<PAGE>
As filed with the Securities and Exchange Commission Registration No. 33-___
on January _____, 1998
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
TAMBORIL CIGAR COMPANY
..............................................................................
(Name of small business issuer in its charter)
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Delaware 2121 65-0774638
- ---------------- --------------------------- ------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S.
of incorporation or Classification Code Employer
organization) Number) Identification No.)
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2600 S.W. 3rd Avenue
Miami, FL 33129
(305) 860-9887
..............................................................................
(Address and telephone number of principal executive offices)
2600 S.W. 3rd Avenue
Miami, FL 33129
(305) 860-9887
..............................................................................
(Address of principal place of business or intended principal place of business)
Adam S. Gottbetter, Esq.
Kaplan Gottbetter & Levenson, LLP
630 Third Avenue
New York, NY 10017
(212) 983-0532
..............................................................................
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
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Title of each Dollar amount Proposed Proposed Amount of
class of to be maximum maximum registration
securities registered /1/ offering aggregate fee
to be price offer
registered per unit /2/ price/2/
- ------------ -------------- ------------ ---------- ------------
Common Stock, $6,600,000 $3.00 $6,600,000 $2,275.86
par value
$.0001 per
share
- ------------ ------------- ------------ ------- -----------
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/1/ Pursuant to Rule 416 under the Securities Act of 1933, also includes an
indeterminate number of additional shares issuable pursuant to antidilution
provisions relating to the securities that are convertible or exercisable into
the Shares of common stock being registered hereby.
/2/ Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended, based upon
the average closing bid prices of the Company's Common Stock on the NASD OTC
Bulletin Board for the five trading days ending December 17, 1997.
- --------------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
PROSPECTUS
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
PROSPECTUS SUBJECT TO COMPLETION DATED JANUARY __, 1998.
TAMBORIL CIGAR COMPANY
2,200,000 SHARES
OF
COMMON STOCK
(PAR VALUE $.0001 PER SHARE)
Up to Two Million Two Hundred Thousand (2,200,000) shares (the "Shares") of
the Common Stock, par value $.0001 per share (the "Common Stock"), of Tamboril
Cigar Company, a Delaware corporation (the "Company"), are being offered for
sale from time to time on behalf of 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"), Refco
Securities, Inc. ("Refco") and Hubbard Imports, a Florida general partnership
("Hubbard") (the Purchasers, Brown Simpson, Refco and Hubbard being collectively
referred to herein as the "Selling Shareholders") or, subject to applicable law,
by pledgees, donees, distributees, transferees or other successors in interest.
See "Selling Shareholders," below. The Company has been advised that the Selling
Shareholders expect to offer the Shares from time to time in transactions on
Nasdaq or such national exchange on which the Company's Common Stock may become
listed, in the over-the-counter market (which may include crosses and block
transactions), in privately negotiated transactions or otherwise in a
combination of such transactions at then current market prices and at terms then
prevailing or at privately negotiated prices. See "Plan of Distribution." The
closing bid price of the Company's Common Stock on the NASD OTC Bulletin Board
on December 17, 1997 was $3.00.
The Shares are authorized for issuance by the Company upon the (i)
conversion of certain 8% Convertible Debentures of the Company in the aggregate
face amount of $200,000 (the "Convertible Debentures"), (ii) conversion of
shares of the Company's Series B Convertible Preferred Stock in the aggregate
stated amount of $2,800,000 (the "Series B Shares"), (iii) exercise
<PAGE>
of 225,000 warrants to purchase shares of Common Stock at an exercise price of
$5.89 per share held by the Purchasers, Refco and Brown Simpson (the "Warrants")
and (vi) 200,000 warrants to purchase shares of Common Stock at an exercise
price of $5.85 per share held by Hubbard (such latter 200,000 warrants being
referred to herein as the "Hubbard Warrants"). The Convertible Debentures, the
Series B Shares and the Warrants were issued by the Company in connection with a
private offering of $3,000,000 (the "Private Offering") concluded with the
Selling Shareholders under a Convertible Debenture and Convertible Preferred
Stock Purchase Agreement dated as of September 22, 1997 by and among the Company
and Infinity, Summit and Glacier, as purchasers (sometimes collectively referred
to herein as the "Purchasers") named therein (the "Purchase Agreement"). The
Hubbard Warrants were issued to Hubbard as part of its compensation under a
Distribution Agreement dated July 7, 1997 between the Company and Hubbard
pursuant to which Hubbard was named exclusive U.S. distributor for the Company's
Tamboril(TM) and Cordova(TM) lines of cigars (the "Distribution Agreement").
The issuance of the Hubbard Warrants was made contingent upon Hubbard and the
Company entering into a second agreement relating to the manufacturing by the
Company of private label cigars under the brand name Hamilton Reserve(TM) (the
"Cigar Production Agreement"). The Company and Hubbard entered into the Cigar
Production Agreement on October 1, 1997. Accordingly, on October 1, 1997, the
Company recorded a charge to earnings of $184,000 for the issuance of the
Hubbard Warrants ($0.92 per warrant). See "THE BUSINESS OF THE COMPANY." Two
million Shares are being registered for resale pursuant to a Registration Rights
Agreement dated as of September 22, 1997 among the Company, the Purchasers,
Refco, as placement agent for the Private Offering and Brown Simpson (the
"Registration Rights Agreement"), and 200,000 Shares are being registered
pursuant to the Hubbard Warrants.
The Company received approximately $2,600,000 in net proceeds from the
Private Offering, after deduction of fees and other expenses totaling
approximately $400,000, and would receive up to an additional $1,325,250 in
proceeds from the exercise of the Warrants (assuming exercise of all the
Warrants) and an additional $1,170,000 in proceeds of the Hubbard Warrants
(assuming all Hubbard Warrants are exercised). All of the proceeds from the
sale of any of the Shares being offered pursuant to this Prospectus will inure
to the benefit of the Selling Shareholders and none of such proceeds will be for
the benefit of the Company. The Selling Shareholders will bear all discounts and
commissions paid to broker-dealers in connection with sales of the Shares. The
Company will not bear any fees or expenses of the Selling Shareholders but will
bear all of the expenses of the registration of the Shares. See "Other Expenses
of Issuances and Distribution."
The Selling Shareholders may effect such transactions by selling the Shares
to or through broker-dealers and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Shareholders
or the purchasers of the Shares for whom such broker-dealers may act as agent or
to whom they sell as principal or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). The Company has
agreed to indemnify the Selling Shareholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
THE BUSINESS OF THE COMPANY, AND AN INVESTMENT IN THE SHARES, ARE SUBJECT TO
CERTAIN RISKS, INCLUDING WITHOUT LIMITATION THE RISKS SET FORTH IN THE SECTION
ENTITLED "RISK FACTORS," WHICH BEGINS ON PAGE 11, BELOW.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is January __, 1998.
2
<PAGE>
AVAILABLE INFORMATION
The Company files periodic reports with the Securities and Exchange
Commission (the "SEC") pursuant to Section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). The reports and other information
filed by the Company with the SEC may be inspected and copied at the public
reference facilities of the SEC in Washington, D.C. and copies of such material
can be obtained from the Public Reference Section of the SEC, Washington, D.C.
20549 at prescribed rates. The Company intends to register its Common Stock
with the Nasdaq SmallCap Stock Market ("Nasdaq"), but as of the date of this
Prospectus the Company has not completed its application and there can be no
assurance that it will be approved for listing on Nasdaq.
The Company's executive offices and its principal place of business are
located at 2600 S.W. 3rd Avenue, Miami, Florida 33129. The Company's telephone
number at that address is (305) 860-9887.
3
<PAGE>
TABLE OF CONTENTS
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PROSPECTUS SUMMARY................................................ 5
RISK FACTORS...................................................... 11
USE OF PROCEEDS................................................... 18
SELLING SHAREHOLDERS.............................................. 19
PLAN OF DISTRIBUTION.............................................. 20
LEGAL PROCEEDINGS................................................. 21
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS...... 22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 25
DESCRIPTION OF SECURITIES......................................... 28
EXPERTS .......................................................... 29
COUNSEL........................................................... 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES................................. 29
ORGANIZATION WITH THE LAST FIVE YEARS............................. 29
THE BUSINESS OF THE COMPANY....................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION......... 39
DESCRIPTION OF PROPERTY........................................... 44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 45
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.......... 46
EXECUTIVE COMPENSATION............................................ 47
FINANCIAL STATEMENTS.............................................. 48
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................... 49
FINANCIAL STATEMENTS.............................................. F-1
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4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "RISK FACTORS" and the Consolidated Financial Statements
of the Company and the Notes thereto, appearing elsewhere in this Prospectus.
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed in "RISK
FACTORS," MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION" AND "THE
BUSINESS OF THE COMPANY" as well as those discussed elsewhere in this
Prospectus.
THE COMPANY
Tamboril Cigar Company (the "Company") manufactures and markets premium,
hand-rolled cigars under the TAMBORIL (TM), CORDOVA(TM) and FORE!(TM) brand
names. The Company began operations in April of 1996 to commercialize the
efforts of its founders in order to create a new premium brand of cigar to
capitalize upon perceived demand for additional premium brands. The Company
conducts its business through two principal operating subsidiaries: (i)
Tabacalera Tamboril, S.A. ("Tabacalera"), which conducts its business in the
Dominican Republic, where it contracts with tobacco growers and manufactures,
packs and ships Tamboril cigars to the United States, and (ii) Tamboril Cigar
International Inc. ("TCI"), which is the U.S. sales and marketing company
through which Tamboril cigars are sold to tobacconists throughout the U.S. TCI
is wholly-owned by the Company and, in turn, owns all the issued and outstanding
common stock of Diversified Tobacco Products, Inc. ("Diversified") and 99.4% of
the issued and outstanding capital stock of Tabacalera, with the remaining 0.6%
owned by Dominican citizens as required by the laws of that country.
The Company's product line now consists of 22 cigars of varying styles and
sizes which are sold to the public through upscale tobacconists and other retail
outlets nationwide at retail prices from $4 to $9.50 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 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. 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 reputation for uncompromising
quality, (iii) focusing on hands-on customer service to establish a loyal
following among tobacconists and (iv) expanding its product line 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.
On July 7, 1997, the Company entered into a distribution agreement (the
"Distribution Agreement") with Hubbard Imports, a Florida partnership
("Hubbard"). The Company believes that the Distribution Agreement, which has
accounted for $2,669,715 in sales through September 30, 1997, will result in
sales of approximately $5,000,000 in the year ending December 31, 1997.
5
<PAGE>
Until June of 1997 the Company sold its products through several different
distributors and directly to retail tobacconists. The Company pursued its
relationship with Hubbard to take advantage of Hubbard's broad network of
tobacco subdistributors in order to more rapidly expand the Company's sales.
Pursuant to the Distribution Agreement, Hubbard was appointed the sole U.S.
distributor of the Company's products in the U.S. until December 31, 2000, with
two 3-year options to renew on the part of Hubbard, so long as Hubbard meets
minimum annual purchase requirements that are to be set in January of each year
for the current calendar year.
The Company has recently 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.
The Company has also introduced a golf-theme novelty line of cigars under
the brand name "FORE!(TM)". Fore!(TM) cigars are displayed in a unique 30-cigar
package, are sold in a novelty glass tube with a golf motif 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 has begun an extensive advertising and promotional campaign
centered on 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
Hubbard's sales efforts relating to the Company's products. The Company has
entered into a license agreement with the operators of TAMBORIL AT THE PARK, an
upscale cigar bar and lounge at the Lombardy Hotel in midtown New York City.
TAMBORIL AT THE PARK, which opened in May 1997, and which 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 Company currently employs approximately 131 full-time employees: five
in its Miami offices and 126 in the Dominican Republic. Of these, approximately
three are engaged in sales and marketing, ten in administrative roles, and 113
in manufacturing.
6
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RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers of the Shares should consider carefully the discussion of
RISK FACTORS contained on pages 11 to 18 of this Prospectus. The risks of
investment in the Shares include the following factors:
. The Company began operations in mid-1996 and has a limited history of
operations. There can be no assurance that management of the Company will
be successful in attaining sufficient revenues to meet its expenses or to
achieve or maintain profitability.
. The marketing of luxury consumer goods such as high-quality, premium
cigars is highly dependent on creating favorable consumer perception
through well-orchestrated advertising and public relations. The Company
has little advertising experience, having expended only minimal amounts on
such activities to date.
. The Company's competitors have significantly greater advertising
resources and experience and enjoy well-established brand names.
. It could be necessary for the Company to seek additional financing or
to materially curtail its expansion plans. There can be no assurance that
such financing would be available to the Company on satisfactory terms or
at all. Failure to obtain such financing could materially slow the
Company's production and impair its ability to increase sales and sustain
profitability.
. The Company may be required or may choose to sell equity securities to
obtain financing in the future including the sale of additional preferred
stock of the Company to the Selling Shareholders. If the Company sells
additional equity securities at a price per share less than the purchase
price hereunder, investors purchasing shares of Common Stock in this
offering would incur additional dilution.
. Tobacco products are subject to extensive regulation at the federal,
state and local levels. There can be no assurance as to the content,
timing or effect of future regulations or that such regulations would not
have a material adverse effect on the Company's business.
. Manufacturers and distributors of tobacco products have been the
subject of increasing litigation in recent years seeking to extend product
liability to such companies for allegedly tobacco-related medical
conditions of smokers. If the Company were to become a party to such
litigation, either any finding of liability on the part of the Company or
the expense and diversion of management time in defending such litigation
could have a material adverse effect on the business of the Company.
7
<PAGE>
. Cigars (and tobacco products generally) have long been subject to
excise taxes on the federal, state and local levels. Substantial increases
in excise taxes could have a material adverse impact on the cigar industry
in general and the Company in particular.
. The Company will be dependent on its current management team for the
foreseeable future. The loss of the services of any member of the
management team could have a material adverse effect on the operations and
prospects of the Company. At this time, the Company has no employment
agreements with any of these individuals. The Company does not currently
have any "key man" life insurance on any of its employees.
