored with local cigar retailers and cigar-friendly restaurants. This
advertising and promotional campaign is intended to support the sales efforts of
the Company's distributors relating to the Company's products.
The Company also licences the Tamboril name to the operators of TAMBORIL AT
THE PARK, an upscale cigar bar and lounge opened in May of 1997 at the Lombardy
Hotel in midtown New York City. TAMBORIL AT THE PARK, is intended to serve as a
flagship for the TAMBORIL and CORDOVA brands, to piggy-back on the success that
both branded (such as Club Macanudo) and unbranded cigar clubs have experienced
in the past few years and to reinforce the premium, luxury status of the
TAMBORIL and CORDOVA brands and their association with fine food and wine. The
project, which is anchored by a 350 seat restaurant named THE PARK, has been
orchestrated by restaurateur John Scotto, who has brought together a team
including designer Robert Denning of DENNING & FOURCADE (whose clients include
Oscar de la Renta and Henry Kravis) and chef Fabrizzio Salerni (formerly of New
York's LESPINASSE) to bring new life to a space where William Randolph Hearst
(and his then-girlfriend, film star Marion Davies) lived and where Rudi Vallee
once crooned to full houses. TAMBORIL AT THE PARK seats 30, with sidewalk cafe
seating for an additional 20, and features cigars from the Company's
CONNECTICUT, SUMATRA and CORDOVA Collections. TAMBORIL AT THE PARK is
complemented by THE PARK'S casual yet-upscale bar menu and a selection of fine
wines, cognacs, vintage ports and single malt Scotches. The Company plans to use
TAMBORIL AT THE PARK as the center of promotional
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events such as tastings and new product launches.
RAW MATERIALS: TOBACCO
The Company's Tabacalera subsidiary was established in the Tamboril region
of the Dominican Republic, which is universally recognized to be one of the
finest tobacco growing regions in the world, and where there is a large pool of
skilled cigar rollers. Dominican cigars currently account for just under 50% of
the world's production of premium cigars. Other noted growing and producing
areas include Honduras, Costa Rica, Indonesia, the Canary Islands and Mexico.
Tabacalera has established relationships with several of the largest growers in
the Dominican Republic and believes that its requirements for tobacco have been
arranged for through the year 2000 through the execution of financing/harvesting
agreements with its key growers. The Company and Tabacalera cement these
relationships by providing financing for growers to enable them to plant and
harvest their crops, which are then committed to the Company. While the Company
believes its requirements for high-grade tobacco to produce "Tamboril" cigars
will be met for the foreseeable future, and inventory levels are more than
sufficient for the Company's projected levels of operations, increases in demand
for high-grade tobacco for use in premium cigars could result in higher prices
and/or scarcities which could, if they occur, have a materially adverse impact
on the Company's business.
EMPLOYEES
The Company currently employs approximately 142 full-time employees: six in
its Miami offices and 136 in the Dominican Republic. Of these, approximately
three are engaged in sales and marketing, ten in administrative roles, and 129
in manufacturing. In addition, the Company employs approximately 186 temporary
employees in the Dominican Republic. None of the Company's employees are
covered by any labor union. The Company believes its relationships with its
employees are generally good.
The ability of the Company to fulfill its goals will be highly dependent on
its ability to recruit and maintain a skilled work force of rollers in the
Dominican Republic. Tabacalera recruits rollers on the basis of favorable
working conditions at the Company's new facilities and competitive wages.
Tabacalera maintains an extensive training program to ensure the quality of its
cigars and to provide a continuing source of skilled rollers. The Company
believes its requirements for skilled workers will be met for the foreseeable
future.
TRADEMARKS
Trademarks and brand names are central to the business of marketing and
distributing premium cigars and are, accordingly, highly important to the
Company's business. The Company received a trademark registration on the
Tamboril trademark. In addition, the Company has applied for trademark
protection on the marks and/or design logos TAMBORIL w/DESIGN, CORTADITO,
CORDOVA, FORE, THE OFFICIAL CIGAR OF WALL STREET, and TAMBORIL HANDMADE
DOMINICAN REPUBLIC, in the United States. The Company also relies on certain
non-patentable trade secrets,
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to produce the distinctive flavors and aromas of its brands of cigars and has
applied for a design patent on the Fore packaging. There can be no assurance
that the Company will be able to prevent unauthorized use or disclosure of such
proprietary information or that other competitors will not be able to develop
substantially similar formulations. The Company intends to vigorously defend,
police, and maintain its trademarks and trade secrets.
COMPETITION
The Company has several large, well-financed competitors in the market for
premium cigars, each of whom enjoys strong, well-known brand names and a history
of successful product launches. These companies compete directly with the
Company for consumer sales, as well for supplies of tobacco and employees. The
largest of these competitors are Consolidated Cigar Holdings Inc. (NYSE symbol:
"CIG"), General Cigar Holdings, Inc. (NYSE Symbol: "MPP"), a division of Culbro
Corporation, and Swisher International Group Inc. (NYSE symbol: "SWR"). Each of
these companies has substantially greater capital resources, manufacturing,
sales and marketing experience, substantially longer and more extensive
relationships with growers and long standing brand recognition and market
acceptance than the Company. The Company believes, however, that the market for
premium cigars has grown sufficiently to support newer brands such as those
offered by the Company. Hubbard currently distributes several brands of cigars
that compete directly with the Company's products.
FLUCTUATING SALES GROWTH RATES AND INVENTORY LEVELS
In late 1996 and early 1997, the substantial growth in demand for cigars,
particularly in the U.S. market, caused several of the Company's largest
competitors to experience substantial growth in their order backlog and
difficulty in obtaining sufficient inventories of tobacco and sufficient skilled
rollers to meet market demand. As a reaction to those developments, most cigar
manufacturers increased their purchases of tobacco, hired additional rollers,
manufactured more cigars and moved these additional inventories into their
distribution channels. In late 1997 and into early 1998, the extraordinarily
rapid rate of industry-wide sales growth that had characterized the years from
1993 through mid-1997 began to slow somewhat. As a result, distributors were
left with larger than normal levels of unsold inventory and resulting strains on
their liquidity.
