<PAGE>
U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ............. to ................................
Commission file number 0-22573
-------
TAMBORIL CIGAR COMPANY
-------------------------------------------------------------
(Exact name of small business issuer as
specified in its charter)
Delaware 65-0774638
-------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2600 S.W. 3rd Avenue
Miami, FL 33129
--------------------------------
(Address of principal executive offices)
(305) 860-9887
--------------------------------
(Issuer's telephone number)
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
<PAGE>
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes .X.. No ...
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes ... No ...
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 5,976,598 shares of Common
Stock, par value $.0001 per share
Transitional Small Business Disclosure Format (check one);
Yes ... No X..
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
[To Come]
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion relates to the consolidated results of operations
and financial condition of the Company and its two principal operating
subsidiaries, Tamboril Cigar International Inc. ("TCI") and Tabacalera Tamboril
S.A. ("Tabacalera").
Tamboril Cigar Company (the "Company") previously entered into a
Distribution Agreement dated July 7, 1997 (the "Distribution Agreement") and a
Cigar Production Agreement dated October 1, 1997 (the "Production Agreement")
(the Distribution Agreement and the Production Agreement being sometimes
referred to herein as the "Agreements") with Hubbard Imports, a Florida
partnership ("Hubbard"). Under the Distribution Agreement, the Company appointed
Hubbard as exclusive distributor in the United States for the Company's
Tamboril/TM/, Cordova/TM/ and Fore/TM/ cigar products. Under the Production
Agreement, the Company agreed to manufacture for Hubbard a line of Hamilton
House Select/TM/ cigars. Both the Distribution Agreement and the Production
Agreement provided for minimum purchase commitments from Hubbard in 1997 and
stated that Hubbard would, in January of each year beginning with 1998,
undertake to purchase a mutually agreed upon number of cigars in the calendar
year beginning that January.
In January of 1998, Hubbard failed to agree to minimum purchase
requirements under the Distribution Agreement and the Production Agreement.
Hubbard has not ordered any cigars from the Company since December 31, 1997 and,
given the course of events since that date it is very unlikely that they will do
so. The failure of Hubbard to abide by its prior agreements and its failure to
notify the Company of various deficiencies in Hubbard's inventory controls and
sales reporting systems resulted in an abrupt, unanticipated disruption of the
Company's sales and distribution. These disruptions have had a material adverse
impact on the Company's sales and profitability in the three month period ended
March 31, 1998, and will have a similar impact on the Company's business in the
three month period ending June 30, 1998. The Company has undertaken efforts to
ameliorate the effects of these developments by attempting to forge distribution
agreements with regional distributors across the United States and in Europe.
The results of the Company's efforts in this regard to date are discussed below
under the caption "RESULTS OF OPERATIONS" and the material adverse impact of
these developments on the Company's cash flow and the need to seek alternative
sources of liquidity while the
3
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Company revamps its distribution organization are discussed under the heading
"LIQUIDITY AND CAPITAL RESOURCES."
Due to Hubbard's failure to agree to its 1998 minimum commitments and other
breaches of its obligations to the Company, on March 20, 1998, the Company gave
notice to Hubbard of its intention to terminate the Agreements. On or around
March 24, 1998, the Company and Hubbard reached an agreement in principle
pursuant to which the Company's distribution channels would be reorganized and
Hubbard relegated to a less significant role. Central to the agreement in
principle was the undertaking of Hubbard to pay all outstanding invoices for
cigars previously shipped to Hubbard. Negotiations between Hubbard and the
Company with regard to various issues concerning the agreement in principle
continued into the first week of April, 1998 but the parties were unable to
resolve them satisfactorily.