. Since Hubbard is the exclusive U.S. distributor of the Company's
products, the Company will be totally dependent on Hubbard for its U.S.
sales. The termination of the Distribution Agreement or the failure of
Hubbard to purchase its minimum commitments from the Company would have a
material adverse effect on the business and prospects of the Company.
Hubbard also distributes several brands of cigars that compete directly
with the Company's products.
. The market for the Company's products is characterized by several
large, well-financed competitors with long-standing brand recognition,
successful histories of new product introductions and long-standing
relationships with tobacco growers and distributors. There can be no
assurance that the Company's competitors will not be able to use their
financial and other advantages resulting in material adverse effects on
the business of the Company.
. Several of the Company's largest competitors have experienced
substantial difficulty in obtaining sufficient inventories of tobacco and
sufficient number of skilled rollers to meet market demand. There can be
no assurance that the Company will not experience such shortages as it
seeks to expand sales and production capabilities. 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.
. During the period from 1964 to 1993, the market for cigars steadily
declined at an annual rate of approximately 3.6%, with large cigars
experiencing an annual decline of 5%. There can be no assurance that the
markets will not retreat to pre-1993 trends. If the long-term market should
decline, it could have a material adverse effect on the business of the
Company.
. All the Company's existing and planned manufacturing operations and
the sources of all its tobacco are located in the Dominican Republic. As
such, the Company is
8
<PAGE>
subject to the risks of changes in social, political and regulatory
climate inherent in foreign trade, including potential changes in either
Dominican or U.S. laws and regulations regarding foreign investment in and
transfers of capital from the Dominican Republic.
. The Company is a holding company, the principal assets of which
consist of the capital stock of TCI, and, through TCI, the capital stock
of Tabacalera. The Company will to a large extent be dependent on the
earnings and cash flows of TCI and Tabacalera for dividends and
distributions to meet its expenses and to pay any cash dividends or
distributions to holders of the Common Stock (if and when they are
authorized by the Board of Directors). Failure of TCI to generate
operating profits and positive cash flow would have a material adverse
effect on the financial condition of the Company.
. The Company has paid no dividends on its Common Stock to date, nor
does it anticipate doing so in the foreseeable future. The Company intends
to use all proceeds of any financing activities and all cash proceeds, if
any, from operations to finance the growth of the Company's sales and to
repay debt. The Series B Shares pay a cumulative dividend of eight percent
(8%) per annum, which is payable quarterly in arrears in either cash or
shares of Common Stock (at the option of the Company) and on the Conversion
Date in shares of Common Stock. The holders of the Series B Shares are
entitled to dividends prior to any such payment to holders of Common Stock.
. There has to date been a limited market for the Common Stock. Sale of
substantial numbers of the Shares into the market could have a depressive
effect on the market price of the Company's Common Stock. Such depressive
effect could reduce the price per share of the Common Stock below that
required for initial or continued listing of the Company's Common Stock for
trading on Nasdaq or a national stock exchange.
. The Company is applying to list its Common Stock for trading on a national
stock exchange. If the Company is not successful in listing its Common
Stock for trading on such exchange and if the price per share of the Common
Stock on the NASD OTC Bulletin Board is below $5 per share, the Common
Stock would most likely come within the definition of "penny stock," as
contained in certain rules and regulations of the SEC. If an exception from
the penny stock rules were not available for the Common Stock, and it were
to come within the penny stock rules, the penny stock rules could have the
effect of limiting the trading market for the Common Stock and the ability
of purchasers in this Offering to sell any shares of Common Stock in the
market and could have a material adverse effect on the liquidity of the
Common Stock, materially increasing the risks of an investment in the
Shares.
. Under the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors of the Company is authorized to designate, and cause
the Company to issue, up to five million (5,000,000) shares of preferred
stock of any class or series, having such rights, preferences, powers and
limitations as the Board shall determine, of which 56,000 Series B Shares
have been issued. This could have the effect of
9
<PAGE>
materially impairing the rights of the holders of the Common Stock to
receive such dividends or preferential payments and/or of reducing, or
eliminating, the amounts that would otherwise have been available for
payment to the holders of the Common Stock.
. The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law, which may have the effect of restricting
changes in control of the Company, including transactions in which the
holders of Common Stock might otherwise receive a premium for their shares
over then current prices, and may limit the ability of such stockholders to
cause or approve transactions which they may deem to be in their best
interest, all of which could have an adverse effect on the market price of
the Shares of Common Stock offered hereby.
. The Company's Certificate of Incorporation and by-laws contain certain
provisions eliminating the liability of directors to the Company for
monetary damages to the fullest extent allowed under the laws of the State
of Delaware, which under certain circumstances could eliminate liability
for such directors' breach of their fiduciary duty to the Company and its
shareholders.
THE OFFERING
Common Stock offered by
the Selling Shareholders 2,200,000 shares
Common Stock to be outstanding
after the offering There are currently 5,903,894 shares of
Common Stock issued and outstanding. A total
of 425,000 Shares are reserved for issuance
pursuant to exercise of the Warrants and the
Hubbard Warrants. The remaining Shares to be
offered pursuant to this Prospectus are to
be issued pursuant to conversion of the
Convertible Debentures and the Series B
Shares which may occur from time to time. As
the conversion prices are to be determined
by reference to the market price of the
Common Stock at the time of conversion it is
not possible to determine at this time the
number of Shares that will actually be
offered or the number of Shares to be
outstanding after completion of the
offering.
If all Series B Shares were converted and
all Warrants and Hubbard Warrants exercised
as of the date of this Prospectus, there
would be approximately 7,154,125 shares of
Common Stock issued and outstanding. The
Purchase Agreement and associated
documentation limit the number of shares of
Common Stock that may be held by any of the
Purchasers to 4.99% of the then issued and
outstanding shares of Common Stock. Absent
such contractual limitation, the total
number of shares outstanding would be
7,619,217.
Use of Proceeds The Company will not receive any proceeds of
the sales of the Shares being offered
pursuant to this Prospectus, all of which
will be paid to the Selling Shareholders.
The Company received approximately
$2,600,000 in net proceeds of the Private
Offering and would receive up to an
additional $1,325,250 in proceeds from the
exercise of the Warrants and up to an
additional $1,170,000 in proceeds from the
exercise of the Hubbard Warrants.
Trading Symbol for the Common
Stock on the NASD OTC
Bulletin Board SMKE
10
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RISK FACTORS
Prospective purchasers of the Shares offered pursuant to this Prospectus
should consider carefully all of the information set forth or incorporated by
reference in this Prospectus and, in particular, should evaluate the following
risks in connection with an investment in the Shares.
LIMITED OPERATING HISTORY
The initial efforts of the founders of the Company to establish a cigar
company began in early 1995. The Company was formed in March 1996 and began
operations in April 1996. Prior to that time, the Company had no operations
upon which an evaluation of the Company and its prospects could be based. There
can be no assurance that management of the Company will be successful in
completing the Company's product development programs, implementing the
corporate infrastructure to support operations at the levels called for by the
Company's business plan, conclude a successful sales and marketing plan to
attain significant penetration of the premium cigar market segment or that the
Company will generate sufficient revenues to meet its expenses or to achieve or
maintain profitability.
In the period from the commencement of operations in April 1996 through
December 31, 1996 the Company had sales of $1,413,815. As of December 31, 1996
the Company had an accumulated a deficit of $221,627. In the nine months ended
September 30, 1997, the Company had net sales of $4,403,640 and earnings before
taxes of $561,820. These results of operations, together with the proceeds of
the Private Offering and the Company's recapitalization of its outstanding debt
as of September 30, 1997 have increased Shareholders' Equity to $5,562,351 as of
September 30, 1997. There can be no assurance that the Company will be able to
sustain profitability.
DIFFICULTIES IN ESTABLISHING NEW BRANDS
The Company's principal business strategy is to develop the Tamboril(TM),
Cordova(TM) and Fore!(TM) brand names as respected brands associated with the
highest quality premium cigars and to continue to introduce new brands targeted
to specific market niches. The marketing of luxury
11
<PAGE>
consumer goods such as high-quality, premium cigars is highly dependent on
creating favorable consumer perception through well-orchestrated advertising and
public relations. The Company has little advertising experience, having expended
only minimal amounts on such activities to date. The Company's competitors have
significantly greater advertising resources and experience and enjoy well-
established brand names. There can be no assurance that the Company's initial
advertising and promotional activities will be successful in creating the
desired consumer perception. Management of the Company believes that the
extensive experience in advertising and promoting cigars of the Company's sole
U.S. distributor, Hubbard Imports ("Hubbard") will enhance the Company's efforts
in this regard.
POSSIBLE NEED FOR ADDITIONAL FINANCING; DILUTION
The Company has been successful to date in raising sufficient investment
capital to support its initial product development efforts, establish its first
production facility, to acquire the site for its second production facility, to
fund the construction costs of its flagship cigar bar, TAMBORIL AT THE PARK, in
New York City and to conduct its initial sales and marketing program. The
Company has obtained net proceeds of approximately $2,600,000 through the
Private Offering to support its ongoing operations and expansion. Under the
Purchase Agreement, the Company must meet certain conditions before it can
require the Purchasers to purchase up to an additional $3,000,000 stated amount
of Series B Shares. If the Company is not successful in meeting those
conditions, it could be necessary to seek additional financing elsewhere or to
materially curtail its expansion plans. There can be no assurance that such
other financing would be available to the Company on satisfactory terms or at
all. Failure to obtain such financing could materially slow the Company's
production and impair its ability to increase sales and sustain profitability.
The Company may be required or may choose to sell equity securities to
obtain financing in the future including the sale of additional preferred stock
of the Company to the Selling Security holders. If the Company sells additional
equity securities at a price per share less than the purchase price hereunder,
investors purchasing shares of Common Stock in this offering would incur
additional dilution. See Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
REGULATION OF TOBACCO PRODUCTS
Cigar manufacturers, like all manufacturers of tobacco products, have been
subject to extensive and increasing regulation through the years at the federal,
state and local levels. These regulations have, for example, imposed labeling
requirements, limited advertising of tobacco products, restricted smoking in
public areas such as office buildings and restaurants and prohibited sales of
tobacco products to minors. Proposals have been entertained to transfer
regulation of tobacco products from the Federal Trade Commission to the Food and
Drug Administration, which has expressed the intention to regulate tobacco
products as an addictive "drug." There can be no assurance as to the content,
timing or effect of future regulations on the federal, state or local levels
12
<PAGE>
or that such regulations would not have a material adverse effect on the
Company's business. See "Business of the Company -- Regulation and Litigation in
the Tobacco Industry."
TOBACCO INDUSTRY LITIGATION
Manufacturers and distributors of tobacco products have been the subject of
increasing litigation in recent years seeking to extend product liability to
such companies for allegedly tobacco-related medical conditions of smokers.
While such litigation has primarily centered on cigarettes, there can be no
assurance that the increased popularity and visibility of cigars will not result
in similar litigation against manufacturers and distributors of cigars. If the
Company were to become a party to such litigation, either any finding of
liability on the part of the Company or the expense and diversion of management
time in defending such litigation could have a material adverse effect on the
business of the Company. See "Business of the Company -- Regulation and
Litigation in the Tobacco Industry."
EXCISE TAXES
Cigars (and tobacco products generally) have long been subject to excise
taxes on the federal, state and local levels. From time to time proposals have
been made to increase such taxes to fund various legislative initiatives. The
Clinton Administration has proposed such increases to fund health care
initiatives, but no action has yet been taken. Substantial increases in excise
taxes could have a material adverse impact on the cigar industry in general and
the Company in particular. See "Business of the Company -- Excise Taxes."
DEPENDENCE ON KEY PERSONNEL
The Company will be dependent on its current management team for the
foreseeable future. The loss of the services of any member of the management
team could have a material adverse effect on the operations and prospects of the
Company. At this time, the Company has no employment agreements with any of
these individuals. The Company does not currently have any "key man" life
insurance on any of its employees.
DEPENDENCE ON HUBBARD
Management of the Company believes that the Distribution Agreement with
Hubbard will enable the Company to expand sales more rapidly than it would be
able to do through its own direct sales force. However, since Hubbard is the
exclusive U.S. distributor of the Company's products, the Company will be
totally dependent on Hubbard for its U.S. sales. The Distribution Agreement
provides that minimum annual purchase commitments will be mutually agreed upon
by Hubbard and the Company in January for each year of the term of the
Distribution Agreement. Should the Company and Hubbard fail to reach agreement
on such minimum commitments, the Distribution Agreement will terminate. In the
event the Distribution Agreement is terminated or if Hubbard fails
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<PAGE>
to honor its minimum purchase commitments, the Company would be forced to obtain
another distributor or distributors for its product and/or to implement an
internal sales force to sell the Company's products to retail tobacconists and
other outlets. The termination of the Distribution Agreement or the failure of
Hubbard to purchase its minimum commitments from the Company would have a
material adverse effect on the business and prospects of the Company. Hubbard
also distributes several brands of cigars that compete directly with the
Company's products.
In the nine months ended September 30, 1997, $2,669,715 of the Company's
$4,403,640 in sales (61%) were made to Hubbard.
COMPETITION
The market for the manufacture and distribution of large, premium cigars
such as those manufactured and distributed by the Company is characterized by
several large, well-financed competitors with long-standing brand recognition,
successful histories of new product introductions and long-standing
relationships with tobacco growers and distributors. These companies compete
with the Company, not only for sales to distributors and to consumers, but also
in the purchase of quality tobacco and in attracting skilled employees, mainly
cigar rollers. New rollers require several months of training before they can be
proficient. While the Company believes that the rapidly expanding market for
sales of premium cigars has created room for new competitors such as the Company
to achieve substantial sales and profits, there can be no assurance that the
Company's competitors will not be able to use their financial and other
advantages in competing in price or in obtaining tobacco, building facilities
and attracting and keeping skilled labor, resulting in material adverse effects
on the business of the Company.