As the longer term characteristics of the "cigar boom" become more
apparent, management of the Company believes that the resulting demand levels
will be substantially higher than they were prior to 1993. As such, the Company
believes that there will continue to be room in the marketplace for newer brands
such as those manufactured and sold by the Company. The Company has not
experienced shortages of tobacco and skilled rollers and management believes (i)
that its relationships with growers (including the Company's practice of
financing growers' production) ensure it a sufficient supply of tobacco for the
foreseeable future and (ii) the Company's relationships with its workers are
sufficiently good and the supply of skilled workers in the Tamboril region is
sufficiently large to ensure that it will continue to have a sufficient staff of
skilled rollers. There can, of course, be no assurance that the Company will
not experience such shortages. The Company has,
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indirectly through Hubbard, experienced the industry-wide difficulties with
excess inventory and has taken steps to ameliorate these problems. See "SALES
AND MARKETING; DISTRIBUTION," above.
While the Company's competitors have geographically diverse operations, the
Company is dependent on supplies of tobacco in the Dominican Republic. Shortages
of Dominican tobacco, whether from natural disaster, economic forces or
otherwise, could have a material adverse effect on the business and prospects of
the Company.
REGULATION AND LITIGATION IN THE TOBACCO INDUSTRY
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation at the federal, state and local levels. Since the early 1970's
the trend has been for increasing regulation, which when coupled with changing
public attitudes toward smoking, has had the effect of reducing overall
consumption of tobacco products in the United States. Federal law has required
warning labels on cigarettes since 1965, though no such warnings have been
required for cigars. Recent federal law enacted by Congress has required states
applying for certain federal grants for substance abuse programs to adopt a
minimum age of 18 for purchase of tobacco products and to establish elaborate
enforcement programs to support this requirement. Legislation proposed but not
enacted by Congress has sought to impose (1) bans on advertising of tobacco
products or on the deductibility of such advertising expenses for federal tax
purposes, (2) additional labeling, warnings or listings of additives, (3)
preemption of state law to impose civil liabilities on manufacturers and
distributors of tobacco products, (4) reimbursement to the federal government
for health care costs 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.
Recent attempts at a nationwide legislative settlement of claims of the
various states against cigarette manufacturers may have slowed the move toward
additional regulation of the cigarette industry for the time being. In the
interim, renewed interest has surfaced in the alleged health dangers of cigar
smoking and there have been calls by various advocacy groups to further regulate
cigars.
The Company cannot predict the outcome of these legislative and regulatory
initiatives or of litigation in the future. Presumably, the trend toward
increased regulation will continue at all levels. Depending on these outcomes,
there may be a materially adverse effect on the tobacco products industry in
general and the Company in particular.
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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.
RESEARCH AND DEVELOPMENT
The Company has no material research and development expenses.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company has no material expenses and no material impact on its
business occasioned by compliance with environmental laws.
ITEM 2. DESCRIPTION OF PROPERTY.
Incorporated by reference to Item 18 "DESCRIPTION OF PROPERTY", included in
the Prospectus.
ITEM 3. LEGAL PROCEEDINGS.
Incorporated by reference to Item 9 "LEGAL PROCEEDINGS", included in the
Prospectus.
The Company has moved for summary judgment to dismiss Carlin's claims, but
no action on that motion has been taken to date.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The Company's Common Stock trades on the National Association of
Securities Dealers, Inc. OTC Bulletin Board under the trading symbol of "SMKE."
The Common Stock began trading under that symbol on November 5, 1996. Prior
to that time, the Common Stock was listed for trading under the symbol "ILLD,"
but there was no established bid price for the Common Stock. Accordingly, the
high and low bid prices for the Company's Common Stock for each quarter within
the last two fiscal years, as reported by National Quotation Bureau, LLC, are as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
QUARTER HIGH BID PRICE LOW BID PRICE
- --------------------------------------------------------------------
<S> <C> <C>
1996 Q1 (1/2-3/29) None None
- --------------------------------------------------------------------
Q2 (4/1-6/28) None None
- --------------------------------------------------------------------
Q3 (7/1-9/30) None None
- --------------------------------------------------------------------
Q4 (10/1-11/4) None None
- --------------------------------------------------------------------
(11/5-12/31) $ 11.375 $ 7.50
- --------------------------------------------------------------------
1997 Q1 (1/2-3/31) 11.0625 7.25
- --------------------------------------------------------------------
Q2 (4/1-6/30) 7.50 4.625
- --------------------------------------------------------------------
Q3 (7/1-9/30) 5.8125 4.50
- --------------------------------------------------------------------
Q4 (10/1-12/31) 4.90625 3.00
- --------------------------------------------------------------------
</TABLE>
Prices for the period November 5, 1996 through December 31, 1997 reflect closing
bid prices and a 1-for-20 reverse stock split. These quotations reflect inter-
dealer prices, without retail mark-up, mark-down or commission, and may not
represent actual transactions.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The foregoing discussion relates to the consolidated results of operations
and financial condition of the Company and its two principal operating
subsidiaries, TCI and Tabacalera.
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 from April 15, 1996
through 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") through December 31, 2001. On October 1, 1997 the
Company entered into a Cigar Production Agreement with Hubbard under which the
Company agreed to manufacture a brand of Hamilton Select(TM) cigars distributed
by Hubbard. Approximately 79% of the Company's sales in the year ended December
31, 1997 were to Hubbard for further distribution.
The Distribution Agreement and the Cigar Production Agreement each provided
that Hubbard and the Company would agree in January of each year (beginning with
1998) as to Hubbard's minimum purchase commitments in the upcoming year. As of
March 20, 1998 Hubbard had not yet agreed to its purchase commitments for 1998
and the Company gave notice of its intention to terminate both the Distribution
Agreement and the Cigar Production Agreement. Pursuant to an agreement in
principle reached by the Company and Hubbard on March 24, 1998, Hubbard's
exclusive sales territory has been reduced to the states of California, Florida,
Hawaii, Kentucky, Pennsylvania and South Carolina. The Company will either work
with Hubbard's prior sub-distributors in the remaining 36 states where Hubbard
distributes products or align itself with independent distributors in those
states. Hubbard will also continue to service national accounts to which it had
sales prior to March 24, 1998. See "BUSINESS OF THE COMPANY-- Sales and
Marketing," above.