In the view of management of the Company Hubbard was, and continues to be,
in breach of various terms of the Agreements including the failure to pay for
cigars previously delivered under the Production Agreement. This amount owed to
the Company is approximately $407,000. The Company also believes that Hubbard
is in breach of various provisions of the Distribution Agreement. The Company
intends to vigorously pursue its rights against Hubbard and its affiliates,
through litigation if necessary. Although the Company believes that its claims
against Hubbard and its affiliates are well grounded and have a reasonable
likelihood of success, there can be no assurance that the Company would be
successful in its claims against Hubbard and its affiliates were it to pursue
litigation or that it would be able to collect if it were to prevail.
The negative impact of the Hubbard situation was further exacerbated by
developments in the overall market for cigars. During the first quarter of
1998, the market for sales in the United States of premium cigars has been
negatively impacted by excess inventories at the wholesale and retail levels.
The Company has been particularly impacted by this excess inventory since its
brands are relatively new and have limited brand recognition. It is anticipated
that higher than normal inventory levels will negatively impact the sales and
profits of the Company for 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.
As previously stated, the loss of Hubbard as a distributor will negatively
impact
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the Company's sales, profits or loss, and liquidity for at least the first two
quarters of 1998. In light of the termination of Hubbard, the Company has
aggressively recruited local and regional distributors to distribute the
Company's cigars. Negotiations are underway in over twenty states and management
of the Company believes that potential distributors have been very receptive to
the Company's products and pricing policies. Management is aggressively seeking
to finalize such arrangements, though none has as yet been concluded.
Based on its initial negotiations, management of the Company believes that
the distribution arrangements it will be able to put into place will be at least
as advantageous to the Company as were the Hubbard arrangements, though it will
take several months at a minimum to complete these arrangements and to begin to
process substantial orders. Even if the Company is successful, the delays in
building sales and the ongoing expenses of operations will result in substantial
losses during this period.
If, however, the Company were unable to establish satisfactory distribution
arrangements, the ability of the Company to generate sales would be materially
negatively impacted. The absence of sales and associated cash flow would
materially negatively impact the Company's liquidity and its ability to pay its
expenses as they come due. The Company is exploring other sources of capital to
fund its operations while it revamps its sales organization, though there can be
no assurance that the Company will be successful in obtaining such financing on
acceptable terms or at all. If such financing were necessary and if the Company
were unsuccessful in obtaining such financing, the failure of the Company to
obtain such financing would impair its ability to continue as a going concern.
The failure to obtain the over $400,000 owed to the Company by Hubbard will
have a material adverse effect on the liquidity of the Company. The Company has
obtained alternative sources of financing to augment its liquidity including
lines of credit of approximately $1,800,000 (for use to finance tobacco
purchases) and has applied for a mortgage of approximately $300,000 on real
property owned outright by the Company in the Dominican Republic. These will
not fully offset, however, the loss of the $400,000 from Hubbard until the
Company can take actions to recover those amounts.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 AS
COMPARED TO THE THREE-MONTH PERIOD ENDED MARCH 31, 1997
Net sales for the three months ended March 31, 1998 were $244,019, which
represented a decline of $543,980, or 69%, from sales of $787,999 in the three
months ended March 31, 1997. In the three months ended March 31, 1997, the
Company was distributing its cigars through retail tobacconists and regional
distributors that had been organized by the Company's in-house sales and
marketing staff. Upon entering into the Distribution Agreement with Hubbard,
Hubbard was named the Company's exclusive
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United States distributor and the Company, accordingly, discontinued all direct
sales efforts. Upon the unexpected cessation of cigar purchases by Hubbard and
the resulting termination of the Distribution Agreement, the Company was left
with no distribution for its products. The sales of $244,019 in the three months
ended March 31, 1998 represent the Company's efforts in the month of March to
begin to reestablish a distribution network of retail tobacconists and regional
distributors under the direction of Company staff. Approximately $200,000 of
such sales were discount sales of discontinued cigar models.