POSSIBLE CONSTRAINTS ON MEETING DEMAND
The substantial growth in demand for cigars has 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 number of skilled rollers to meet market demand. While (i) the
Company has not yet experienced such shortages, (ii) the Company believes 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 (iii) 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 be no assurance that the Company will not experience
such shortages as it seeks to expand sales and production capabilities. 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.
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<PAGE>
DECLINES IN THE CIGAR MARKET PRIOR TO 1993
While the Company believes that the significant increases in cigar sales
since 1993 are due to demographic and social trends that will continue for the
foreseeable future, during the period from 1964 to 1992, the market for cigars
steadily declined at an annual rate of approximately 3.6%, with large cigars
experiencing an annual decline of 5%. While the Company believes the market
for premium cigars will continue to expand significantly over the next several
years, there can be no assurance that the markets will not retreat to pre-1993
trends. If the long-term market should decline, it could have a material
adverse effect on the business of the Company.
RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND INTERNATIONAL TRADE
All the Company's existing and planned manufacturing operations and the
sources of all its tobacco are located in the Dominican Republic. As such, the
Company is subject to the risks of changes in social, political and regulatory
climate inherent in foreign trade, including potential changes in either
Dominican or U.S. laws and regulations regarding foreign investment in and
transfers of capital from the Dominican Republic. While the Company is not
aware of any such social, political or regulatory changes, if such a change
should occur, it could materially impair the Company's operations and its
financial condition.
HOLDING COMPANY STRUCTURE
The Company is a holding company, the principal assets of which consist of
the capital stock of TCI, its principal U.S. operating subsidiary, and, through
TCI, the capital stock of Tabacalera, its Dominican Republic operating
subsidiary. The Company conducts no business on its own independent of TCI and
Tabacalera. Accordingly, the Company will to a large extent be dependent on the
earnings and cash flows of TCI and Tabacalera for dividends and distributions to
meet its expenses and to pay any cash dividends or distributions to holders of
the Common Stock (if and when they are authorized by the Board of Directors).
This situation is ameliorated to some extent by the access of the Company to the
capital markets for investment capital to support its expenses and fuel the
growth of the operating businesses, though there can be no assurance that such
capital will continue to be available. Failure of TCI to generate operating
profits and positive cash flow would have a material adverse effect on the
financial condition of the Company.
DIVIDENDS
The Series B Shares pay a cumulative dividend of eight percent (8%) per
annum, which is payable quarterly either in cash or shares of Common Stock (at
the option of the Company) and upon the Conversion Date of the Series B Shares
in shares of Common Stock at a conversion price per share based upon the average
per share market price of the Company's Common Stock for the five (5) trading
days immediately prior to conversion. The Company has paid no dividends on its
Common Stock to date, nor does it anticipate doing so in the foreseeable future.
The Company intends to use
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<PAGE>
all proceeds of any financing activities and all cash proceeds, if any, from
operations to finance the growth of the Company's sales and to repay debt.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Certificate of Incorporation and By-Laws include provisions
that eliminate the personal liability of the directors of the Company for
monetary damages to the fullest extent possible under the laws of the State of
Delaware or other applicable law. These provisions eliminate the liability of
directors to the Company and its stockholders for monetary damages arising out
of any violation of a director of his fiduciary duty of due care. Under
Delaware law, however, such provisions do not eliminate the personal liability
of a director for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or involving intentional misconduct or knowing
violation of law, (iii) payment of dividends or repurchases of stock other than
from lawfully available funds, or (iv) any transaction from which the director
derived an improper benefit. These provisions do not affect a director's
liabilities under the federal securities laws or the recovery of damages by
third parties.
LIMITED MARKET FOR THE COMMON STOCK
The Company's Common Stock began trading in the over-the-counter market as
quoted on the National Association of Securities Dealers OTC Bulletin Board
under the new trading symbol "SMKE" on November 5, 1996. Prior to that time
there was no public market for the Company's Common Stock. Since it has begun
trading, there has been a limited market for the Common Stock. The Company is
applying for listing of its Common Stock on a nationally recognized stock
exchange. There can be no assurance that the Company will meet the listing
requirements of such exchange or that its Common Stock will be approved for
trading on such exchange. Sales of substantial numbers of the Shares into the
market could have a depressive effect on the market price of the Company's
Common Stock. Such depressive effect could reduce the price per share of the
Common Stock below that required for initial or continued listing of the
Company's Common Stock for trading on such exchange. There can be no assurance
that a broader market for the Common Stock will develop subsequent to this
Offering. Failure of such a market to develop could have a material adverse
effect on the liquidity of the Common Stock, and, therefore, on an investment in
the Shares. This would significantly increase the risks of such an investment.
POTENTIAL RISKS OF LOW PRICED STOCKS
If the Company is not successful in listing its Common Stock for trading on
Nasdaq and if the price per share of the Common Stock on the NASD OTC Bulletin
is below $5 per share, the Common Stock would most likely come within the
definition of "penny stock," as contained in certain rules and regulations of
the SEC. Under those regulations, any broker-dealer seeking to effect a
transaction in a penny stock not otherwise exempt from the rules must first
deliver to the potential customer a standardized risk disclosure document in a
form prepared by the SEC which provides information about penny stocks and the
nature and level of risks in the penny stock market.
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<PAGE>
The broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salespersons in the transaction and monthly account statements showing the
market value of each penny stock held in the customer's account. This
information must be given to the customer orally or in writing before the
transaction and in writing before or with delivery of the customer's
confirmation of the transaction. Under the penny stock rules, the broker-dealer
must make a special determination of the suitability of the suggested investment
for the individual customer and must receive the customer's written consent to
the transaction. If an exception from the penny stock rules were not available
for the Common Stock and it were to come within the penny stock rules, the penny
stock rules could have the effect of limiting the trading market for the Common
Stock and the ability of purchasers in this Offering to sell any shares of
Common Stock in the market. If the trading market for the Common Stock were so
limited, it could have an adverse effect on the liquidity of the Common Stock
and could have the effect of materially increasing the risks of an investment in
the Shares.
FUTURE SALES OF COMMON STOCK OR SENIOR SECURITIES
Current shareholders of the Common Stock of the Company own all of the
5,903,894 Shares of Common Stock issued and outstanding prior to this Offering.
Of these Shares 5,575,310 are currently eligible for public resale and the
remaining 328,584 Shares will become so eligible on or before September 30, 1998
or earlier if certain registration rights granted to holders whose Shares were
issued pursuant to the Company's September 30, 1997 recapitalization are
exercised. Pursuant to the Purchase Agreement, the Company may require the
Purchasers to purchase up to an additional $3,000,000 aggregate stated amount of
Series B Preferred Stock in two tranches of $1,500,000 each, provided that
various conditions are then met. If the Company so elects, it would issue up to
an additional 60,000 shares of Series B Shares and a number of warrants to be
determined at closing. The conversion of such additional Series B Shares and/or
the issuance of Common Stock pursuant to the exercise of such additional
warrants could have the effect of further depressing the market price of the
Company's Common Stock. While the Company cannot predict the impact of the
public resale into the market of any of such shares on the public trading price
of the Company's Common Stock, sales of substantial amounts of such shares of
Common Stock or the availability of substantial amounts of such shares for sale
could adversely affect prevailing market prices.
It is anticipated that the Selling Shareholders will offer for sale all of
the Shares convertible or exercisable, as the case may be, from the Convertible
Debentures, the Series B Shares and the Warrants. Further, because it is
possible that a significant number of Shares could be sold at the same time
hereunder, such sales, or the possibility thereof, may have a depressive effect
on the market price of the Company's Common Stock.
Under the Company's Amended and Restated Certificate of Incorporation, the
Board of Directors of the Company is authorized to designate, and cause the
Company to issue, up to five million (5,000,000) shares of preferred stock of
any class or series, having such rights, preferences, powers and limitations as
the Board shall determine. While the Series B Shares are outstanding the
holders thereof have the right to receive dividends and a preference, upon
liquidation, dissolution
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<PAGE>
or winding up of the Company, superior to the rights of holders of Common Stock.
The Board could, after conversion of all the Convertible Debentures and Series B
Shares, authorize and cause the Company to issue one or more series or classes
of preferred stock having rights, preferences and powers senior to those of the
Common Stock, including the right to receive dividends and/or preferences upon
liquidation, dissolution or winding-up of the Company in excess of, or prior to,
the rights of the holders of the Common Stock. This could have the effect of
materially impairing the rights of the holders of the Common Stock to receive
such dividends or preferential payments and/or of reducing, or eliminating, the
amounts that would otherwise have been available for payment to the holders of
the Common Stock.
EFFECT OF TAKEOVER PROVISIONS OF DELAWARE LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, which may have the effect of restricting changes in
control of the Company, including transactions in which the holders of Common
Stock might otherwise receive a premium for their shares over then current
prices, and may limit the ability of such stockholders to cause or approve
transactions which they may deem to be in their best interest, all of which
could have an adverse effect on the market price of the Shares of Common Stock
offered hereby.
USE OF PROCEEDS
The Company previously received approximately $2,600,000 in net proceeds
from the Private Offering and will receive all proceeds from the exercise of any
warrants which would total an additional $1,325,250 if all the Warrants were
exercised and up to an additional $1,170,000 in proceeds from the exercise of
the Hubbard Warrants (if all Hubbard Warrants are exercised). All Shares
offered by this Prospectus are being sold by the Selling Shareholders and all
proceeds of the sales of such Shares will inure to the benefit of the Selling
Shareholders. No proceeds of this Offering will inure to the benefit of the
Company.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth the name of each Selling Shareholder, the
number of shares of Common Stock beneficially held by each such Selling
Shareholder prior to the commencement of the offering made hereby, the number of
Shares that may be offered by each such Selling Shareholder, and the number of
Shares to be owned by each such Selling Shareholder assuming the sale of all
Shares acquired upon conversion or exercise of the Convertible Debentures,
Series B Shares, and/or Warrants, issued to each such Selling Shareholder upon
the initial closing of the Purchase Agreement. See "SECURITIES BEING OFFERED."
The number of Shares that may actually be sold by each of the Selling
Shareholders will be determined by each such Selling Shareholder and may depend
upon a number of factors, including, among other things, the market price of the
Common Stock. The table below sets forth information as of December 17, 1997
concerning the beneficial ownership of Common Stock of each of the Selling
Shareholders. All information concerning beneficial ownership has been
furnished by the Selling Shareholders.
<TABLE>
<CAPTION>
Shares Owned Shares Offered Shares Owned
Before Offering in the Offering After Offering(1)
Name of Shareholder Number (2) Percent (3)(4) Number Number (2) Percent(3)
------------------------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Infinity Emerging
Opportunities Limited 310,077 4.99% 310,077 0 0
Summit Capital Limited 310,077 4.99% 310,077 0 0
Glacier Capital Limited 310,077 4.99% 310,077 0 0
Brown Simpson, LLC 45,000 * 45,000 0 0
Refco Securities, Inc. 75,000 1.25% 75,000 0 0
Hubbard Imports 200,000 3.28% 200,000 0 0
</TABLE>
TOTAL
* Less than one percent (1%).
/1/ Assumes that all Shares offered herein are sold.
/2/ Represents those Shares held by the Selling Shareholder, if any, together
with those shares that such Selling Shareholder has the right to acquire
within 60 days (including the maximum number of Shares issuable upon the
conversion of the Convertible Debentures and the Series B Shares, and
exercise of Warrants or Hubbard Warrants held by such Selling Shareholder,
assuming that such conversion and exercise occurred as of December 17,
1997, which is 310,077 Shares for Infinity, 310,077 Shares for Summit, and
310,077 Shares for Glacier). See "SECURITIES BEING OFFERED." Each of the
Selling Shareholders specifically disclaims beneficial ownership of the
Shares held (or acquirable upon exercise or conversion of any derivative
securities held) by the other Selling Shareholders and, as such, the number
of Shares represented hereby does not reflect any Shares beneficially owned
by any other Selling Shareholder.
/3/ The percentages indicated are based on 5,903,894 shares of Common Stock
issued and outstanding as of December 17, 1997 and, with respect to each
Selling Shareholder, the shares of Common Stock underlying the Convertible
Debentures, the Series B Shares and Warrants or Hubbard Warrants held by
such Selling Shareholder, but limited to 4.99% per the Purchase Agreement.
See "SECURITIES BEING OFFERED." The percentage calculations do not include
any Shares of Common Stock issuable upon the exercise of currently
outstanding options, warrants, or other rights to acquire Shares of Common
Stock, other than those relating to the Convertible Debentures, the Series
B Shares and the Warrants or Hubbard Warrants held by such Selling
Shareholder.
/4/ The maximum number of Shares that a Selling Shareholder (either singularly
or as part of a group) may receive on conversion of a Convertible Debenture
or a Series B Share, or exercise of a Warrant may not exceed at any one
time an amount equal to the difference between (a) 4.99% of the Company's
then issued and outstanding shares of Common Stock following such
conversion or exercise minus (b) the number of Common Shares that it then
owns (exclusive of Shares beneficially owned due to ownership of
Convertible Debentures, Series B Shares and Warrants). In addition, if the
per share market price for the five (5) trading days immediately prior to
any conversion date is less than $3.00 per share, the Company may limit the
maximum number of shares of Common Stock to be issuable pursuant to such
conversion to such number of shares as is equal to the dollar amount to be
converted divided by $3.00 and the Company may, at its option, either (a)
make a cash payment intended to give the Holder the benefit of his
conversion as if the Shares were converted based on the per share market
price or (b) issue the total number of shares based on the actual
conversion price. The Company shall not be obligated to honor any such
conversion or exercise if, after giving effect to the issuance of such
Shares, the Company would not be in compliance with applicable NASD
regulations. This Prospectus also relates to such presently indeterminate
number of additional shares of Common Stock as may be issuable upon
conversion of the Series B Shares or payment of dividends on the Series B
Shares, based upon fluctuations in the conversion price of the Series B
Shares in accordance with Rule 416 under the Securities Act.
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<PAGE>
PLAN OF DISTRIBUTION.