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 at least the first
six months 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>
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 year ended December 31,
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.*
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C> <C> <C>
Net sales 1,413,815 100.0% 6,442,894 100.0%
Cost of sales 573,687 40.6% 2,754,527 42.8%
- ---------------------------------------------------------------------------------------------------
Gross profit 840,128 59.4% 3,688,367 57.2%
Selling, general and administrative expenses 1,034,386 73.2% 2,693,380 41.8%
- ---------------------------------------------------------------------------------------------------
Income (loss) from operations (194,258) -13.7% 994,987 15.4%
Other income - 0.0% 131,884 2.0%
Interest expense 27,369 1.9% (164,769) -2.6%
- ---------------------------------------------------------------------------------------------------
Net income (loss) before provision for income taxes (221,627) -15.7% 962,102 14.9%
Provision for income taxes - 0.0% 209,600 3.3%
- ---------------------------------------------------------------------------------------------------
Net income (loss) (221,627) -15.7% 752,502 11.7%
===================================================================================================
</TABLE>
* Percentages may not foot, due to rounding.
Net sales for the period from inception at April 15, 1996 to December 31,
1996 (the "1996 Period") and for the year ended December 31, 1997 were
$1,413,815, and $6,442,894, respectively. Comparisons relating to the sales for
the 1996 Period are difficult, if not impossible, since most of the 1996 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.
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. On October 1, 1997 the Company and Hubbard entered into
a Cigar Production Agreement pursuant to which the Company agreed to manufacture
specially for Hubbard a line of Hamilton Select(TM) cigars and Hubbard agreed to
purchase a minimum quantity of Hamilton Select(TM)'s from the Company.
Substantially all of the Company's sales for the period from July 7, 1997
through December 31, 1997 and approximately 79% of the Company's sales for the
year ended December 31, 1997 resulted from purchases from the Company by Hubbard
under the Distribution Agreement and the Cigar Production Agreement.
Like many other distributors of cigars, Hubbard is currently carrying
higher than standard levels of inventory of cigars and new orders have been
delayed until inventory levels have been reduced to more standard levels.
Accordingly, Hubbard made no purchase commitments for 1998 and has purchased no
cigars from the Company since December 31, 1997. As a result, the Company has
no backlog of orders at this time.
Management of the Company did not fully anticipate the difficulties
subsequently encountered with Hubbard due to the paucity of inventory controls
and sales reporting information forthcoming from Hubbard from July 1997 through
March 1998. Since learning of Hubbard's inventory surpluses in March of 1998,
the Company has moved quickly to approach alternative distributors of the
Company's products. The disruption of sales and distribution activity
occasioned by the Hubbard inventory imbalances will result in depressed sales of
the Company's products during at least the first calendar quarter of 1998. The
Company is working to re-establish independent distribution in the 44 states
that will not be reserved to Hubbard going forward and to assist Hubbard in
selling the Company's products in the six remaining Hubbard states so that
inventories of the Company's products are reduced to commercially viable levels
and Hubbard will
12
<PAGE>
begin re-ordering product from the Company. Management of the Company has
estimated that it will take from 4 to 6 months for the situation in the Hubbard
states to stabilize and for significant orders from Hubbard to commence once
again. There can, however, be no assurance that Hubbard will be successful in
reducing such inventories or that Hubbard will not choose to sell the Company's
cigars at deep discounts in the Hubbard states, further depressing the market
for the Company's products in those states.
The reduced sales targets for the Hubbard states and the need to establish
new, or re-establish old, distribution channels in the remaining states, will
result in slower sales for the Company in the first quarter of 1998 and
perhaps in the second quarter as well. Moreover, the need for the Company to
distribute directly or to support additional local or regional distributors will
result in additional sales expenses that were not contemplated when Hubbard was
the sole distributor for the United States market. The combined effect of these
developments will be to strain the Company's liquidity, as cash inflows will be
slowed and cash expenditures will be accelerated. The Company has taken several
steps to attempt to alleviate this situation. See "Liquidity and Capital
Resources," below.
The Company is in the final stages of building a second manufacturing
facility to increase capacity from approximately 300,000 cigars per month to
approximately 800,000 cigars per month. It is anticipated that the new facility
will be fully operational during the first quarter of 1998. All manufacturing
operations will be transferred to the new facility as soon as it becomes fully
operational. The current facility is under lease and could be vacated as early
as August of 1998. It is anticipated that the new facility will have excess
capacity for all of 1998. The Company is in the process of drastically scaling
down production in order to bring down inventory levels in line with anticipated
demand.
Cost of goods sold in the period from April 15, 1996 through December 31,
1996 amounted to $573,687 or approximately 41% of sales. Costs of goods sold
during the year ended December 31, 1997 were $2,754,527, or approximately 43% of
sales. Accordingly, gross profits for the 1996 Period and for the year ended
December 31, 1997 amounted to $840,128 (approximately 59% of sales) and
$3,688,367 (approximately 57% 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, the
introduction of new products aimed at lower-priced market niches and the
Company's excess inventory situation will result in lower gross profit
percentages in 1998.
Selling, general and administrative ("SG&A") expenses from April 15, 1996
through December 31, 1996 totaled $1,034,386, or approximately 73% of sales,
representing the costs of establishing the Company infrastructure, including
advertising and travel expenses of $120,000 for new product introductions. SG&A
expenses for the year ended December 31, 1997 totaled $2,693,380 (approximately
42% of sales). Travel and advertising expenses totaled $808,000 as the Company
continued to aggressively promote its brands and to introduce new brands such as
Cordova(TM) and FORE(TM). Professional and consulting fees amounted to $512,000.
Current levels of SG&A expense should remain relatively constant.
13
<PAGE>
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. Income from
operations in the year ended December 31, 1997 was $994,987, due principally to
the significant increase in total sales as 1997 represented the Company's first
full year of operations. Also contributing was a significant decrease in SG&A
expenses as a percentage of sales. There can be no assurance that the Company
will be able to increase, or maintain, its level of sales.
Net interest expense for the 1996 Period 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 in 1997. Net interest expense for the year ended December 31, 1997
was $164,769. All the Company's loans were recapitalized on September 30, 1997
and interest expense for subsequent periods will, therefore, be decreased by
approximately $60,000 per quarter. Interest expense attributable to the
Company's 8% Convertible Debentures issued in connection with the Company's
$3,000,000 financing on September 23, 1997 will increase interest expense by
approximately $4,000 per quarter and the Company's new lines of credit and
mortgage will increase interest expense by approximately $100,000 per quarter.
Provision of income taxes for the year ended December 31, 1997 was
$209,600. No provision for income taxes was recorded in the 1996 Period, as the
Company experienced a loss for that period. The provision for income taxes for
the year ended December 31, 1997, expressed as a percentage, varies from the
statutory rates applicable in the United States due to the application of tax-
loss carryovers from the prior periods.