To date, the Company has received purchase orders from approximately 15 new
distributors, representing a geographic area of 26 states. Management is
actively seeking to embody these arrangements in binding contracts. Management
of the Company believes that the new distributors will provide substantially
more sales and inventory controls than did Hubbard and that the terms of the
arrangements with such distributors will be more beneficial to the Company in
terms of pricing structure and point-of-sale support, though there can be no
assurance that this will be the case. Management of the Company believes that
it will take at least six months before the Company will be able to arrange
sufficient distribution programs to return sales to the levels experienced in
the latter months of 1997. There can, of course, be no assurance that the
Company will be successful in returning sales to those levels, or that sales
will be sufficient to cover the Company's expenses.
Gross profit for the three months ended March 31, 1998 was $24,363, or 10%
of sales, down substantially from 67%, or $527,900 in the year earlier period.
This reduction was due primarily to an increase in the cost of goods sold from
33% ($260,099) in the three months ended March 31, 1997 to 90% ($219,656) in the
period ended March 31, 1998. This increase was primarily due to the fact that
the vast majority of sales in the quarter (approximately 83%) were discounted
sales of discontinued cigar models.
Selling, general and administrative expense in the three months ended March
31, 1998 was $1,057,743, up 39.2% or $297,929 from $759,814 in the three months
ended March 31, 1997. This increase was due primarily to costs of $112,000 in
"liquidated damages" of $28,000 per month during the period incurred due to
Events of Default under the Company's Series B Shares, see "Item 3. Defaults
Upon Senior Securities," increased bad debt allowance and increased professional
and consulting fees.
Loss from operations in the three months ended March 31, 1998 was
$1,033,380, up from $231,914 in the three months ended March 31, 1997. This was
occasioned by the lack of sales due to the cessation of purchases from the
Company by Hubbard, the fact that the Company had increased expenditure levels
in anticipation of continued sales from Hubbard, as well as the extreme
reduction in gross profit percentage due to discounted sales of discontinued
cigar models.
6
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The Company's interest expense for the three months ended March 31, 1998
was $8,001, down $20,429 or 71.8% from the three-months ended March 31, 1997,
representing the results of the Company's recapitalization of most of its
outstanding debt in September of 1997. Interest expense in subsequent quarters
will increase, as the Company intends to borrow to finance tobacco purchases and
take out a mortgage on its production facilities in the Dominican Republic as a
result of the unavailability of sufficient revenues to fund these activities.
See "LIQUIDITY AND CAPITAL RESOURCES."
Net loss in the three months ended March 31, 1998 was $879,915, up from
$260,334 in the three months ended March 31, 1997, an increase of $619,581 or
approximately 238%. The substantial decrease in sales in the quarter was the
primary reason for the increase in the net loss.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, cash on hand was $67,127, which if not augmented
would suffice to fund the Company's operations for approximately one month. The
Company obtained loans aggregating approximately $470,000 in the three months
ended March 31, 1998, consisting of approximately $270,000 under a line of
credit in the Dominican Republic dedicated to tobacco purchases and $200,000
from Jenadosa Holdings Limited, a shareholder of the Company. Without these
loans, the Company would not have been able to meet its obligations as they
came due. The Company's cash position has been materially negatively impacted
by the sudden cessation of purchases from the Company by Hubbard and Hubbard's
refusal to pay in excess of $400,000 due and owing to the Company in respect of
prior shipments of cigars.
The Company's line of credit in the Dominican Republic is for approximately
$1.8 million, which may only be used for tobacco purchases. Borrowings to date
under the line of credit total approximately $270,000. Interest on the line of
credit is at prime in the Dominican Republic, which is currently twenty percent
(20%) per annum. The Company has also applied for a mortgage of approximately
$300,000 on its Dominican facilities, which are currently owned free and clear
of any liens. Management of the Company has been assured by its bank in the
Dominican Republic that the mortgage will be approved but it has not yet been
approved and there can be no assurance that it will be. Management intends to
explore sales of aged tobacco from excess inventories to other manufacturers to
enhance liquidity. Management's goals in such sales are to raise approximately
$400,000 to $500,000. There can be no assurance that management will be
successful in locating buyers at prices advantageous to the Company or at all.