Sales of Shares may be made from time to time by the Selling Shareholders,
or, subject to applicable law, by pledgees, donees, distributees, transferees or
other successors in interest. Such sales may be made on Nasdaq, in the over-
the-counter market, on a national securities exchange (any of which may involve
crosses and block transactions), in privately negotiated transactions or
otherwise or in a combination of such transactions at prices and at terms then
prevailing or at prices related to the then current market price, or at
privately negotiated prices. In addition, any Shares covered by this Prospectus
which qualify for sale pursuant to Section 4(1) of the Securities Act, or Rule
144 promulgated thereunder may be sold under such provisions rather than
pursuant to this Prospectus. Without limiting the generality of the foregoing,
the Shares may be sold in one or more of the following types of transactions:
(a) a block trade in which the broker-dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(c) an exchange distribution in accordance with the rules of such exchange; (d)
ordinary brokerage transactions and transactions in which the broker solicits
purchasers; and (e) face-to-face transactions between sellers and purchasers
without a broker-dealer. In effecting sales, brokers or dealers engaged by the
Selling Shareholders may arrange for other brokers or dealers to participate in
the resales.
In connection with distributions of the Shares or otherwise, the Selling
Shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales of
the Shares registered hereunder in the course of hedging the positions they
assume with Selling Shareholders. The Selling Shareholders may also sell Shares
short and deliver the Shares to close out such short positions.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Shareholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by the Selling
Shareholders, or any other broker-dealer, are acting as principal or agent for
the Selling Shareholders, the compensation to be received by underwriters who
may be selected by the Selling Shareholders, or any broker-dealer, acting as
principal or agent for the Selling Shareholders and the compensation to be
received by other broker-dealers, in the event the compensation of such other
broker-dealers is in excess of usual and customary commissions, will, to the
extent required, be set forth in a supplement to this Prospectus (the
"Prospectus Supplement"). Any dealer or broker participating in any
distribution of the Shares may be required to deliver a copy of this Prospectus,
including the Prospectus Supplement, if any, to any person who purchases any of
the Shares from or through such dealer or broker.
The Company has advised the Selling Shareholders that during such time as
they may be engaged in a distribution of the Shares included herein they are
required to comply with Regulation M promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). With certain exceptions,
Regulation M precludes any Selling Shareholder, any affiliated purchasers and
any broker-dealer or other person who participates in such distribution from
bidding for or purchasing, or attempting to induce any person to bid for or
purchase, any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or purchases
made in order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the
marketability of the Common Stock.
To comply with the securities laws of certain jurisdictions, if applicable,
the Shares will be offered or sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain jurisdictions the
Shares may not be offered or sold unless they have been registered or qualified
for sale in such jurisdictions or any exemption from registration or
qualification is available and is complied with.
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<PAGE>
All expenses of the registration of the Shares under the Securities Act and
applicable state securities laws, if required, will be paid by the Company,
including, without limitation, SEC filing fees and expenses of compliance with
state securities or "blue sky" laws, if any, printing expenses, fees and
disbursements of counsel for the Company, and reasonable expenses of one counsel
for all of the Selling Shareholders; provided, however, that the Selling
Shareholders will pay all underwriting discounts and selling commissions, if
any. The Selling Shareholders will be indemnified by the Company against
certain civil liabilities, including certain liabilities under the Securities
Act, arising from or relating to any untrue statement or alleged untrue
statement of any material fact contained in the registration statement of which
this prospectus is contained, this prospectus, or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances in which they were made, not misleading.
LEGAL PROCEEDINGS.
By letter agreement dated January 21, 1997 (the "Agreement"), the Company
appointed Carlin Equities Corp. ("Carlin"), as exclusive placement agent in
connection with a contemplated offering of approximately 1.4 million shares of
the Company's common stock at $7.00 per share (the "Proposed Offering").
Pursuant to the Agreement, the Company was to provide a confidential offering
memorandum in form and substance satisfactory to Carlin. During the period
January 21, 1997 through April 30, 1997, various meetings took place between
Carlin and the Company and their respective counsel, and documents and
correspondence were exchanged. The Company provided Carlin and its counsel with
several drafts of a confidential offering memorandum and related documents
drafted to the specifications of Carlin and its counsel. Carlin and its counsel
repeatedly and, in the opinion of the Company, unreasonably rejected these
documents. In light of these developments and the fact that Carlin had not
introduced the Company to prospective investors, the Company concluded that
Carlin had abandoned the Proposed Offering. The Company then decided not to go
forward with the Proposed Offering. On April 30, 1997, the Company released an
offering memorandum in connection with a new and substantively different
offering contemplated by the Company, of between approximately 330,000 and
1,170,000 million shares of preferred stock at $6.00 per share (the "New
Offering"). Carlin was advised by letter of May 2, 1997 that the Company
decided not to go forward with the Proposed Offering and was instead proceeding
on its own to pursue the New Offering.
By letter of May 13, 1997, Carlin advised the Company that Carlin believes
it is entitled to certain compensation and costs if the Company completes the
New Offering. In early July, 1997, Carlin commenced an action in the United
States District Court, Southern District of New York, styled Carlin Equities
---------------
Corp. v. Tamboril Cigar Company, Docket No. 97 Civ. 4988 contract seeking
- -------------------------------
compensation for various fees and commissions, and in lieu of the issuance of
warrants to purchase the Company's stock, with total damages of an unspecified
amount but of at least $1,680,000. The Company has answered, denying Carlin's
assertions, asserting several affirmative defenses and has asserted
counterclaims totaling in excess of $1,000,000. The case has been set for
discovery and certain depositions have been taken. The
21
<PAGE>
Company believes that Carlin's claims lack merit since the Agreement terminated
before the Company incurred any obligation to Carlin, Carlin abandoned the
Proposed Offering, and Carlin failed to satisfy conditions precedent to its
rights to receive fees and other compensation. The Company intends to vigorously
defend itself against all claims made in the Carlin Action.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) The directors, executive officers and significant employees of the
Company and their ages as of December 17, 1997 are as follows. Directors of the
Company serve for a term of one year or until their successors are elected.
Officers are appointed by, and serve at the pleasure of, the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Anthony Markofsky 30 President, Chief Executive Officer
and Director
Thomas E. Knudson 42 Vice President and Director
David S. Rector 51 Secretary and Director
Pedro J. Mirones 57 Vice President, Chief Financial Officer
and Treasurer
Abraham Shafir 48 Director and President of Tabacalera
Jean-Francois Perrault 36 Director
Aric Frons 54 Director
</TABLE>
ANTHONY MARKOFSKY, 30, PRESIDENT, CHIEF EXECUTIVE OFFICER AND DIRECTOR.
Mr. Markofsky became President and Chief Executive Officer of the Company
on April 28, 1997. He has been a Director since October 1996. Prior to that
time, Mr. Markofsky served as Vice President and Sales Administration Manager of
the Company, a position he has held with TCI since its founding in March 1996.
From April 1995 to January 1996, Mr. Markofsky served as a consultant to
Intercare Inc., a medical management company. From April 1991 to April 1995, he
held various positions with CareFlorida Inc., a health maintenance organization.
Mr. Markofsky is also a Director and Secretary of United Health Partners Inc., a
company listed as a "Related Party" in the Notes to the Consolidated Financial
Statements included as part of this Prospectus. UHP currently has no operations.
Mr. Markofsky's father is Ian Markofsky, President and sole
22
<PAGE>
shareholder of Viking Investment Group II., Inc., a substantial shareholder of
the Company and guarantor of the Company's obligations under the lease for its
Miami premises.
THOMAS E. KNUDSON, 42, DIRECTOR, VICE PRESIDENT OF SALES.
Mr. Knudson joined TCI in June of 1996 and has occupied his current
position and has been a Director of the Company since October 1996. Prior to
that time, Mr. Knudson was a principal of several entrepreneurial ventures
including serving as Secretary of Leadville Development Corp., a commercial real
estate developer (1990 until June 1996), President and owner of Cocobianco, a
clothing importer and retailer (1986 to 1996) and Principal of Fast
Incorporated, a BMW dealership, all located in and around Sun Valley Idaho. Mr.
Knudson is also a Director and President of United Health Partners Inc. ("UHP"),
a company listed as a "Related Party" in the Notes to the Consolidated Financial
Statements included as part of this Prospectus. UHP currently has no
operations.
DAVID S. RECTOR, 51, DIRECTOR, SECRETARY.
Mr. Rector has been a Director since August, 1996. From August 1996 to
March 1997, Mr. Rector was also Executive Vice President and General Manager of
the Company, where he was instrumental in organizing the Company's operations
and administration. Mr. Rector was appointed Secretary of the Company in June
of 1997. Over the past two decades, Mr. Rector has served as a business
consultant to, and held senior positions in, a variety of ventures. From July
of 1995 until July 1996, Mr. Rector was principal of David Stephen Group, a
business consulting firm. Mr. Rector was Chief Operating Officer of Headstrong
Group, a manufacturer and distributor of recreational safety helmets, from July
to November 1995. From January to June of 1995 Mr. Rector was General Manager
of Bemiss-Jason, a distributor of paper products. From June 1992 to April 1994
he was President of Supercart International, a distributor of shopping carts.
From April 1986 to June 1992 he was principal of Blue Moon, a distributor of
garment buttons. From 1980 to 1985, Mr. Rector served as President of Sunset
Designs, a designer of leisure time craft. From 1972 to 1980, Mr. Rector held
various managerial sales and marketing positions with Crown Zellerbach
Corporation, a multi-billion dollar manufacturer of paper and forest products.
PEDRO J. MIRONES, 57, VICE PRESIDENT, FINANCE AND ADMINISTRATION, CHIEF
FINANCIAL OFFICER AND TREASURER.
Mr. Mirones joined the Company in his current position in December, 1996.
From 1978 until January of 1996, Mr. Mirones held several positions with Suave
Shoe Corporation, a publicly traded manufacturer and distributor of shoes, which
is now known as French Fragrances, Inc. These positions included Vice President
Finance and Controller of the Manufacturing Division, Vice President Finance--
Corporate and Senior Vice President Finance and Administration. From January
1996 until joining the Company in December 1996, Mr. Mirones attended Florida
International University. Prior to joining Suave, Mr. Mirones was associated
with the public accounting firm of Ernst & Young from 1969 to 1978. Mr. Mirones
is a member of the Florida Institute of Certified Public Accountants.
23
<PAGE>
ABRAHAM SHAFIR, 48, DIRECTOR, PRESIDENT OF TABACALERA.
Mr. Shafir, a citizen of the State of Israel, relinquished the post of
President of the Company on April 28, 1997 to focus his energies on the
manufacturing operations of Tabacalera, where he has spent much of his time with
the Company. Mr. Shafir served as President and Chief Executive Officer and a
Director of TCI since its founding in March of 1996 and of the Company from
October 1996 to April 1997. He will continue in his role as a Director. From
1994 to 1995, Mr. Shafir served as President of Bagel Factory, a baked goods
manufacturing company located in the State of Israel. From 1988 to 1993, Mr.
Shafir was President of Mesa Gold, a jewelry import and sales company located in
Miami, Florida and New York, New York. From 1979 to 1988, Mr. Shafir owned and
operated various manufacturing and import sales companies in Israel and Miami,
Florida. Mr. Shafir lived and worked in the Dominican Republic for three years
and was Vice President, Manufacturing of the Weaving Division of Casa Central, a
major garment manufacturer located in Santo Domingo, from 1972 to 1975.
JEAN-FRANCOIS PERRAULT, 36, DIRECTOR.
Mr. Perrault was elected as a Director of the Company at a meeting of the
Board of Directors held on November 25, 1997. Mr. Perrault is, and has since
May of 1995 been, Senior Vice President, Corporate Finance, of Marleau, Lemire
Securities, Inc., an investment banking and securities broker-dealer
headquartered in Montreal, Canada. From November 1993 through May 1995, Mr.
Perrault was an Investment Manager for Fonds de Solidarite des Travailleurs du
Quebec, a Canadian private merchant bank with approximately $1.5 billion in
assets under management. From March 1992 through November 1993, Mr. Perrault was
Manager, Corporate Finance, for KMPG Peat Marwick Thorne, the Canadian affiliate
of the international accounting and consulting firm.
ARIC FRONS, 54, DIRECTOR.
Mr. Frons was elected as a Director of the Company at a meeting of the
Board of Directors held on November 25, 1997. Mr. Frons retired from his
position as Creative Director, International Team, for McCann-Erickson Worldwide
in September of 1997. From March of 1995 to that date, he was based in Malaysia
and was responsible for working with major global accounts. Mr. Frons was
associated with McCann-Erickson since 1991, principally in New York City, with
the exception of approximately six months in 1994 when he was Vice President for
Stephen Gordet Associates in Miami, Florida. Mr. Frons is a first cousin of
Abraham Shafir, a Director of the Company and President of its Tabacalera
subsidiary.
24
<PAGE>
Each of the Directors and officers of the Company also serve in the same
capacities in TCI and Diversified. Mr. Shafir is Director and President and Mr.
Knudson is Director, Treasurer and Vice President of Tabacalera.
At a meeting of the Board of Directors held on November 25, 1997, the Board
unanimously approved the establishment of two committees of the Board of
Directors: the Audit Committee and the Conflicts Committee. Messrs. Rector,
Perrault and Frons were appointed to serve on both committees, with Mr. Rector
to serve as Chairman of both.
(b) Another key employee of the Company is MR. JUAN CAPELLAN, GENERAL
MANAGER OF TABACALERA. Mr. Capellan, who has spent over 20 years in the cigar
industry in the Dominican Republic, is operations manager at Tabacalera. Prior
to joining Tabacalera in May, 1996, Mr. Capellan was Factory Manager in charge
of Human Resources and Product Development at the Anillo de Oro plant in
Tamboril and was production supervisor at the E. Leon Jimenes factory, also in
Tamboril. Prior to that Mr. Capellan worked as a cigar roller at various
facilities in the Tamboril area.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.
(a) Security Ownership of Certain Beneficial Owners.