While the Company has been able to generate net profits in the past five
quarters, the Company is still in the early stages of its growth and there can
be no assurances 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. The Company's inventory imbalance and the need to revamp its
distribution networks will result in a loss in the first quarter of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal cash requirements are for operating expenses
consisting primarily of labor costs, raw materials (tobacco) purchases,
including advance funding for growers, funding of accounts receivable and
inventory of finished products. The Company has, since its inception, taken on
substantial commitments relating to the construction of its facility in the
Dominican Republic. Cash used in operations has consistently exceeded cash from
operations as the Company has continued to expand its inventories and hire
additional workers. The principal sources of cash for the Company have been
from financing activities including the issuance of common stock and convertible
preferred stock, as well as convertible debentures, and loans evidenced by
promissory notes and advances from a related party. All promissory notes and
advances were repaid or recapitalized during 1997.
14
<PAGE>
As of December 31, 1997, cash on hand was $425,908. As indicated above,
the inventory situation will create a drain on cash flows for the immediate
future. Management of the Company has taken several steps to attempt to
increase the Company's available cash and ameliorate the instant cash flow
drain. First, the Company has received approval from its bank for lines of
credit totaling approximately $1.8 million through its Tabacalera subsidiary in
the Dominican Republic to finance the Company's purchases of tobacco. Tabacalera
has also applied for a mortgage on its facilities in the Dominican Republic,
which were previously owned free and clear of any liens. The amount of the
mortgage is approximately $300,000. Management of Tabacalera has been assured by
the bank that the mortgage will be approved, but it has not yet been so approved
and there can be no assurance that it will be.
The Company is in default under certain terms of the Purchase Agreement
dated as of September 22, 1997 with the Purchasers. Accordingly, certain
penalty provisions are in effect that increase the interest rates on the
Company's 8% Convertible Debentures and the dividend rate on the Company's
Series B Preferred Stock to 16% from their prior levels of 8%. As this interest
and dividends are, under most circumstances, payable in shares of the Company's
common stock, and not in cash, they should not, in the opinion of management of
the Company result in a considerable drain on the Company's cash reserves. The
existence of this default, however, so long as it remains uncured, would prevent
the Company from requiring the Purchasers to provide the additional up to
$3,000,000 in funding to the Company under the Purchase Agreement.
In addition to the loans and mortgage for which it has applied, the Company
plans to sell a portion of its excess inventory of aged tobacco in the market
and believes that it can obtain approximately $500,000 in such proceeds and
still leave ample inventories to support sales in the second half of 1998
and the first half of 1999. Finally, Hubbard has agreed to pay the Company
approximately $400,000 in past due invoices. Management of the Company believes
that these measures will be adequate to support the Company's cash needs until
sales momentum and related cash flow can be restored.
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
15
<PAGE>
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 December 31, 1997, the Company had negative cash
flow from operations of $2,313,748, due to significant increases in accounts
receivable ($1,235,972), inventory ($1,633,712) and advances to suppliers
($916,738), all attributable to the Company's increased sales activity. These
were offset by net income of $752,502 for the year ended December 31, 1997.
Net cash inflows from financing activities during the year ended December
31, 1997 was $3,508,574, representing approximately $2,600,000 in net proceeds
of the Private Offering described in "RECENT SALES OF UNREGISTERED SECURITIES"
and the recapitalization of the Company's debt. Cash flows used for investing
activities during the year ended December 31, 1997 amounted to $904,821,
primarily representing capital expenditures related to the construction of the
Company's second manufacturing facility in the Dominican Republic. Capital
expenditures for the remainder of 1998 are expected to be approximately
$200,000.
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 such taxes will be
enacted in the future. Such increases were proposed by the Clinton
Administration in 1993 to fund that administration's health care reform
initiatives, but were not enacted by Congress. Imposition of significant
increases in excise taxes could have a material adverse impact on the large
cigar industry in general and the Company in particular.
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation at the federal, state and local levels. Since the early 1970's
the trend has been for increasing regulation, which when coupled with changing
public attitudes toward smoking, has had the effect of reducing overall
consumption of tobacco products in the United States. Federal law has required
warning labels on cigarettes since 1965, though no such warnings have been
required for cigars. Recent
16
<PAGE>
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 Prospectus are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements contained
herein is the Company's ability to implement its business strategy successfully,
which will be dependent on business, financial, and other factors beyond the
Company's control, including, among others, prevailing changes in consumer
preferences, access to sufficient quantities of raw material, availability of
trained laborers and changes in tobacco products regulation. There can be no
assurance that the Company will continue to be successful in implementing its
business strategy. Other factors could also cause actual results to vary
materially from the future results covered in such forward-looking statements.
ITEM 7. FINANCIAL STATEMENTS.
[SEE ATTACHED]
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL
17
<PAGE>
DISCLOSURE.
None.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Incorporated by reference to Item 10 "DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS", included in the Prospectus.
Jean-Francois Perrault, Director, has been Vice President-Investments of SCC
Canada Inc. since March 23, 1998. His prior employer Marlieu Lemaire Securities,
ceased its securities operations on January 21, 1998.
The following persons failed to timely file the indicated reports required under
Section 16(a) of the Securities Exchange Act of 1934.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
REPORTING PERSON TITLE FORM NOT FILED TRANSACTIONS NOT
REFLECTED
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Anthony Markofsky President; Director Form 3 Existing ownership of
Company common stock
upon effectiveness of
the Company's Form
10-SB
- -----------------------------------------------------------------------------------------------------
Abraham Shafir Director Form 3 "
- -----------------------------------------------------------------------------------------------------
Thomas Knudson Vice President; Director Form 3 "
- -----------------------------------------------------------------------------------------------------
David Rector Secretary; Director Form 3 "
- -----------------------------------------------------------------------------------------------------
Ian Markofsky Beneficial owner of more Form 3 "
than 10% of the Schedule 13D
Company's issued and
outstanding common stock
- -----------------------------------------------------------------------------------------------------
</TABLE>
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain summary information with respect to the
compensation paid to the Company's Chief Executive Officer for the last three
fiscal years for services rendered in all capacities of the Company.