Failure to do so would further exacerbate the Company's current liquidity
crisis.
From its inception in April of 1996, the Company's cash used in operations has
exceeded its cash generated from operations as the Company has increased
inventories and staff in the effort to establish the Company's brands and
achieve initial market penetration.
7
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The Company has financed these expanding operations from its financing
activities, which have included loans, sales of common stock and a $3 million
financing completed in September 23, 1997 which consisted of an institutional
placement of convertible debentures and convertible preferred stock.
The Company had negative cash flows from operations of $637,369 in the
three months ended March 31, 1998, which is essentially even with negative cash
flows from operations of $684,355 in the first three months of 1997. The
principal causes of this negative cash flow were large increases in inventory of
$702,283 and a net loss of $879,915. Cash inflows from financing activities
during the three months ended March 31, 1998 totaled approximately $471,289,
representing $271,189 in borrowings under the line of credit and $200,000 in
loans from a stockholder. Cash inflows in the three months ended March 31, 1997
consisted of $675,000, representing the proceeds of sales of notes to investors.
Cash on hand at March 31, 1998 was $67,127, compared with $98,980 on March 31,
1997. The Company intends to meet its cash needs in the three-month period to
end on June 30, 1998 through sales to new distributors, sales of its excess
inventory of aged tobacco and additional borrowings.
The Company is currently in default of certain terms of the Purchase
Agreement pursuant to which the $3 million financing was completed. See "Item
3. Defaults Upon Senior Securities." The effect of such default is to increase
the interest rate on the $200,000 principal amount of convertible debentures
from 8% to 16%, to increase the dividend rate on the $2.8 million stated amount
of convertible preferred stock from 8% to 16% and to require the Company to pay
the Purchasers under the Purchase Agreement "liquidated damages" in an amount
equal to 1% of the aggregate stated amount of the Series B Shares issued and
outstanding for each month in which the Company remains in default.
The effect of these penalty provisions will be to further limit the
Company's liquidity. The Company intends to alleviate the drain on cash from
these provisions by paying the increased interest and dividends in shares of
Common Stock, provided that the Purchasers consent. The liquidated damages are
payable in cash only, unless the Purchasers elect to accept Common Stock in lieu
thereof. Moreover, the existence of these defaults prevents the Company from
requiring the Purchasers to invest up to an additional $3 million as provided
for in the Purchase Agreement, so long as the defaults remain in effect.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
On September 22, 1997 the Company entered into a purchase agreement (the
"Purchase Agreement") with Infinity Emerging Opportunities Limited ("Infinity"),
Summit Capital Limited ("Summit"), Glacier Capital Limited ("Glacier")
(Infinity, Summit and Glacier sometimes being collectively referred to herein as
the "Purchasers"), Brown Simpson, LLC ("Brown Simpson") and Refco Securities,
Inc. ("Refco") pursuant to which the Company issued to the Purchasers, Refco and
Brown Simpson an aggregate
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of $200,000 face amount of the Company's 8% Convertible Debentures due September
22, 1999, $2,800,000 aggregate stated amount of the Company's Series B
Convertible Preferred Stock (the "Series B Shares") and 225,000 Warrants to
purchase shares of the Company's Common Stock. The Purchase Agreement was filed
as an Exhibit to the Company's Current Report on Form 8-K filed with the
Commission on October 1, 1997. Reference is hereby made to the Purchase
Agreement for all the terms thereof, and of the Convertible Debentures, the
Series B Shares and the Warrants. Capitalized terms used and not otherwise
defined herein shall have the meanings ascribed to them in the Purchase
Agreement.