The following information relates to those persons known to the Company to
be the beneficial owner of more than ten percent (10%) of the Common Stock, par
value $.0001 per share, the only class of voting securities of the Company
outstanding, as of the date of this Prospectus.
<TABLE>
<CAPTION>
TITLE NAME AND OWNED OWNED OF CLASS
OF ADDRESS OF BEFORE AFTER THE AFTER
CLASS BENEFICIAL OWNER THE OFFERING OFFERING OFFERING
- ------------ -------------------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Common Abraham Shafir 925,000 (1) 925,000 (1) 15.3%
Stock, par c/o Tamboril Cigar shares shares
value $.0001 Company
per share 2600 S.W. Third Ave.
Miami, FL 33129
" Ian Markofsky 1,500,000 1,500,000 25.4%
c/o Viking Investment shares shares
Group II, Inc. ("Viking") Beneficial
630 Third Ave. ownership of
New York, NY 10017 shares held by
Viking
- -------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 800,000 shares owned directly and 125,000 shares issuable
pursuant to immediately exercisable options.
25
<PAGE>
(b) Security Ownership of Management.
The number of shares of Common Stock of the Issuer owned by the Directors
and Executive Officers of the Issuer is as follows:
<TABLE>
<CAPTION>
AMOUNT AND PERCENTAGE OF
NAME AND NATURE OF CLASS
TITLE OF ADDRESS OF BENEFICIAL AFTER OFFERING
CLASS BENEFICIAL OWNER OWNERSHIP
- --------- ------------------------ ------------- ---------------
<S> <C> <C> <C>
Common Anthony Markofsky 102,500 (1) 1.7%
Stock, Director, President and Shares
par value Chief Executive Officer
$.0001 c/o Tamboril Cigar Company
per share 2600 S.W. 3rd Ave.
Miami, FL 33129
" Thomas E. Knudson 102,500 (2) 1.7%
Director, Vice President Shares
c/o Tamboril Cigar Company
2600 S.W. 3rd Ave.
Miami, FL 33129
" Abraham Shafir 925,000 (3) 15.3%
Direct or Shares
c/o Tamboril Cigar Company
2600 S.W. 3rd Ave.
Miami, FL 33129
" David S. Rector 125,000 (4) 2.1%
Director, Secretary Shares
c/o David Stephen Group
1640 Terrace Way Direct
Walnut Grove, CA 94596
" Pedro J. Mirones 5,000 (5) less than 1%
Vice President and Chief
Financial Officer
c/o Tamboril Cigar Company
2600 S.W. 3rd Ave.
Miami, FL 33129 N/A
" All Officers and
Directors as a Group 1,260,000 (6) 20.8%
- -------------------------------------------------------------------------
</TABLE>
(1) Includes 90,000 shares owned directly and 12,500 shares issuable
pursuant to immediately exercisable options granted under the Company's
Employee Stock Option Plan.
(2) Includes 90,000 shares owned directly and 12,500 shares issuable
pursuant to immediately exercisable options granted under the Company's
Employee Stock Option Plan.
(3) Includes 800,000 shares owned directly and 125,000 shares issuable
pursuant to immediately exercisable options granted under the Company's
Employee Stock Option Plan.
(4) Includes 120,000 shares owned directly and 5,000 shares issuable
pursuant to immediately exercisable options.
(5) Includes 5,000 shares issuable pursuant to immediately exercisable
options.
(6) Includes 160,000 Shares issuable pursuant to immediately exercisable
options.
26
<PAGE>
(d) Options, Warrants and Rights
The number of Shares of Common Stock reserved for issuance pursuant to
options are:
<TABLE>
<CAPTION>
Title and Amount of
Securities Called
For By Options, Exercise Date Of
Name Of Holder Warrants or Rights Price Exercise
<S> <C> <C> <C>
Anthony Markofsky Common Stock, 25,000 $4.71 12,500 Currently
Shares exercisable
through November
25, 2002, 12,500
to vest on
November 25, 1998
if still employed
by the Company at
that date
Thomas E. Knudson Common Stock, 25,000 $4.71 12,500 Currently
Shares exercisable
through November
25, 2002, 12,500
to vest on
November 25, 1998
if still employed
by the Company at
that date
Abraham Shafir Common Stock, 250,000 $4.71 125,000 Currently
Shares exercisable
through November
25, 2002, 125,000
to vest on
November 25, 1998
if still employed
by the Company at
that date
Juan Capellan Common Stock, 50,000 $4.71 25,000 Currently
Shares exercisable
through November
25, 2002, 25,000
to vest on
November 25, 1998
if still employed
by the Company at
that date
Pedro Mirones Common Stock, 10,000 $4.71 5,000 Currently
Shares exercisable
through November
25, 2002, 5,000
to vest on
November 25, 1998
if still employed
by the Company at
that date
David Rector Common Stock, 10,000 $4.71 5,000 Currently
Shares exercisable
through November
25, 2002, 5,000
to vest on
November 25, 1998
if still a Director
of the Company at
that date
- --------------------------------------------------------------------------
</TABLE>
There are 225,000 shares of Common Stock reserved for issuance pursuant to
the Warrants and 200,000 shares of Common Stock received for issuance pursuant
to the Hubbard Warrants.
27
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The only voting security of the Company outstanding is its Common Stock,
par value $.0001 per share. The Company is authorized to issue up to 20,000,000
shares of Common Stock, par value $.0001 per share, of which 5,903,894 shares
are outstanding on the date hereof. Assuming conversion of all Convertible
Debentures and Series B Shares at the Conversion Prices in effect on December
17, 1997 and the exercise of all Warrants as of the date of this Prospectus,
there would be 7,154,125 shares outstanding. However, the terms of the Purchase
Agreement limit the number of shares into which any Selling Shareholder may
consent or exercise to an amount equal to 4.99% of the Company's issued and
outstanding common stock. Holders of Common Stock are entitled to one vote for
each share held of record on each matter submitted to a vote of stockholders.
There is no cumulative voting for election of directors. Subject to the prior
rights of any series of preferred stock which may from time to time be
outstanding, if any, including the Series B Shares, holders of Common Stock are
entitled to receive ratably, dividends when, as, and if declared by the Board of
Directors out of funds legally available therefor and, upon the liquidation,
dissolution, or winding up of the Company, are entitled to share ratably in all
assets remaining after payment of liabilities and payment of accrued dividends
and liquidation preferences on the preferred stock, if any. Holders of Common
Stock have no preemptive rights and have no rights to convert their Common Stock
into any other securities. The outstanding Common Stock is validly authorized
and issued, fully paid, and nonassessable.
In addition, 500,000 shares of Common Stock have been reserved for issuance
pursuant to the Company's Employee Stock Option Plan, 225,000 Shares of Common
Stock have been reserved for issuance pursuant to the Warrants and 200,000
shares of Common Stock have been reserved for issuance pursuant to the Hubbard
Warrants. See "SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
The shares of Common Stock being offered pursuant to this Prospectus are
reserved for issuance pursuant to conversion and exercise rights held by the
Selling Shareholders pursuant to (i) the Convertible Debentures , (ii) fifty-
six thousand (56,000) Series B Shares with an aggregate stated amount of
$2,800,000, (iii) 225,000 Warrants and (vi) 200,000 Hubbard Warrants. The
Convertible Debentures and the Series B Shares are convertible into shares of
Common Stock (i) at the option of the holder thereof at any time and (ii) if not
earlier converted, on the second anniversary of their issuance, in each case at
a conversion price based on the market value of the Company's Common Stock as
determined by a formula specified in the Convertible Debentures or the
Certificate of Designation for the Series B Shares, as applicable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series, to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of Preferred Stock and to fix the number of shares constituting any
series and the designations of such series, without any further vote or action
by the Company's stockholders. The Board of Directors, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company.
As of September 22, 1997, 116,000 shares of Preferred Stock were designated
as Series B Shares. There are 56,000 Series B Shares issued and outstanding and
held of record by the Selling Shareholders. Pursuant to the Purchase Agreement,
the Company may issue up to an aggregate of 116,000 shares of Series B Shares to
the Purchasers.
The holders of Series B Shares are entitled to an 8% cumulative dividend,
payable quarterly in cash or Common Stock (at the option of the Company). The
Series B Shares have no voting rights except that a vote of a majority of the
Series B Shares is required for any adverse change to the rights and
preferences of any class of stock senior to the Series B Shares. The Series B
Shares are convertible into Common Stock at a rate equal to $50 divided by the
lesser of (i) $4.71 or (ii) 77- 1/2% of the average market price per share of
the Common Stock for the five trading days immediately preceding conversion (the
"Per Share Market Value"). The number of shares of Common Stock that would be
issuable upon the conversion of Series B Shares shall be limited so that no
Selling Shareholder owns, at any one time, in excess of 4.99% of the issued and
outstanding Common Stock and may otherwise be reduced at the option of the
Company if the Per Share Market Value is below $3.
28
<PAGE>
The Series B Shares have dividend and liquidation preferences entitling the
holders thereof to receive such payments prior to any other security holders of
the Company. The Certificate of Designation of the Series B Shares is included
as Exhibit 4.3 to the Registration Statement of which this Prospectus is a part.
WARRANTS
As of December 17, 1997, there were Warrants outstanding to purchase an
aggregate of 225,000 shares of the Company's Common Stock at an exercise price
of $5.89 per share and 200,000 Hubbard Warrants exercisable at $5.85 per share.
Under the Purchase Agreement, the Company will issue warrants to purchase
additional shares of Common Stock if there are additional sales of Series B
Shares under the Purchase Agreement. The number of Warrants to be so issued and
the exercise price are to be determined by reference to the average market price
within five days of the issue date, if and when the Company issues the Series B
Shares. Each warrant contains or will contain provisions for the adjustment of
the exercise price and the aggregate number of share issuable upon exercise of
the warrant under certain circumstances, including stock dividends, stock
splits, reorganizations, reclassification and consolidations.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement entered into by the Company and
the Selling Shareholders, the Company has granted the Selling Shareholders and
their transferee rights to have the shares of Common Stock issuable upon
conversion of Series B Shares or the Convertible Debentures or upon exercise of
the Warrants registered for resale pursuant to an effective registration within
90 days of the closing date. Pursuant to the Distribution Agreement, Hubbard was
granted "piggyback" registration rights to register the Shares underlying the
Hubbard Warrants. This Prospectus is the result of such rights under the
Registration Rights Agreement and the Hubbard Warrants. The Company has agreed
to keep this Prospectus effective for three years or until all of the remaining
registered shares can be resold pursuant to Rule 144 of the Act. Holders of
registration rights also have unlimited rights to participate in registered
public offerings by the Company. These rights are subject to certain conditions,
including the right of the Company to defer a proposed offering for not more
than 60 days upon its good faith determination that it would be disadvantageous
to the Company.
<PAGE>
EXPERTS
The Consolidated Financial Statements of the Company as of December 31,
1996 and for the period from April 15, 1996 (Date Operations Commenced) to
December 31, 1996 included in this Prospectus, have been included herein in
reliance upon the report of Goldstein Golub Kessler & Company, P.C., independent
certified public accountants, given upon the authority of said firm as experts
in accounting and auditing.
COUNSEL
Certain legal matters in connection with the registration of the Shares
were passed upon by Kaplan Gottbetter & Levenson, LLP, counsel to the Company.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES.
The Company's Amended and Restated Certificate of Incorporation and By-laws
contain provisions eliminating the personal liability of a director to the
Company and its stockholders for certain breaches of his or her fiduciary duty
of care as a director. This provision does not, however, eliminate or limit the
personal liability of a director (i) for any breach of such director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Delaware statutory provisions making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve
on the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above), including grossly negligent business decisions made in connection with
takeover proposals for the Company. As a result of this provision, the ability
of the Company or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care has been limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or recision based upon a director's breach of his duty of care. The
SEC has taken the position that the provision will have no effect on claims
arising under the federal securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the Delaware General Corporation Law.
Under the Registration Rights Agreement the Selling Shareholders have agreed to
indemnify the Company from certain liabilities, including certain liabilities
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ORGANIZATION WITHIN THE LAST FIVE YEARS
(a) Abraham Shafir, Anthony Markofsky, Thomas Knudson, David Rector and
Ian Markofsky (through his ownership of Viking) each received the shares of the
Company's Common Stock, as founders' shares in consideration of their services
in organizing TCI, arranging for the manufacturing facility in Tamboril,
staffing that operation and commencing the product development process that led
to the Company's Connecticut Collection and Sumatra Collection product lines and
negotiating the Reorganization. At the time of issuance, the shares were of
29
<PAGE>
nominal value, and the Board of Directors of TCI determined that the value of
services rendered by each of Messrs. Shafir, Markofsky, Knudson and Rector
exceed the par value of the shares so issued. The shares in TCI held by each of
these individuals were exchanged for shares of the Issuer in connection with the
Reorganization on the same terms as all shareholders of TCI. See SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(b) The Company obtained loans totaling $2,950,000 from certain
shareholders of the Company and others to help finance its operations to date.
The total obtained from shareholders was $2,700,000. On September 30, 1997, the
Company repaid $ 1,149,935 in unpaid principal and interest of that debt with a
portion of the proceeds of the Private Offering and recapitalized the remaining
$1,984,681 by issuing to the remaining debtors 328,584 Units consisting of one
share of Common Stock and one five-year Warrant exercisable at a price of $5.89.
The combined value of each Unit was $6.04.