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (g)
Name Other Securities
and Annual Underlying
Principal Compensation Options/
Position Year Salary $ Bonus $ $ SARs # (5)
<S> <C> <C> <C> <C> <C>
Abraham Shafir, Director, 1997 120,000 35,600(3) 250,000
President and CEO (1) 1996 120,000 37,000(3)
Anthony Markofsky, Director, 1997 55,083 14,000 8,100(4) 25,000
President and CEO (2) 1996 12,665 - 5,400(4)
</TABLE>
No other executive officer received total compensation in excess of $100,000
during the year ended December 31, 1997. The Company does not have employment
agreements with any of its executive officers. Commencing on January 1, 1998 the
base salary for Mr. Shafir was increased to $180,000 per year and the salary for
Mr. Markofsky was increased to $100,000 per year.
(1) President and CEO from inception to April 28, 1997.
(2) President and CEO since April 28, 1997.
(3) Other compensation relates to life insurance payments made by the Company
on behalf of Mr. Shafir in the amount of $18,000, a company car and health
insurance premiums.
(4) Automobile allowance and health insurance premiums for Mr. Markofsky.
(5) Options to buy shares of common stock of the Company at $4 per share
(market value at date of grant) with an expiration date of November 25, 2002.
The following table sets forth information concerning options granted during the
year ended December 31, 1997 pursuant to the Company's stock option plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise
Options/SARs Employees in or Base Expiration
Name Granted (#) Fiscal Year Price ($/Sh) Date
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Abraham Shafir 250,000 68% $4.00 25-Nov-02
CEO President
Anthony Markofsky 25,000 7% $4.00 25-Nov-02
</TABLE>
No options were exercised by any of the Company's executive officers. There was
no repricing of options during the fiscal year ended December 31, 1997.
19
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Incorporated by reference to Item 15 "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT", included as Item 11 of the Prospectus.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Incorporated by reference to Item 19 "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS", included in the Prospectus.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of 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**
10.1 Distribution Agreement between the Company and
Hubbard Imports*
10.2 Cigar Production Agreement between the Company and
Hubbard Imports***
10.3 Consulting Agreement between the Company and
Viking****
10.4 Stock Option Plan****
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**
* 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.
*** Incorporated by reference to the Company's Form 10-QSB/A filed with the
Commission on December 10, 1997.
**** Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Commission on December 16, 1997.
***** Incorporated by reference to the Company's Registration Statement on Form
SB-2 as declared effective by the Commission on January 28, 1998.
(b) The Company filed the following Current Reports on Form 8-K during the
quarter ended December 31, 1997
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Date Item Reported Financial Statements
Filed Included
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
October 1, 1997 Item 5. Other Events. None.
Conclusion of Company's $3 million financing
involving convertible debentures, convertible
preferred stock and common stock purchase warrants.
- ---------------------------------------------------------------------------------------------------
December 17, 1997 Item 5. Other Events. None.
Election of two new directors; adoption of Stock
Option Plan.
- ---------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TAMBORIL CIGAR COMPANY
/s/ Anthony Markofsky
By:______________________
Anthony Markofsky
President
March 31, 1998
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
/s/ Anthony Markofsky
By: ___________________________________
Anthony Markofsky
President and Chief Executive Officer
Date: March 31, 1998
/s/ Pedro J. Mirones
By:___________________________________
Pedro J. Mirones
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date: March 31, 1998
21
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-14
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Tamboril Cigar Company
We have audited the accompanying consolidated balance sheet of Tamboril Cigar
Company and Subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the period
from April 15, 1996 (date operations commenced) to December 31, 1996 and for the
year ended December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tamboril Cigar
Company and Subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the period from April 15, 1996 (date
operations commenced) to December 31, 1996 and for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
February 13, 1998, except for the
third and fourth paragraphs of
Note 6, as to which the date is
March 24, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Current Assets:
Cash (Note 1) $ 425,908
Accounts receivable - less allowance for doubtful accounts of $102,000 (Note 6) 1,424,668
Inventory (Notes 1 and 2) 2,447,650
Advances to suppliers 1,098,326
Other current assets 38,712
Deferred income taxes (Note 9) 30,400
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 5,465,664
Property and Equipment, net (Notes 1 and 3) 1,173,552
Other Assets 160,545
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,799,761
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 557,262
Accrued expenses and other current liabilities 240,716
Current maturities of long-term debt 7,252
- -------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 805,230
Long-term Debt (Note 4) 225,534
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,030,764
------------------------------------------------------------------------------------------------
Commitments (Note 8)
Stockholders' Equity (Notes 1, 4 and 7):
Series B 8% convertible preferred stock - $.0001 par value; $50 stated value;
authorized 116,000 shares, issued and outstanding 56,000 shares 6
Common stock - $.0001 par value; authorized 20,000,000 shares, issued and
outstanding 5,903,894 shares 590
Additional paid-in capital 5,347,562
Foreign currency translation adjustment (Note 1) (110,036)
Retained earnings 530,875
- -------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 5,768,997
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,799,761
=================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- ---------------------------------------------------------------------------------------------
PERIOD FROM
APRIL 15, 1996
(DATE OPERATIONS
COMMENCED) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales (Notes 1 and 6) $1,413,815 $6,442,894
Cost of goods sold 573,687 2,754,527
- ---------------------------------------------------------------------------------------------
Gross profit 840,128 3,688,367
Selling, general and administrative expenses 1,034,386 2,693,380
- ---------------------------------------------------------------------------------------------
Income (loss) from operations (194,258) 994,987
Other income - 131,884
Interest expense (27,369) (164,769)
- ---------------------------------------------------------------------------------------------
Net income (loss) before provision for income taxes (221,627) 962,102
Provision for income taxes (Notes 1 and 9) - 209,600
- ---------------------------------------------------------------------------------------------
Net income (loss) $ (221,627) $ 752,502
=============================================================================================
Earnings (loss) per common share (Note 1):
Basic $ (.05) $ .12
============================================================================================
Weighted-average shares used in computing earnings per
share (Note 1):
Basic 4,651,502 5,657,656
============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