Under the terms of the Purchase Agreement, the Debentures and the
Certificate of Designation of the Series B Shares, the Company undertook to (1)
file a registration statement with respect to the Underlying Shares into which
the Debentures and the Series B Shares are convertible and for which the
Warrants are exercisable within twenty (20) days from the closing date of
September 23, 1998 (the "Closing Date"), (2) to cause the Company's Common Stock
to be listed for trading on the Nasdaq SmallCap Stock Market ("Nasdaq") within
ninety days from the Closing Date, (3) to pay interest on the Debentures and
dividends on the Series B Shares quarterly on the last day of March, June,
September and December of each year so long as and the Debentures and Series B
Shares, respectively, remain outstanding and (4) to perform various other tasks
related to the Common Stock and its trading market. Failure to meet any of
these conditions would result in an event of default under the Purchase
Agreement. Upon an event of default various penalty and liquidated damage
provisions apply.
HW Partners, L.P., in its role as Purchasers' Representative under the
Purchase Agreement, has notified the Company that, in its view, the Company's
failure to pay interest on the Debentures on December 31, 1997 and dividends on
the Series B Shares on March 31, 1998 each constituted an Event of Default under
the Purchase Agreement.
The Company has previously disclosed in its Annual Report on Form 10-KSB
for the year ended December 31, 1997, that it is in default under certain terms
of the Purchase Agreement, that 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%. In addition, the Company is required, for such period of time
during which it is in default, to pay "liquidated damages" to the Purchasers
each month a monthly amount equal to one percent (1%) of the aggregate Stated
Amount of outstanding Series B Shares. Management of the Company and the
Purchasers differ as to the date upon which the initial Event of Default
occurred and, therefore, on the amounts due in respect of increased interest and
dividends. It is the view of management of the Company that, 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
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$3,000,000 in funding to the Company under the Purchase Agreement. In addition,
if the Company were required to issue substantial numbers of shares of its
Common Stock to satisfy its obligations to pay interest, dividends and penalties
or "liquidated damages," this could result in substantial dilution of the equity
interests of its existing shareholders.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION.
In connection with its reexamination of its marketing and distribution
programs, the Company has decided to withdraw as a sponsor of the GOLF DIGEST's
National Amateur Challenge. While the Company initially believed that this
event would be a strong opportunity to promote Tamboril's FORE/TM/ golf-motif
cigar, management of the Company does not believe that the organizers of the
event have created the proper levels of interest in the event to justify its
cost to the Company. In the view of management, FORE has generated strong level
of interest in the golf community and it would be better to direct the Company's
marketing resources to other aspects of the FORE/TM/ promotional campaign. The
Company effected its withdrawal prior to the execution of any definitive
agreements relative to its participation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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
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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 Registration Statement on Form
SB-2 as declared effective by the Commission on January 28, 1998.
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(b) None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TAMBORIL CIGAR COMPANY
May 20, 1998 /s/ Anthony Markofsky
--------------------------
Anthony Markofsky
President and Chief Executive
Officer
May 20, 1998 /s/ Pedro J. Mirones
-----------------------------
Pedro J. Mirones
Vice President, Chief Financial
Officer and Principal Accounting
Officer
12
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Tamboril Cigar Company and Subsidiaries
Consolidated Balance Sheet
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 67,127 $ 425,908
Accounts receivable -- Less allowance for doubtful
accounts of $302,000 and $ 102,000 at
March 31, 1998 and December 31, 1997, respectively 502,902 1,424,668
Inventory 3,149,933 2,447,650
Advances to suppliers 1,402,398 1,098,326
Prepaid expenses and other current assets 124,920 69,112
- -----------------------------------------------------------------------------------------------------
Total current assets 5,247,280 5,465,664
- -----------------------------------------------------------------------------------------------------
Property and equipment 1,334,337 1,173,552
Other current assets 166,812 160,545
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 6,748,429 $ 6,799,761
=====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings 271,189 -
Current maturities of long-term debt 207,252 7,252