The names of all shareholders and other creditors, the amounts of their loans
and the amounts of cash repayments and/or Units issued were:
<TABLE>
<CAPTION>
Cash Units
Lender Amount of Loan Repayments Issued
- ------ -------------- ----------- ------
<S> <C> <C> <C>
Jenadosa Holdings Limited $ 75,000 $ 38,890 7,339
Jenadosa Holdings Limited 100,000 -0- 18,275
South Edge International Inc. 200,000 44,445 29,428
Shangri La Investments Ltd. 150,000 77,750 14,234
Shangri La Investments Ltd. 200,000 -0- 35,725
Tradewinds Investments Ltd. 300,000 319,973 -0-
Tradewinds Investments Ltd. 375,000 18,877 62,389
Tradewinds Investments Ltd. 500,000 -0- 86,546
Tradewinds Investments Ltd. 50,000 -0- 8,627
Tradewinds Investments Ltd. 300,000 -0- 51,070
Effingham Investments Limited 250,000 250,000 -0-
Effingham Investments Limited 200,000 200,000 2,320
Alphacom Data Security Services Ltd. 200,000 200,000 3,147
Highgate Resources Limited 50,000 -0- 9,484
All but Alphacom and Highgate are
shareholders of the Company
</TABLE>
(c) Viking Investment Group II, Inc. ("Viking"), which owns 1,500,000
shares (25.4%) of the Company's Common Stock, received those shares as founder's
shares in connection with Viking's efforts in founding the Company in
conjunction with Messrs. Shafir, Markofsky, Knudson and Rector as described
above. Ian Markofsky, the President and sole shareholder of Viking, is the
father of Anthony Markofsky, President and a Director of the Company. Viking
has also guaranteed the Company's obligations on the lease for its Miami
facilities.
(d) The shares of South Edge and Viking in TCI were exchanged for shares of
the Issuer pursuant to the Reorganization on the same terms as all other
shareholders of TCI.
(e) In April 1996 the Company assumed the lease on its current Miami
premises from United Health Partners ("UHP") and in connection with the
assumption of the lease purchased
30
<PAGE>
certain furniture and fixtures from UHP. Anthony Markofsky, President and a
Director, and Thomas Knudson, Vice President and a Director of the Corporation,
are also directors and officers of UHP. The Company was indebted to UHP in the
amount of $134,000 for advances on operating expenses made by UHP, which
advances were repaid in September of 1997. UHP no longer has any operations.
THE BUSINESS OF THE COMPANY
(A) BUSINESS DEVELOPMENT.
The Company manufactures and markets premium, hand-rolled cigars under the
TAMBORIL (TM), CORDOVA(TM) and FORE!(TM) brand names. TCI was incorporated in
April of 1996 to commercialize the efforts of its founders in order to create a
new premium brand of cigar. These founders believed that the strong growth in
the popularity of cigar smoking which can be traced back to 1992 had created a
demand for additional premium brands. Abraham Shafir, President of the
Company's Tabacalera manufacturing subsidiary, had previously lived in the
Dominican Republic and was intimately familiar with the long history of quality
tobacco growing and cigar production in that country. After investigating the
availability of a steady supply of high quality tobacco and the skilled labor
pool necessary to produce premium cigars by hand, the founders settled on the
town of Tamboril, acquired a warehouse and manufacturing facility and began the
process of formulating the blend of tobaccos and perfecting the fermenting,
curing, aging and rolling processes that have resulted in the Company's Tamboril
line of cigars.
The Company conducts its business through two principal operating
subsidiaries: (i) Tabacalera which conducts its business in the Dominican
Republic, where it contracts with tobacco growers and manufactures, packs and
ships Tamboril cigars to the United States and (ii), TCI which is the U.S. sales
and marketing company through which Tamboril cigars are sold through Hubbard to
tobacconists throughout the U.S. The Company has established a third subsidiary,
Diversified Tobacco Company, a Delaware corporation ("Diversified"), to
manufacture and/or distribute private label cigars and non-tobacco-related
products intended to capitalize on the Tamboril(TM) brand recognition. TCI is
wholly-owned by the Company and, in turn, owns all the issued and outstanding
common stock of Diversified and 99.4% of the issued and outstanding capital
stock of Tabacalera, with the remaining 0.6% owned by Dominican citizens as
required by the laws of that country.
The Company's corporate structure was established through a reorganization
that was completed in October 1996 (the "Reorganization"). The Reorganization
was effected through an Acquisition Agreement and Plan of Reorganization dated
October 23, 1996 by and between the Company and TCI (the "Reorganization"). In
the Reorganization the Company acquired all the issued and outstanding common
stock of TCI in exchange for 5,281,671 shares of the Company's Common Stock.
The Company was originally formed under the laws of the State of Washington on
May 24, 1937 for the primary purpose of engaging in the mining business and
operated under the name "Idaho Leadville Mines Co." Available corporate records
indicate that the Company did operate in the mining business at various times
since its inception. The Company engaged in only minimal activity for at least
five (5) years prior to the Reorganization and for the two (2) years prior to
the Reorganization the Company's business plan was to reorganize itself as a
vehicle to effect a
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merger, exchange of capital stock, asset acquisition, or other similar
combination with one or more operating businesses. From its formation until the
consummation of the Reorganization, the Company did not conduct any significant
commercial operations. Pursuant to the Reorganization, and in furtherance of its
new business plan, the Company's name was changed to "Tamboril Cigar Company"
and its state of incorporation was changed to Delaware. The Company's remaining
mining claims were, pursuant to the Reorganization, transferred to a corporation
controlled by the former controlling shareholders of the Company ("Mining Co.").
The principal shareholder of Mining Co. received the sum of $50,000 plus 50,000
shares of Common Stock. The Company retained a small minority interest (1,000
shares) in Mining Co, which was recently repurchased by Mining Co.
TCI commenced business in early 1996 under the name "Conquistador Cigar
Company" and changed its name to "Tamboril Cigar Company" to reflect its
business plan to market and distribute premium cigars under the "Tamboril" brand
name. As part of the Reorganization, the operating subsidiary changed its name
to "Tamboril Cigar International, Inc." Tabacalera was established in the
Dominican Republic for the purpose of purchasing, processing, rolling, finishing
and packaging tobacco grown in the Tamboril region into finished and packaged
cigars for export to the U.S. market. Tabacalera sells all its finished product
to TCI which markets and distributes premium cigars in the U.S. under the
TAMBORIL(TM), CORDOVA(TM) AND FORE!(TM) brand names.
(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 Hubbard for distribution to tobacconists nationwide
and which are sold at retail prices from $4 to $9.50 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 principal two
products lines: The CONNECTICUT COLLECTION and the SUMATRA COLLECTION.
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 red wine solution to enhance flavor, fermented, dried, stripped,
aged and hand-rolled into Tamboril cigars. In the rolling process, binder
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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 work through Hubbard to
expand sales of the current product line through increased sales, marketing and
promotional activities through existing distribution channels and expansion into
new channels. 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 reputation for
uncompromising quality, (iii) focusing on hands-on customer service to establish
a loyal following among tobacconists and (iv) expanding its product line 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.
The Company has recently 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.
The Company has also introduced a golf-theme novelty line of cigars in
October of 1997 under the brand name "FORE!(TM)". Fore!(TM) cigars are
displayed in a unique 30-cigar package, are sold in a novelty glass tube with a
golf motif 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 entered into a Cigar Production Agreement with Hubbard as of
October 1, 1997 to produce the Hamilton House Select(TM) brand cigars for
Hubbard through the year 2000, with multiple options for Hubbard to renew
thereafter.
The Company's business strategy is intended 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% since 1992 to more than 176,000,000 cigars in 1995 (the last full
year for which statistics are available). Industry experts have estimated that
this total will have grown to approximately 265,000,000 cigars for 1996, as
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
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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 has led to significant back orders
across the entire industry as existing inventories were insufficient to meet
demand. Several of the Company's larger competitors have had difficulty in
filling these back orders and are adding additional capacity to meet consumer
demand. The Company believes this places it in an advantageous competitive
position, as the current mismatch of supply and demand creates unprecedented
opportunity for new brands to penetrate the market. Management believes that the
success of its initial sales and marketing efforts, as evidenced by its
penetration into over 500 of the country's finer tobacco retailers, is a strong
indication that the Company's cigars are well positioned to take advantage of
the ongoing growth of the premium cigar market.
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 has been 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. To date, the Company's product introductions have been conducted with
over 500 retail outlets throughout the United States.
The Company began operations in April 1996 and in the period from inception
to December 31, 1996 recorded sales in excess of $1,400,000. For the nine
months ended September 30, 1997, sales were $4,403,640. On July 7, 1997, the
Company entered into a distribution agreement (the "Distribution Agreement")
with Hubbard Imports that the Company believes will result in sales of
approximately $5,000,000 in the period between June 1, and December 31, 1997.
Sales of $2,669,715 have been made to Hubbard in the period from June 1 through
September 30, 1997. Until June of 1997 the Company sold its products through
several different distributors and directly to retail tobacconists. The Company
pursued its relationship with Hubbard to take advantage of Hubbard's broad
network of tobacco subdistributors in order to more rapidly expand the Company's
sales. Pursuant to the Distribution Agreement, Hubbard was appointed sole U.S.
distributor of the Company's products in the U.S. until December 31, 2000 with
two successive three-year options by Hubbard to renew the Distribution Agreement
so long as Hubbard meets
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minimum annual purchase requirements that are to be set in January of each year
for the current calendar year.
The Company has begun an extensive advertising and promotional campaign
centered on 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
Hubbard's sales efforts relating to the Company's products.
The Company has entered into a licence agreement with 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 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, the current demand for high-grade
tobacco for use in premium cigars may result in higher prices and/or scarcities
which could, if they occur, have a materially adverse impact on the Company's
business.
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EMPLOYEES
The Company currently employs approximately 131 full-time employees:
five in its Miami offices and 126 in the Dominican Republic. Of these,
approximately three are engaged in sales and marketing, ten in administrative
roles, and 113 in manufacturing. 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. While the Company
believes its requirements for skilled workers will be met for the foreseeable
future, there can be no assurance that the significant backlog of orders in the
cigar industry and the increased demand for workers to meet that demand will not
make it difficult or prohibitively expensive for the Company to attract and
retain a sufficient staff of skilled rollers to meet its business plan.
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 has applied for trademark protection on the
marks and/or design logos TAMBORIL, CORTADITO, DIABLO, THE OFFICIAL CIGAR OF
WALL STREET, SERIOUS CIGARS MADE BY SERIOUS SMOKERS and CONQUISTADOR, and has
made application for the marks FORE! and CORDOVA in the United States. The
Company also relies on certain non-patentable trade secrets to produce the
distinctive flavors and aromas of its brands of cigars. 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. (NYSF 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 is growing rapidly enough to support the entry of new brands such
as those offered by the Company and that the inability of the entrenched
competitors to meet current
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demand, as evidenced by their large back order positions, supports this
position. Hubbard currently distributes several brands of cigars that compete
directly with the Company's products.
POSSIBLE CONSTRAINTS ON MEETING DEMAND
The substantial growth in demand for cigars has 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. While (i) the Company has not
yet experienced such shortages, (ii) the Company believes 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 (iii)
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
be no assurance that the Company will not experience such shortages. 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.
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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.
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.
DEPENDENCE ON HUBBARD
Management of the Company believes that its Distribution Agreement with
Hubbard will enable the Company to expand sales more rapidly than it would be
able to do through its direct sales force. However, since Hubbard will be the
exclusive U.S. distributor of the Company's products, the Company will be
totally dependent on Hubbard for its U.S. sales. The Distribution Agreement
provides that minimum annual purchase commitments will be mutually agreed upon
bribution Agreement. Should the Company and Hubbard fail to reach agreement on
such minimum commitments, the Distribution Agreement could terminate. In the
event the Distribution Agreement is terminated or if Hubbard fails to honor its
minimum purchase commitments, the Company would be forced to obtain another
distributor or distributors for its product and/or to implement an internal
sales force to sell the Company's products to retail tobacconists and other
outlets. The termination of the Distribution Agreement or the failure of
Hubbard to purchase its minimum commitments from the Company would have a
material adverse effect on the business and prospects of the Company.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company was incorporated and began start-up operations in April of
1996. In the period from the commencement of operations on April 15, 1996
through September 30, 1996, the Company was primarily engaged in locating a site
in the Dominican Republic at which to conduct manufacturing operations,
negotiating with tobacco growers to ensure supplies of quality tobacco,
recruiting employees and product development to establish the blends of tobaccos
and the curing and aging processes to create the Company's cigars. Sales for
the three and nine month periods ended September 30, 1996 totaled $94,119 and
total expenses were $297,693 and $396,899, respectively, resulting in net losses
of $203,574 for the three months and $302,780 for the nine months ended
September 30, 1996. Since the Company was barely operational at that time,
comparisons between the three month and nine month periods ended September 30,
1996 and the three- and nine-month periods ended September 30, 1997 are not
appropriate and could, in fact, be misleading.
Due to the foregoing, the following information discusses the results of
operations, liquidity and capital resources and related matters for the three
months and nine months ended September 30, 1997 and compares such results to
those for the year ended December 31, 1996. All information relates to the
consolidated results and financial condition of the Company and its two
principal operating subsidiaries, 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 ended December 31, 1996.
In April of 1997, the Company introduced its CORDOVA(TM) line of cigars and in
October 1997 introduced FORE!(TM), a golf-motif cigar. On July 7, 1997 the
Company entered into a distribution agreement with Hubbard Imports, a Florida
partnership ("Hubbard") pursuant to which Hubbard became the exclusive U.S.
distributor for the Company's products (the "Distribution Agreement"). The
Company intends focusing on manufacturing and marketing activities, leaving
virtually all day-to-day sales activities to Hubbard.
The market for sales in the United States of premium cigars, generally
defined to be those made by hand and retailing for prices in excess of $1, has
expanded considerably since 1993 after declining consistently from 1964 through
1992. Management of the Company believes that the demographic factors
underlying the growth in the cigar market since 1993 will contribute to
continued expansion of the market for at least the next few years. Among these
factors are (1) the emergence of an expanding base of younger new cigar smokers,
both male and female, (2) increasing popularity of cigars among celebrities who
are viewed as trend-setters, (3) increased media interest, especially the
successful launch of Cigar Aficianado magazine, (4) promotion of "cigar
friendly" restaurants and nightclubs and (5) the increase in the population of
people over fifty years of age, a group that has traditionally been viewed as
consuming more luxury goods, including cigars, than any other demographic group.