SERIES B 8% FOREIGN
CONVERTIBLE ADDITIONAL CURRENCY
PREFERRED STOCK COMMON STOCK PAID-IN TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock - - 2,600,000 $ 260 $ (50) -
Issuance of common stock for
professional services - - 25,000 2 4,998 -
Issuance of common stock for - - 2,833,338 283 989,717 -
cash
Issuance of common stock in
reverse acquisition (Note 1) - - 116,972 12 (58,412) -
Net loss - - - - - -
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 - - 5,575,310 557 936,253 -
Issuance of common stock in
connection with a recapitalization
of notes payable and notes
payable - stockholders (Note 4) - - 328,584 33 1,984,648 -
Issuance of Series B 8%
convertible preferred stock 56,000 $6 - - 2,426,661 -
Foreign currency translation - - - - - $(110,036)
adjustment
Net income - - - - - -
- --------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 56,000 $6 5,903,894 $ 590 $ 5,347,562 $(110,036)
==============================================================================================================
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
======================================================================
YEAR ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------
RETAINED
EARNINGS
(ACCUMULATED STOCKHOLDERS'
DEFICIT) EQUITY
- ----------------------------------------------------------------------
<S> <C> <C>
Issuance of common stock - $ 210
Issuance of common stock for
professional services - 5,000
Issuance of common stock for - 990,000
cash
Issuance of common stock in
reverse acquisition (Note 1) - (58,400)
Net loss $(221,627) (221,627)
- ----------------------------------------------------------------------
Balance at December 31, 1996 (221,627) 715,183
Issuance of common stock in
connection with a recapitalization
of notes payable and notes
payable - stockholders (Note 4) - 1,984,681
Issuance of Series B 8%
convertible preferred stock - 2,426,667
Foreign currency translation - (110,036)
adjustment
Net income 752,502 752,502
- ----------------------------------------------------------------------
Balance at December 31, 1997 $ 530,875 $5,768,997
======================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------------------------
PERIOD FROM
APRIL 15, 1996
(DATE OPERATIONS
COMMENCED) TO YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (221,627) $ 752,502
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 24,324 95,517
Provision for doubtful accounts 15,000 87,000
Deferred income taxes - (30,400)
General and administrative expenses paid by issuance of
common stock 5,000 -
Changes in operating assets and liabilities:
Increase in accounts receivable (290,696) (1,235,972)
Increase in inventory (813,938) (1,633,712)
Increase in advances to suppliers (181,588) (916,738)
Increase in other current assets (31,419) (7,293)
Increase in other assets (103,550) (34,665)
Increase in accounts payable 122,308 434,955
Increase in accrued expenses and other
current liabilities 65,658 175,058
- ----------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,410,528) (2,313,748)
- ----------------------------------------------------------------------------------------------
Cash flows used in investing activity - purchase of property,
plant and equipment (384,122) (904,821)
- ----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 250,000 -
Proceeds from issuance of notes payable - stockholders 725,000 1,975,000
Repayment of notes payable and notes payable - stockholders - (965,319)
Proceeds from (repayments of) loans by related party 133,779 (133,779)
Proceeds from issuance of common stock 931,810 -
Proceeds from issuance of Series B convertible preferred stock - 2,426,667
Proceeds from issuance of debentures - 173,219
Proceeds from loan payable - bank - 32,786
- ----------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,040,589 3,508,574
- ----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash - (110,036)
- ----------------------------------------------------------------------------------------------
Net increase in cash 245,939 179,969
Cash at beginning of period - 0 - 245,939
- ----------------------------------------------------------------------------------------------
Cash at end of period $ 245,939 $ 425,908
==============================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. PRINCIPAL BUSINESS Tamboril Cigar Company is a manufacturer and
ACTIVITY AND distributor of handmade cigars. The tobacco is
SIGNIFICANT ACCOUNTING purchased and the cigars are manufactured at
POLICIES: facilities in the Dominican Republic and sold to
retail tobacconists throughout the United
States.
The accompanying consolidated financial
statements at December 31, 1996 and 1997 and
for the period from April 15, 1996 (date
operations commenced) to December 31, 1996 and
for the year ended December 31, 1997 include
the accounts of Tamboril Cigar Company
("Tamboril," formerly Idaho Leadville Mines Co.)
Tamboril Cigar International Inc.
("International") and Tamboril Cigar
International Inc.'s wholly owned and
majority-owned subsidiaries, Diversified
Tobacco Company ("Diversified") and Tabacalera
Tamboril SA. ("Tabacalera") (collectively the
"Company"). All intercompany transactions and
balances have been eliminated in consolidation.
On October 23, 1996, from a legal standpoint,
Tamboril acquired all of the outstanding common
stock of International and, accordingly, is
shown in these financial statements as the
parent. However, for accounting purposes the
acquisition has been treated as a
recapitalization of International with
International as the acquirer (reverse
acquisition).
Revenue from the sale of products is recognized
at the date of shipment to customers.
Depreciation of property and equipment is
provided for by the straight-line method over
the estimated useful lives of the respective
assets. Amortization of leasehold improvements
is provided for over the related lease term.
The Company maintains cash balances in bank
accounts which, at times, may exceed federally
insured limits. It has not experienced any
losses to date resulting from this policy.
Inventory is stated at the lower of cost (first-
in, first-out method) or market. In accordance
with generally recognized industry practice, all
leaf tobacco inventory is classified as current
although portions of such inventory, because of
the duration of the aging process, ordinarily
would not be utilized within one year.
For federal income tax purposes, Tamboril,
International and Diversified are included in
the consolidated tax return of Tamboril.
Tabacalera files an income tax return in the
Dominican Republic.
All assets and liabilities of the foreign
subsidiary are translated into U.S. dollars at
fiscal year-end exchange rates. Income and
expense items are translated at average exchange
rates prevailing during the fiscal year. The
resulting translation adjustments are recorded
as a component of stockholders' equity.
Management does not believe that any recently
issued, but not yet effective, accounting
standards if currently adopted would have a
material effect on the accompanying consolidated
financial statements.
F-7
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation. In accordance with the
provisions of SFAS No. 123, the Company has
elected to apply Accounting Principles Board
Opinion No. 25 and related interpretations in
accounting for its stock options issued to
employees and has provided the pro forma
disclosures as if the Company had adopted the
cost recognition requirements (see Note 10).
The Company and the cigar industry in general
have recently experienced shortages in certain
types of natural wrapper and filler due to the
increase in demand for tobacco for premium
cigars. Although the shortages have not
materially impacted cigar production, no
assurance can be made that future shortages will
not have an adverse effect on the Company.
In 1997, the Financial Accounting Standards
Board issued SFAS No. 128, Earnings per Share.