Accounts payable 375,380 557,262
Accrued expenses and other current liabilities 784,161 240,716
- -----------------------------------------------------------------------------------------------------
Total current liabilities 1,637,982 805,230
- -----------------------------------------------------------------------------------------------------
Notes payable - stockholder 200,000 -
Long-term debt 23,857 225,534
- -----------------------------------------------------------------------------------------------------
Total liabilities 1,861,839 1,030,764
- -----------------------------------------------------------------------------------------------------
Stockholders' Equity
Series B 8% convertible preferred stock - $.0001 par
par value; $50 stated value; authorized 116,000
shares, issued and outstanding 54,680 and 56,000 5 6
shares
Common Stock - $.0001 par value; authorized
20,000,000 shares issued and outstanding
5,929,457 and 5,903,894 shares 593 590
Additional paid-in capital 6,164,017 6,160,465
Accumulated other comprehensive income (loss) (112,528) (110,036)
Accumulated deficit (1,165,497) (282,028)
- -----------------------------------------------------------------------------------------------------
Stockholders' Equity 4,886,590 5,768,997
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,748,429 $ 6,799,761
=====================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Cash Flows
(UNAUDITED)
<TABLE>
<CAPTION>
For the three month period ended March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Comprehensive income (loss) $ (882,407) $ (260,344)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 30,139 14,466
Provision for doubtful accounts 200,000 -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 721,766 (169,252)
(Increase) decrease in other current assets (55,808) 12,469
Increase in advances to suppliers (304,072) (224,585)
Increase in inventory (702,283) (161,443)
Increase in other assets (6,267) (64,283)
Increase (decrease) in accounts payable (181,882) 64,861
Increase in accrued expenses and other current liabilities 543,445 103,756
- -------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (637,369) (684,355)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activity - purchase of property and equipment (190,924) (137,604)
- -------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Short term borrowings from bank 271,189 -
Proceeds from issuance of notes payable - stockholders 200,000 675,000
Repayment of long-term debt (1,677) -
- -------------------------------------------------------------------------------------------------------------------
Cash provided by financing activities 469,512 675,000
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Net decrease in cash (358,781) (146,959)
- -------------------------------------------------------------------------------------------------------------------
Cash at beginning of the period 425,908 245,939
- -------------------------------------------------------------------------------------------------------------------
Cash at end of the period $ 67,127 $ 98,980
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Operations
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Month Period Ended
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Net sales $ 244,019 $ 787,999
Cost of goods sold 219,656 260,099
- --------------------------------------------------------------------------------
Gross profit 24,363 527,900
- --------------------------------------------------------------------------------
Selling, general and administrative expenses 1,057,743 759,814
- --------------------------------------------------------------------------------
Loss from operations (1,033,380) (231,914)
- --------------------------------------------------------------------------------
Interest expense 8,001 28,430
- --------------------------------------------------------------------------------
Net loss before income taxes (1,041,381) (260,344)
- --------------------------------------------------------------------------------
Provision for income taxes (161,466) --
- --------------------------------------------------------------------------------
Net loss $ (879,915) $ (260,344)
- --------------------------------------------------------------------------------
Loss per common share
Basic $ (0.17) $ (0.05)
================================================================================
Weighted average number of common shares
used in computing loss per share
Basic 5,915,411 5,575,310
================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
15
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Changes in Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Convertible Additional
Comprehensive Preferred Stock Common Stock Paid-in
Income (Loss) Shares Amount Shares Amount Capital
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ -- $ -- 5,575,310 $ 557 $ 936,253
- ------------------------------------------------------------------------------------------------------------------------------
Net Loss -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ -- -- $ -- 5,575,310 $ 557 $ 936,253
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ -- 56,000 $ 6 5,903,894 $ 590 $ 6,160,465