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The Company has established one manufacturing facility in the Dominican
Republic and is building a second facility to meet estimated increased demand
for the Company's cigars. The growth of the demand for cigars in general, and
premium cigars in particular, has created substantial competition within the
industry for the purchase of raw tobacco used in manufacturing cigars and for
the skilled labor required to roll cigars by hand. While the Company has not
yet experienced any shortages of tobacco or labor, there can be no assurance
that it will not encounter such difficulties as it expands its operations. The
effect of any shortages of materials or labor could be to prevent the Company
from filling demand or to make the cost of doing so prohibitive.
RESULTS OF OPERATIONS
The following discussion relates to the consolidated operations of the
Company and its subsidiaries, TCI and Tabacalera for the period from inception
at April 15, 1996 through December 31, 1996 and for the three- and nine-month
periods ended September 30, 1997. The Company is a holding company, the sole
assets of which are the capital stock of TCI and Tabacalera and the operations
summarized, therefore, relate to the consolidated operations of these operating
subsidiaries.
Net sales for the period ended December 31, 1996 were $1,413,815,
representing sales of the Company's first two product lines, the CONNECTICUT
COLLECTION and the SUMATRA COLLECTION from April 15 through December 31, 1996.
Most of these sales occurred in the fourth quarter of 1996, as the initial
period was spent organizing the Company's facilities, hiring a skilled work
force and formulating the blends of tobacco and other ingredients used in
manufacturing the Company's brands. The Company intends to work with Hubbard to
increase sales of these two product lines by increasing the number of retail
tobacconists to whom the products are distributed and by opening additional
distribution channels. In addition, the Company has introduced CORDOVA(TM) ,
which is a more moderate priced line of cigars, and FORE!(TM), a golf-motif
packaged cigar designed for sale in golf pro shops and golf equipment outlets.
The Company believes that its products are well-placed to take advantage of the
continued growth of the cigar market and that the results from the periods from
inception to December 31, 1996 and January 1 through September 30, 1997 support
management's views.
In the period from January 1 through July 7, 1997, the Company sold its
products directly to retail tobacconists throughout the United States, utilizing
a sales force of five employees. On July 7, 1997 the Company entered into the
Distribution Agreement with Hubbard, pursuant to which Hubbard was appointed
exclusive distributor for the Company's products in the United States through
December 31, 2000 (the "Distribution Agreement"). Under the Distribution
Agreement, Hubbard must maintain certain minimum annual purchases from the
Company to continue to have the exclusive rights to distribute the Company's
cigars in the United States. These minimum amounts are to be set each January
for the ensuing calendar year. Management of the Company believes that,
although operating through a distributor such as Hubbard will lower the
Company's gross profit margins, it will enable the Company to more rapidly
penetrate its target market for premium cigars. In addition, the Company
believes that the Hubbard relationship will result in lower costs of sales,
marketing and promotion, resulting in significant gains in net profits.
Net sales for the three- and nine-month periods ended September 30, 1997
were $1,864,652 and $4,403,640, respectively. Sales to Hubbard in the three-
and nine-month periods ended
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September 30, 1997 accounted for $1,516,023 (81%) and $2,669,715 (61%) of total
sales, respectively, in those periods. Sales included initial sales of
Cordova(TM), which was introduced in April of 1997. There were no sales of
Fore!(TM) in the period. Sales of Fore!(TM) are expected to begin to have an
impact in the fourth quarter of 1997. The Distribution Agreement is expected to
contribute approximately $5,000,000 in total to sales in calendar 1997, of which
$2,669,715 have occurred as of September 30, 1997.
The Company is currently building a second manufacturing facility to
increase capacity from approximately 300,000 cigars to approximately 800,000
cigars per month. The Company believes that market conditions for cigars
generally and for the Company's products (based on initial product reaction) are
sufficient to account for this additional capacity and that the Company's sales
have the potential to grow considerably from the partial year results reflected
in the financial statements for the periods from April 15, 1996 through December
31, 1996 and January 1, 1997 through September 30, 1997. There can be no
assurance, however, that the Company's products will receive market acceptance
or that sales will increase, or even maintain the initial sales figures.
Cost of goods sold in the period from April 15, 1996 through December 31,
1996 amounted to $573,687 or 41% of sales, leaving gross profits of $840,128, or
59%. Costs of goods sold during the three- and nine-month periods ended
September 30, 1997 were $892,688 and $1,799,068 or 48% and 41% of sales,
respectively. Accordingly, gross profits for the three- and nine-month periods
ended September 30, 1997 were $971,964 (52% of sales) and $2,604,572 (59% of
sales), respectively. Management of the Company believes these percentage levels
of gross profit compare favorably with industry norms, but that the pricing to
Hubbard under the Distribution Agreement and the introduction of new products
aimed at lower-priced market niches will result in lower gross profits
percentages in the future.
Selling, general and administrative expenses from April 15, 1996 through
December 31, 1996 totaled $1,034,386, or 73% of sales, representing the costs
of establishing the Company infrastructure. These levels should decline
substantially as a percentage of total revenues as the Company's operations in
manufacturing and sales expand. The Company spent approximately $120,000 in
advertising and travel expenses for new brand introductions. Expenses in this
category should increase in actual dollars, but should decline as a percentage
of total sales if the Company is successful in expanding its sales according to
plan. Selling, general and administrative expenses in the three- and nine-month
periods ended September 30, 1997 totaled $541,325 (29% of sales) and $2,039,736
(46% of sales), respectively. The lower percentage over the three months
compared with the nine months is attributable to Hubbard's taking over much of
the sales function since the execution of the Distribution Agreement.
Management believes that this percentage will stabilize over the next few
quarters as Company advertising levels will increase to support expanded sales
efforts by Hubbard.
The Company experienced a loss from operations from April 15, 1996 through
December 31, 1996 of $194,258, principally due to the expenses of establishing
the Company and formulating and promoting its first product lines. Interest
expense was $27,369, representing the expense associated with loans obtained by
the Company to support start-up costs and operations. The Company obtained
additional loans of approximately $1,975,000 since December 31, 1996. Net
interest expense was $163,516 for the nine months ended September 30, 1997. All
the Company's loans were recapitalized on September 30, 1997.
41
<PAGE>
Income from operations for the three- and nine-month periods ended
September 30, 1997 was $430,639 and $725,336, respectively. Interest expense
for the three- and nine-month periods was $81,478 and $163,516 respectively,
resulting in net income for the periods of $223,161 and $435,820. Interest
expense in future periods will be decreased by approximately $60,000 per quarter
due to the recapitalization of certain debt of the Company as of September 30,
1997, but will be increased by approximately $5,000 per quarter by virtue of the
Company's 8% Convertible Debentures issued in connection with a $3,000,000
financing completed on September 23, 1997. See "LIQUIDITY AND CAPITAL
RESOURCES." While the Company has been able to generate net profits in the past
three quarters, the Company is still in the early stages of its growth and
there can be no assurance that the Company's products will attain sufficient
market acceptance or that expenses will stabilize at levels that will result in
profits in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company had negative cash flows from operating activities of $1,410,528
for the period from April 15, 1996 to December 31, 1996. Cash inflows from
financing activities during that period totaled $2,040,589, consisting of
$931,810 in net proceeds from sales of its capital stock and $975,000 in
proceeds of loans evidenced by promissory notes from investors and $133,779 in
advances from a related party. During that period the Company purchased
property and equipment totaling $384,122. This resulted in cash available at the
end of the period of $245,939. The Company incurred additional debt of
approximately $1,975,000 in the period from December 31, 1996 through September
30, 1997 to support continued construction of its second manufacturing facility
in the Dominican Republic and advanced construction costs for TAMBORIL AT THE
PARK. On September 30, 1997, a total of $1,984,681 in aggregate principal and
interest of the Company's debt was recapitalized by the issuance of 328,584
shares of Common Stock and 328,584 five-year warrants to purchase shares of
Common Stock at an exercise price of $5.89 per Share. This recapitalization will
materially decrease the Company's debt service requirements and, thus, increase
the Company's cash available for operations. The Company also repaid an
additional $1,149,935 in principal and accrued interest on its outstanding debt
on September 30, 1997.
From January 1 through September 30, 1997, the Company had negative cash
flow from operations of $1,526,270, namely due to significant increases in
accounts receivable ($818,000), inventory ($1,340,000) and advances on tobacco
purchases ($436,000), all attributable to the Company's increased sales,
primarily due to the Distribution Agreement. These were offset by operating
income of $430,639 for the three month, and $725,336 for the nine months, ended
September 30, 1997. Net interest expense of $81,478 for the three months, and
$163,516 for the nine months, ended September 30, 1997, resulted in pretax
income of $349,161 for the three months, and $561,820 for the nine months, ended
September 30, 1997.
Net cash inflows from financing activities during the nine months ended
September 30, 1997 was $3,475,852, representing approximately $2,600,000 in net
proceeds of the Private Offering described below in "RECENT SALES OF
UNREGISTERED SECURITIES" and the recapitalization of the Company's debt. Cash
flows used for investing activities during the nine month period ended September
30, 1997 amounted to $515,857, representing capital expenditures related to the
construction of the Company's second manufacturing facility in the Dominican
Republic. Capital expenditures for the remainder of 1997 are expected to
approximate $300,000.
42
<PAGE>
As of September 30, 1997, cash on hand was $1,679,664. The cash on hand
as of September 30, 1997 is expected to be sufficient to finance the Company's
anticipated capital expenditures, increases in working capital requirements, and
its financing of tobacco growers for the remainder of 1997. The Company has no
lines of credit or similar arrangements with banks or other traditional lending
services.
The Company plans to use the remaining proceeds from the sale of Series B
Shares and Convertible Debentures to support expansion of manufacturing and
sales and marketing activities. The Company will most likely seek to require the
Purchasers to provide the additional up to $3,000,000 in financing available
under the Purchase Agreement to support expansion including additional inventory
and increased marketing expenditures. Failure to obtain such equity capital
could have a material adverse impact on the Company's ability to expand its
operation. There can be no assurance that the Company will meet the conditions
to such additional sales set forth in the Purchase Agreement or that equity
capital will be otherwise available to the Company on acceptable terms or at
all.
INFLATION
Inflationary trends in the time the Company has been in operation have not
been material. Historically, cigar companies, especially manufacturers of
premium cigars, have been able to pass most inflationary increases through to
their customers through price increases.
TAXATION AND REGULATION; EXCISE TAXES
Cigars have long been subject to federal, state and local excise taxes and
it is frequently suggested that additional excise taxes be levied on such
products to support various legislative programs. The federal excise tax on
large cigars, such as those manufactured and distributed by the Company, is
currently 12.75% of the manufacturer's selling price net of the excise tax and
certain other exclusions, with a maximum tax of $30 per 1,000 cigars. The
Company is unable to predict whether significant iuture. Such increases were
proposed by the Clinton Administration in 1993 to fund that administration's
health care reform initiatives, but were not enacted by Congress. Imposition
of significant increases in excise taxes could have a material adverse impact on
the large cigar industry in general and the Company in particular.
REGULATION
Cigar manufacturers, like other producers of tobacco products, are subject
to regulation at the federal, state and local levels. Since the early 1970's
the trend has been for increasing regulation, which when coupled with changing
public attitudes toward smoking, has had the effect of reducing overall
consumption of tobacco products in the United States. Federal law has required
warning labels on cigarettes since 1965, though no such warnings have been
required for cigars. Recent federal law enacted by Congress has required states
applying for certain federal grants for substance abuse programs to adopt a
minimum age of 18 for purchase of tobacco products and to establish elaborate
enforcement programs to support this requirement. Legislation proposed but not
enacted by Congress has sought to impose (1) bans on advertising of tobacco
products or on the deductibility of such advertising expenses for federal tax
purposes, (2) additional labeling, warnings or listings of additives, (3)
preemption of state law to impose civil liabilities on manufacturers and
distributors
43
<PAGE>
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.
DESCRIPTION OF PROPERTY.
(a) The Company maintains its administrative, sales and marketing offices
in its headquarters which consists of approximately 5,800 square feet of space
leased from an unrelated party at 2600 S.W. 3rd Avenue, Miami, FL 33129. The
Company's lease extends to March, 2001, with an option to renew for an
additional 5 years, and is at rates which the Company believes are competitive
for like space in its area. Annual rental payments under this lease are $93,000
as of April 1, 1997, $99,000 as of April 1, 1998, with annual increases
thereafter tied to the Consumer Price Index. The Company believes this facility
will be adequate for the foreseeable future and that, if additional space were
needed, it could be obtained in close geographic proximity at similar rates. The
Company's obligations under the lease are guaranteed by Viking, which is a
substantial shareholder of the Company. Ian Markofsky, the President and sole
shareholder of Viking, is the father of Anthony A. Markofsky, the Company's
President and a Director.
44
<PAGE>
The Company's manufacturing facilities are housed in a mixed use facility
of approximately 6,700 square feet leased by Tabacalera at Calle Real #167,
Tamboril, Santiago de los Caballeros, Republica Dominica. This facility also
houses warehouse and administrative offices of Tabacalera. Tabacalera is
currently building an additional facility on land owned outright by Tabacalera
adjacent to its existing facility. This facility will consist of approximately
33,000 square feet and is projected to approximately double the Company's
existing manufacturing capacity.
(b) The Company does not invest in real estate, other than as incident to
its manufacturing operations.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
At a meeting of the Board of Directors of the Company held on November 25,
1997, the Board approved a consulting contract with Viking Investment Group II,
Inc. ("Viking") pursuant to which Viking is rendering consulting services to the
Company in identifying and negotiating with potential strategic marketing
partners and potential acquisition targets. Viking is to receive a flat fee of
$25,000 per month for the four months beginning October, 1997 and ending
January, 1998 and, if the Company is successful in completing a joint venture,
acquisition or financing arranged with the assistance of Viking, success fees to
be determined at the time the transaction is concluded. Viking owns 1,500,000
shares of the Company's common stock and Ian Markofsky, the President and sole
shareholder of Viking, is the father of Anthony Markofsky, President of the
Company and Ian Markofsky, through his ownership of Viking, is a principal
shareholder of the Company. SEE "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT."