SFAS No. 128 replaced the previously reported
primary and fully diluted earnings per share
with basic and diluted earnings per share,
respectively. Unlike the previously reported
primary earnings per share, basic earnings per
share excludes the dilutive effects of stock
options. Diluted earnings per share is similar
to the previously reported fully diluted
earnings per share. Earnings per share amounts
for all periods presented have been calculated
in accordance with the requirements of SFAS No.
128. Diluted earnings per share amounts are not
presented because they are antidilutive.
Costs incurred for producing and communicating
advertising are expensed as incurred and are
included in selling, general and administrative
expenses in the accompanying consolidated
statement of operations. Advertising expenses
were approximately $70,000 and $575,000 for the
period ended December 31, 1996 and for the year
ended December 31, 1997, respectively.
The preparation of financial statements in
conformity with generally accepted accounting
principles requires the use of estimates by
management affecting reported amounts of assets
and liabilities and revenue and expenses and the
disclosure of contingent assets and liabilities.
Actual results could differ from these
estimates.
<TABLE>
<CAPTION>
2. INVENTORY: At December 31, 1997, inventory consists of the following:
<S> <C>
Raw materials $ 1,729,092
Finished goods 718,558
--------------------------------------------------------------
$ 2,447,650
==============================================================
</TABLE>
F-8
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3. PROPERTY AND EQUIPMENT: At December 31, 1997, property and equipment, at cost, consists of the following:
Estimated
Useful Life
------------------------------------------------------------------------------
<S> <C> <C>
Machinery and equipment $ 587,247 5 to 7 years
Land 93,220
Buildings and building improvements 448,639 20 years
Furniture and fixtures 25,728 5 years
Computers 43,904 5 years
Leasehold improvements 90,205 Term of lease
------------------------------------------------------------------------------
1,288,943
Less accumulated depreciation and amortization 115,391
------------------------------------------------------------------------------
$1,173,552
==============================================================================
</TABLE>
At December 31, 1997, approximately $1,136,000
of the Company's property and equipment (net of
$79,127 accumulated depreciation) is located in
the Dominican Republic.
<TABLE>
<CAPTION>
4. LONG-TERM DEBT: At December 31, 1997, long-term debt consists of the following:
<S> <C>
Loan payable to a bank in monthly installments of $839 through
December 2001, including interest, at 9.35% per annum. $ 32,786
8% convertible debenture due September 1999. On September 23,
1997, the Company sold $200,000 face amount of 8% convertible
debentures ("Debentures") which are convertible, prior to maturity,
into shares of the Company's common stock (see Note 7). Interest
is payable quarterly. 200,000
------------------------------------------------------------------------------
232,786
Less current portion 7,252
------------------------------------------------------------------------------
$225,534
==============================================================================
Aggregate maturities of long-term debt are as follows:
Year ending December 31,
1998 $ 7,252
1999 207,975
2000 8,770
2001 8,789
------------------------------------------------------------------------------
$232,786
==============================================================================
</TABLE>
F-9
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On September 30, 1997, the Company reached an
agreement with the holders of the Company's
notes payable and notes payable -stockholders,
by which the Company repaid $965,319 of its
outstanding notes payable plus 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. The warrants are
exercisable at any time up to the fifth
anniversary of their issuance at an exercise
price of $5.89 per share.
Based on the borrowing rates currently available
for loans with similar terms and average
maturities, the fair value of long-term debt
approximates the carrying amount.
5. RELATED PARTY In 1996, the Company purchased furniture and
TRANSACTIONS: fixtures from United Health Partners
Inc. ("UHP"), a company that has a
stockholder and officer that is a stockholder
and officer of the Company.
The Company assumed the office lease of UHP in
April 1996.
At December 31, 1996, the Company had an amount
due UHP of approximately $134,000 that is
noninterest-bearing. This amount was repaid
during 1997.
6. MAJOR CUSTOMER: During the year ended December 31, 1997, sales
to one customer accounted for approximately 79%
of net sales. After entering into a distribution
agreement (the "Agreement") with this customer,
substantially all the Company's sales were to
this customer. This customer comprised
approximately 90% of the Company's accounts
receivable at December 31, 1997.
On July 7, 1997, the Company entered into a
distribution agreement with this major customer.
Part of the compensation given to this major
customer under the agreement was the issuance of
200,000 warrants to purchase shares of common
stock of the Company at an exercise price of
$5.85. These warrants were subsequently
canceled.
The Agreement between the Company and its major
customer provided that the Company and the major
customer would agree in January of each year
(beginning in 1998) as to the minimum purchase
commitment for the upcoming year. As of March
20, 1998 the major customer had not yet agreed
to its purchase commitment for 1998 and the
Company gave notice of its intent to terminate
the Agreement. Pursuant to a new agreement, in
principle, reached by the Company and the major
customer on March 24, 1998, the major customer
would continue to sell the Company's products in
six states and continue to service any national
accounts it currently services. The Company will
either work with the major customer's sub-
distributors or align itself with independent
distributors.
Management of the Company did not fully
anticipate the difficulties subsequently
encountered with the major customer. Since
learning of the major customer's inventory
surpluses in March of 1998, the Company has
moved quickly to approach alternative
distributors of the Company's products. The
disruption of sales and distribution activity
occasioned by the major customer's inventory
imbalances will result in depressed sales of the
Company's products during the first calendar
quarter of 1998. The Company is working to re-
establish independent distribution in the 44
states that will not be reserved to the major
customer going forward and to assist the major
customer in selling the Company's products in
the major customer's six remaining states so
that inventories of the Company's products are
reduced to commercially viable levels and the
major customer will begin re-ordering product
from the Company. Management of the Company has
estimated that it will take from four to six
months for the situation in the major customer's
states to stabilize and for significant orders
from the major customer to commence once again.
There can, however, be no assurance that the
major customer will be successful in reducing
such inventories or that the major customer will
not chose to sell the Company's cigars at deep
discounts in the major customer's states,
further depressing the market for the Company's
products in those states.
7. 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
Tamboril in a transaction accounted for as a
reverse acquisition (see Note 1).
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 (see Note
4) 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"). The Company canceled 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,
exercisable at any time up to the fifth
anniversary of their issuance, at an exercise
price of $5.89 per share. At December 31, 1997,
dividends in arrears were approximately $61,000.
F-10
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Debentures and the Series B Preferred Stock
are convertible at their stated values into
shares of the Company's common stock at the
lower 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
pays a cumulative dividend of 8% and has the
right to receive dividends and a preference upon
liquidation superior to the rights of holders of
common stock.