- ------------------------------------------------------------------------------------------------------------------------------
Net Loss (879,915) -- -- -- -- --
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment (2,492)
Conversion of Series B 8% convertible
preferred stock (1,320) (1) 25,563 3 3,552
Dividend on 1320 shares of Series B
8% convertible preferred stock
- ------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $ (882,407) 54,680 $ 5 5,929,457 $ 593 $ 6,164,017
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
Accumulated
Other
Comprehensive Accumulated Stockholders
Income (Loss) Deficit Equity
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ (221,627) $ 715,183
- ----------------------------------------------------------------------------------
Net Loss -- (260,344) (260,344)
- ----------------------------------------------------------------------------------
Balance at March 31, 1997 $ -- $ (481,971) $ 454,839
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Balance at December 31, 1997 $ (110,036) $ (282,028) $ 5,768,997
- ----------------------------------------------------------------------------------
Net Loss (879,915) (879,915)
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment (2,492) (2,492)
Conversion of Series B 8% convertible
preferred stock -- 3,554
Dividend on 1320 shares of Series B
8% convertible preferred stock (3,554) (3,554)
- ----------------------------------------------------------------------------------
Balance at March 31, 1998 $ (112,528) $(1,165,497) $ 4,886,590
- ----------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
16
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles applicable to interim financial
statements and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Tamboril Cigar Company (the "Company"), the
accompanying financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of March 31, 1998. Furthermore,
all adjustments were of a normal recurring nature.
2. INVENTORY:
Inventory consists of the following:
March 31, 1998 December 31, 1997
Raw Materials $2,039,525 $1,729,092
Finished Goods 1,110,408 718,558
- --------------------------------------------------------------------------
$3,149,933 $2,447,650
==========================================================================
As of March 31, 1998, approximately $ 3,053,000 of the Company's inventory is
located in the Dominican Republic.
17
<PAGE>
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997 Useful Life
------------- ----------------- -----------
<S> <C> <C> <C>
Machinery and equipment 658,809 $ 587,247 5 to 7 years
Land 93,220 93,220
Buildings and building improvements 548,372 448,639 20 years
Furniture and fixtures 25,728 25,728 5 years
Computers 43,904 43,904 5 years
Leasehold improvements 109,834 90.205 Term of lease
- ------------------------------------------------------------------------------------
1,479,867 1,288,943
Less accumulated depreciation 145,530 115,391
- ------------------------------------------------------------------------------------
$1,334,337 $1,173,552
====================================================================================
</TABLE>
Approximately $ 1,219,000 of the Company's property and equipment, net of
$99,616 accumulated depreciation, is located in the Dominican Republic.
4. SHORT-TERM BANK BORROWINGS
Effective March 3rd, 1998, the Company negotiated a credit agreement with the
Banco Popular Dominicano, which provides for advances up to Dominican Republic
("RD")$25,000,000 for the purchase of tobacco. Interest is based on the prime
rate in the Dominican Republic, 20 % at March 31, 1998, and is adjusted and
payable monthly. As of March 31, 1998, the Company had borrowed DR$4,000,000,
all of which was classified as short-term borrowings. Borrowing under the
agreement is secured by tobacco inventories. Under the agreement, the Company
had approximately RD$21,000,000 in unused available lines of credit at March
31, 1998.
18
<PAGE>
5. LONG-TERM DEBT
At March 31, 1998 and at December 31, 1997, long-term debt consist of the
following:
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Loan payable to a bank in monthly
installments of $839 through December
2001, including interest at 9.35% per annum. $ 31,109 $ 32,786
8% convertible debenture due
September 1999 ("Debentures"). 200,000 200,000
- -----------------------------------------------------------------------------
231,109 232,786
Less: Current portion 207,252 7,252
- -----------------------------------------------------------------------------
$ 23,857 $225,534
=============================================================================
</TABLE>
On September 22, 1997, the Company entered into a Convertible Debenture and
Convertible Preferred Stock Purchase Agreement ("Agreement") with several
purchasers (See Note 8) pursuant to which the Company agreed to sell up to an
aggregate of $200,000 of the Company's 8% Convertible Debentures. On September
23, 1997, Company's sold $200,000 of the 8% Convertible Debentures. The
Debentures are convertible prior to maturity, into shares of the Company's
common stock. Interest, which is payable quarterly, is currently in arrears.