8. COMMITMENTS: The Company has entered into noncancelable
operating leases for office and warehouse
facilities, which expire in March 2001. The
approximate future minimum rental commitments
under these leases, exclusive of required
payments for increases in certain operating
costs, are as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 93,000
1999 99,000
2000 99,000
2001 25,000
-------------------------------------------------------------------------------
$316,000
===============================================================================
</TABLE>
The office lease has an option to renew for five
years at a base rent, as defined. Rent expense
for the period ended December 31, 1996 and for
the year ended December 31, 1997 was
approximately $38,000 and $98,000, respectively.
The Company's lease commitment for office space
is guaranteed by a stockholder of the Company.
At December 31, 1997, the Company was committed
under agreements with tobacco suppliers to
purchase approximately $3,100,000 of tobacco by
June 30, 1998.
<TABLE>
<CAPTION>
9. INCOME TAXES: For the year ended December 31, 1997, the provision for income taxes consists of:
<S> <C>
Current:
Federal $174,000
State and local 17,000
Foreign 49,000
-------------------------------------------------------------------------------
TOTAL CURRENT 240,000
Deferred income tax benefit (30,400)
-------------------------------------------------------------------------------
$209,600
===============================================================================
</TABLE>
F-11
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The difference between income taxes computed at
the statutory federal rate of 34% and the
provision for income taxes relates to the
following:
<TABLE>
<CAPTION>
Period ended Year ended
December 31, December 31,
1996 1997
------------------------------------------------------------------
<S> <C> <C>
Provision at federal statutory rate 34 % 34 %
State income taxes, net of federal income
tax benefit - 1
Foreign income not taxed in U.S., net of
foreign income taxes - (6)
Utilization of net operating loss
carryforwards - (7)
Valuation allowance for deferred tax asset (34) -
------------------------------------------------------------------
- 0 - % 22 %
==================================================================
</TABLE>
At December 31, 1997, the components of deferred
income taxes and the deferred income tax
provision, resulting from the differences in the
bases of assets and liabilities for income tax
and financial reporting purposes, and other
items are as follows:
<TABLE>
<CAPTION>
<S> <C>
Current:
Allowance for doubtful accounts $36,700
Other (6,300)
------------------------------------------------------------------------------
$30,400
==============================================================================
</TABLE>
10. STOCK OPTION PLAN: The Company has a stock option plan (the "Option
Plan") in which 500,000 common shares have been
reserved for future issuance. The Option Plan
provides for the issuance of incentive stock
options and nonincentive stock options for the
sale of shares of common stock to employees and
nonemployee directors of the Company at a price
not less than the fair market value of the
shares on the date of the option grant, provided
that the exercise price of any incentive stock
option granted to an employee or nonemployee
director owning more than 10% of the outstanding
common shares of the Company may not be less
than 110% of the fair market value of the shares
on the date of the incentive stock option grant.
The term of each option, which may not exceed
five years, and the manner of exercise are
determined by the board of directors.
F-12
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the status of the Company's Option
Plan as of December 31, 1997 and changes during
the year is as follows:
<TABLE>
<CAPTION>
Weighted-Average
Fixed Options Options Exercise Price
------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year - 0 - - 0 -
Granted during year 370,000 $ 4.00
------------------------------------------------------------------------------
OUTSTANDING AT END OF YEAR 370,000 $ 4.00
==============================================================================
</TABLE>
The following table summarizes information about
stock options outstanding and exercisable at
December 31, 1997:
<TABLE>
<CAPTION>
Weighted-
Number Average Weighted-
Outstanding Remaining Average
Range of and Contractual Exercise
Exercise Price Exercisable Life Price
-------------------------------------------------------------------------------
<S> <C> <C> <C>
$4.00 370,000 4.92 years $ 4.00
===============================================================================
</TABLE>
If the Company had elected to recognize
compensation cost based on the fair value of the
options granted at grant date as prescribed by
SFAS No. 123, net income and earnings per common
share for the year ended December 31, 1997 would
have been adjusted to the pro forma amounts
indicated in the table below:
<TABLE>
<CAPTION>
As Reported Pro Forma
-------------------------------------------------------------------------------
<S> <C> <C>
Net income $752,502 $679,502
===============================================================================
Earnings per common share:
Basic $ .12 $ .11
===============================================================================
</TABLE>
The Company's assumptions used to calculate the
fair values of options issued were (i) risk-free
interest rate of 5.6%, (ii) expected life of
five years, (iii) expected volatility of 20%,
and (iv) expected dividends of $0.
F-13
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
11. FOREIGN OPERATIONS: The Company operates principally in two
geographic areas: the United States and the
Dominican Republic. Following is a summary of
information by area:
<TABLE>
<CAPTION>
December 31, 1996 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Net sales to unaffiliated customers:
United States $1,413,815 $6,442,894
Dominican Republic - 0 - - 0 -
-------------------------------------------------------------------------------
NET SALES AS REPORTED IN THE ACCOMPANYING
CONSOLIDATED STATEMENT OF OPERATIONS $1,413,815 $6,442,894
===============================================================================
Inter-area sales:
United States - 0 - - 0 -
Dominican Republic $ 538,604 $2,855,415
-------------------------------------------------------------------------------
TOTAL INTER-AREA SALES $ 538,604 $2,855,415
===============================================================================
<CAPTION>
December 31, 1996 1997
-------------------------------------------------------------------------------
<S> <C> <C>
Income (loss) from operations:
United States $ 383,024 $ (14,801)
Dominican Republic 369,478 (206,826)
-------------------------------------------------------------------------------
NET INCOME (LOSS) AS REPORTED IN THE
ACCOMPANYING CONSOLIDATED STATEMENT
OF OPERATIONS $ 752,502 $ (221,627)
===============================================================================
Identifiable assets:
United States $2,032,692 $ 806,453
Dominican Republic 4,691,309 1,182,378
-------------------------------------------------------------------------------
6,724,001 1,988,831
General corporate assets 82,060 23,097
-------------------------------------------------------------------------------
TOTAL ASSETS AS REPORTED IN THE
ACCOMPANYING CONSOLIDATED BALANCE SHEET $6,806,061 $2,011,928
===============================================================================
</TABLE>
Inter-area sales are accounted for at cost and
are eliminated in consolidation in the
accompanying consolidated statement of
operations. Identifiable assets are those that
are identifiable with operations in each
geographic area. General corporate assets
consist of organizational costs.
F-14