Under the terms of the Agreement, the Company's failure to pay interest on
December 31, 1997 and March 31, 1998 constitute an event of default. In an event
of default, the holders of the Debentures have the right to declare the
Debentures, including accrued interest and an adjustment amount as defined under
the Agreement, payable on demand. Additionally, in the case of an event of
default, the interest rate is increased to 16% from the prior of level of 8%.
Based on the default, the Debentures have been classified as current in the
March 31, 1998 balance sheet.
19
<PAGE>
6. NOTES PAYABLE - STOCKHOLDER
As of March 31, 1998, Notes payable--stockholder consists of the following:
Note payable-Jenadosa Holdings Limited
Due February 2000 bearing interest at 10% per annum $100,000
Due March 2000 bearing interest at 10% per annum 100,000
- --------------------------------------------------------------------
$200,000
====================================================================
7. MAJOR CUSTOMER
On July 7, 1997, the Company entered into a distribution agreement (the
"Distribution Agreement") and on October 1, 1997 entered into a Cigar Production
Agreement (the "Production Agreement") with Hubbard Imports ("Hubbard"), a
Florida partnership. Under the terms of the Distribution Agreement, Hubbard
became the exclusive distributor in the United States for the Company's
products. The Company believes that is in breach of various provisions of the
Distribution Agreement and of the Production Agreement. On March 20, 1998 the
Company informed Hubbard of the Company's intention to terminate both the
distribution and the Production Agreement.
From the commencement of the agreement until December 31, 1997, substantially
all of the Company's sales were made to Hubbard. During the quarter ended March
31, 1998 no sales were made to Hubbard. Approximately $415,000 (60%) of the
Company's receivables as of March 31, 1998 is due from Hubbard. Hubbard has
refused to pay those receivables. Selling, general and administrative expenses
for the quarter ended March 31, 1998 reflect a reserve of approximately $200,000
for bad debt expenses related to such receivable. The Company intends to
vigorously pursue its rights against Hubbard and its affiliates, through
litigation if necessary. Failure to collect such receivable would have a
significant negative effect on the liquidity of the Company.
20
<PAGE>
8. STOCKHOLDERS'S EQUITY
On September 22, 1997, the Company entered into a Convertible Debenture and
Convertible Preferred Stock Purchase Agreement with several purchasers, pursuant
to which the Company agreed to sell up to an aggregate of $200,000 of the
Company's Debentures and $5,800,000 stated amount of the Company's Series B 8%
convertible preferred stock (the "Series B Preferred Stock"). On September 23,
1997, the Company sold $200,000 face amount of the Debentures and 56,000 shares
($2,800,000 stated amount) of the Series B Preferred Stock. At March 31, 1998
dividends in arrears were approximately $180,000.
Dividends, which are payable quarterly, are currently in arrears. Under the
terms of the Series B Preferred Stock and the Purchase Agreement, the Company's
failure to pay dividends on December 31, 1997 and March 31, 1998 constitute and
event of default. In an event of default, the Series B 8% Preferred Stock
dividend rate increases to 16% from 8%. Additionally, in an event of default,
the Company is required to pay liquidated damages in an amount equal to 1% of
the stated amount outstanding as of the date of default and on each anniversary
thereafter. Based on the default, Selling, general and administrative expenses
have been charged $112,000 of expenses related to the liquidated damages under
the Purchase Agreement.
On February 19, 1998, the Company issued 25,563 shares of the Company's common
stock in a conversion of 1,320 shares of the Series B Preferred Stock, including
$3,554 of accrued dividends on those 1,320 shares.
21