45
<PAGE>
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 resumed 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, the first three quarters of 1997, and the fourth
quarter of 1997 through December 17, 1997, as reported by National Quotation
Bureau, LLC, are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
QUARTER HIGH BID PRICE LOW BID PRICE
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
1995 Q1 (1/3-3/31) None None
- -------------------------------------------------------------------------------
Q2 (4/3-6/30) None None
- -------------------------------------------------------------------------------
Q3 (7/3-9/29) None None
- -------------------------------------------------------------------------------
Q4 (10/2-12/29) None None
- -------------------------------------------------------------------------------
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 (10/1-12/17) 4.90625 3.00
- -------------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Prices for the period November 5, 1996 through November 7, 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.
(b) The approximate number of holders of record of the Company's Common
Stock according to ADP Proxy Services is 1,109.
(c) The Company has not paid any cash dividends on its Common Stock, nor
does it intend to do so in the foreseeable future. Under the General
Corporation Law of the State of Delaware, the Issuer may only pay dividends out
of capital and surplus, or out of certain delineated retained earnings, all as
defined in the General Corporation Law. There can be no assurance that the
Issuer will have such funds legally available for the payment of dividends in
the event that the Issuer should decide to do so.
EXECUTIVE COMPENSATION
The aggregate annual remuneration of the Company's Chief Executive Officer for
the Year ended December 31, 1996 was:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Name of Individual or Capacities in Which
Identity of Group Remuneration Was Aggregate Remuneration
Received
- ------------------------------------------------------------------------------
<S> <C> <C>
Abraham Shafir President and CEO of Tabacalera $157,000(1)
- ------------------------------------------------------------------------------
</TABLE>
(1) Includes $120,000 in salary and non-cash compensation of $37,000 relating to
life insurance, health insurance and use of a Company automobile.
No other officer was paid in excess of $100,000.
47
<PAGE>
FINANCIAL STATEMENTS
Registrant's Consolidated Financial Statements as of December 31, 1996 and
for the period from April 15, 1996 (Date Operations Commenced) to December 31,
1996, and the independent auditors' report of Goldstein Golub Kessler & Company,
P.C., independent certified public accountants, with respect thereto, appear on
pages F-1 to F-10 of this Registration Statement on Form SB-2. Registrant's
Unaudited Consolidated Financial Statements as of September 30, 1997 and for
the Nine Months Ended September 30, 1997 appear on pages F-11 to F-19 of this
Registration Statement on Form SB-2.
48
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
49
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
================================================================================
INDEPENDENT AUDITOR'S REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity F-5
Statement of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-10
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, 1996, 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. 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 audit.
We conducted our audit 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 audit provides 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, 1996, and the results of their
operations and their cash flows for the period from April 15, 1996 (date
operations commenced) to December 31, 1996 in conformity with generally accepted
accounting principles.
/s/ Goldstein Golub Kessler & Company, P.C.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
January 24, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
==============================================================================================
<S> <C>
DECEMBER 31, 1996
- -----------------------------------------------------------------------------------------------
ASSETS (Note 10)
Current Assets:
Cash (Note 1) $ 245,939
Accounts receivable - less allowance for doubtful accounts of $15,000 275,696
Inventory (Notes 1 and 2) 813,938
Advances to suppliers 181,588
Other current assets 31,419
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 1,548,580
- -----------------------------------------------------------------------------------------------
Property and Equipment, net (Notes 1 and 3) 359,798
Other Assets 103,550
- -----------------------------------------------------------------------------------------------
TOTAL ASSETS $2,011,928
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 122,308
Accrued expenses and other current liabilities 65,658
Due to related party (Note 6) 133,779
- -----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 321,745
Notes Payable (Note 4) 250,000
Notes Payable - stockholders (Note 7) 725,000
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,296,745
- -----------------------------------------------------------------------------------------------
Commitments (Note 8)
Stockholders' Equity (Notes 1 and 5):
Common stock - $.0001 par value; authorized 20,000,000 shares, issued 5,575,310 557
Additional paid-in capital 936,253
Accumulated deficit (221,627)
- -----------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY 715,183
- -----------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,011,928
===============================================================================================
</TABLE>
See notes to 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 DECEMBER 31, 1996
- ---------------------------------------------------------------------------
<S> <C>
Net sales (Notes 1 and 10) $1,413,815
Cost of goods sold 573,687
- ---------------------------------------------------------------------------
Gross profit 840,128
Selling, general and administrative expenses 1,034,386
- ---------------------------------------------------------------------------
Loss from operations (194,258)
Interest expense 27,369
- ---------------------------------------------------------------------------
Net loss $ (221,627)
===========================================================================
Net loss per common share (Note 1) $ (.05)
===========================================================================
Weighted average number of common shares outstanding (Note 1) 4,651,502
===========================================================================
</TABLE>
See notes to financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
==================================================================================================
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock 2,600,000 $260 $ (50) - $ 210
Issuance of common stock for
professional services 25,000 2 4,998 - 5,000
Issuance of common stock for cash 2,833,338 283 989,717 - 990,000
Issuance of common stock in reverse
acquisition (Note 1) 116,972 12 (58,412) - (58,400)
Net loss - - - $(221,627) (221,627)
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,575,310 $557 $936,253 $(221,627) $ 715,183
==================================================================================================
</TABLE>
See notes to 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 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------
<S> <C>
Cash flows from operating activities:
Net loss $(221,627)
Provision for doubtful accounts 15,000
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 24,324
General and administrative expenses paid by issuance of stock 5,000
Changes in operating assets and liabilities:
Increase in accounts receivable (290,696)
Increase in other current assets (31,419)
Increase in advances to suppliers (181,588)
Increase in inventory (813,938)
Increase in other assets (103,550)
Increase in accounts payable 122,308
Increase in accrued expenses and other current liabilities 65,658
- --------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (1,410,528)
- --------------------------------------------------------------------------------------
Cash flows from investing activity - purchase of property and equipment (384,122)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 250,000
Proceeds from issuance of notes payable - stockholders 725,000
Proceeds from advances by related party 133,779
Net proceeds from issuance of common stock 931,810
- --------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 2,040,589
- --------------------------------------------------------------------------------------
Net increase in cash and cash at end of period $ 245,939
======================================================================================
</TABLE>
See notes to financial statements.
F-6
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
1. PRINCIPAL Tamboril Cigar Company is a manufacturer and
BUSINESS distributor of handmade cigars. The tobacco is
ACTIVITY AND purchased and the cigars are manufactured at
SIGNIFICANT facilities in the Dominican Republic and sold to
ACCOUNTING retail tobacconists throughout the United States.
POLICIES:
The accompanying consolidated financial statements
at December 31, 1996 and for the period from April
15, 1996 (date operations commenced) to December
31, 1996 include the accounts of Idaho Leadville
Mines Co. (an inactive company), Tamboril Cigar
Company and Tamboril Cigar Company's wholly owned
and majority-owned subsidiaries, Diversified
Tobacco Company and Tabacalera Tamboril SA.
(collectively the "Company"). All intercompany
transactions and balances have been eliminated in
consolidation.
On October 23, 1996, Idaho Leadville Mines Co.
acquired all of the outstanding common stock of
Tamboril Cigar Company. For accounting purposes
the acquisition has been treated as a
recapitalization of Tamboril Cigar Company with
Tamboril Cigar Company as the acquirer (reverse
acquisition).
Subsequent to December 31, 1996, Tamboril Cigar
Company changed its name to Tamboril Cigar
International Inc. and Idaho Leadville Mines Co.
reincorporated in the state of Delaware by merging
into a newly formed Delaware company called
Tamboril Cigar Company.
Revenue from the sale of products is recognized at
the date of shipment to customers.
Depreciation of property and equipment is provided
for by the straight-line method over the estimated
useful lives of the respective assets.
Amortization of leasehold improvements 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.
Loss per share is calculated based upon the
weighted average number of shares of common stock
outstanding during the year.
Management does not believe that any recently
issued, but not yet effective, accounting
standards if currently adopted would have a
material effect on the accompanying consolidated
financial statements.
The Company and the cigar industry in general have
recently experienced shortages in certain types of
natural wrapper and filler due to the increase in
demand for tobacco for premium cigars. Although
the shortages have not materially impacted cigar
production, no assurance can be made that future
shortages will not have an adverse effect on the
Company.
F-7
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================
Based on the borrowing rates currently available
for loans with similar terms and average
maturities, the fair value of the notes payable
and notes payable - stockholders approximates the
carrying amount.
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 for the period ended
December 31, 1996.
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: Inventory consists of the following:
<S> <C>
Raw materials $454,789
Finished goods 359,149
-----------------------------------------------------------------
$813,938
=================================================================
3. PROPERTY AND Property and equipment, at cost, consists of the following:
EQUIPMENT:
Estimated
Useful Life
-----------------------------------------------------------------
Machinery and equipment $176,821 5 to 7 years
Land 97,691
Buildings and building
improvements 41,206 20 years
Furniture and fixtures 16,194 5 years
Computers 11,118 5 years
Leasehold improvements 41,092 Term of lease
-----------------------------------------------------------------
384,122
Less accumulated depreciation
and amortization 24,324
------------------------------------------------------------------
$359,798
==================================================================
Approximately $270,000 of the Company's property and equipment
(net of $13,856 accumulated depreciation) is located in the
Dominican Republic.
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==============================================================================================
4. NOTES PAYABLE: Notes payable consist of the following:
<S> <C>
Note payable - Highgate Resources Ltd.:
Due April 1998 bearing interest at 10% per annum $ 50,000
--------------------------------------------------------------------
Note payable - Alphacom Data Security Services Ltd.:
Due October 1998 bearing interest at 10% per annum $200,000
--------------------------------------------------------------------
$250,000
====================================================================
5. STOCKHOLDERS' On April 16, 1996, the Company issued 25,000 shares of common stock
EQUITY: to its attorney in exchange for services valued at $5,000. On
October 23, 1996, the Company issued 116,972 shares of common stock
to the stockholders of Idaho Leadville Mines Co. in a transaction
accounted for as a reverse acquisition (see Note 1).
6. RELATED PARTY The Company purchased furniture and fixtures from United Health
TRANSACTIONS: 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.
There is an amount due UHP of approximately $134,000 that is
noninterest-bearing and due on demand.
7. NOTES PAYABLE - Notes payable - stockholders consist of the following:
STOCKHOLDERS:
Notes payable - Jenadosa Holdings Limited:
Due August 1998 bearing interest at 10% per annum $ 75,000
Due September 1998 bearing interest at 10% per annum 100,000
Note payable - South Edge International Inc.:
Due August 1998 bearing interest at 10% per annum 200,000
Notes payable - Shangri La Investments Ltd.:
Due October 1998 bearing interest at 10% per annum 150,000
Due December 1998 bearing interest at 10% per annum 200,000
--------------------------------------------------------------------
$725,000
====================================================================
</TABLE>
F-9
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
<C> <S>
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:
Year ending December 31,
1997 $ 87,000
1998 93,000
1999 99,000
2000 99,000
2001 25,000
--------------------------------------------------------------------
$403,000
====================================================================
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 was
approximately $38,000.
The Company's lease commitment for office space is guaranteed by a
stockholder of the Company.
9. INCOME TAXES: As of December 31, 1996, the Company has a net operating loss
carryforward for both financial reporting and income tax purposes
of approximately $223,000 available to offset future income through
2011. There were no material temporary differences between the book
bases and tax bases of assets and liabilities. This resulted in a
deferred income tax asset of approximately $55,000 for which the
Company recorded a full valuation allowance due to uncertainty
of future realization of such losses.
10. 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 for 1996:
Net sales to unaffiliated customers:
United States $1,413,815
Dominican Republic 0
----------
Net sales as reported in the accompanying
consolidated statement of operations $1,413,815
==========
Inter-area sales:
United States $0
Dominican Republic 538,604
----------
Total inter-area sales $538,604
==========
Loss from operations:
United States ($14,801)
Dominican Republic (206,826)
----------
Net loss as reported in the accompanying
consolidated statement of operations ($221,627)
==========
Identifiable assets:
United States $806,453
Dominican Republic 1,182,378
----------
1,988,831
General corporate assets 23,097
----------
Total assets as reported in the accompanying
consolidated balance sheet $2,011,928
==========
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.
</TABLE>
F-10
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
Consolidated Balance Sheet
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $1,679,664 $ 245,939
Accounts receivable, net of allowance for doubtful
accounts of $65,000 and $15,000, respectively 1,094,132 275,696
Inventory 2,153,680 813,938
Advances to tobacco growers 617,451 181,588
Prepaid expenses and other current assets 43,334 31,419
- -----------------------------------------------------------------------------------------
Total Current Assets 5,588,261 1,548,580
- -----------------------------------------------------------------------------------------
Property and equipment 828,570 359,798
Other assets 203,049 103,550
- -----------------------------------------------------------------------------------------
Total Assets $6,619,880 $2,011,928
=========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 422,087 122,308
Accrued expenses and other current liabilities 435,442 65,658
Due to related party - 133,779
- -----------------------------------------------------------------------------------------
Total Current Liabilities 857,529 321,745
- -----------------------------------------------------------------------------------------
Notes Payable - 250,000
Notes Payable Stockholders - 725,000
Debentures 200,000
- -----------------------------------------------------------------------------------------
Total Liabilities 1,057,529 1,296,745
- -----------------------------------------------------------------------------------------
Stockholders' Equity:
Series B 8% Convertible preferred stock-$0.0001 par
value; $50.00 stated value; authorized 116,000 shares,
issued 56,000 shares 6 -
Common stock--$.0001 par value; authorized 20,000,000
shares, issued 5,903,894 in 1997 and 5,575,310 in 1996 590 557
Additional paid-in capital 5,347,562 936,253
Retained earnings (Deficit) 214,193 (221,627)
- -----------------------------------------------------------------------------------------
Stockholders' Equity 5,562,351 715,183
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,619,880 $2,011,928
=========================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS PERIOD ENDED
September 30, September 30,
1997 1996
-------------- -------------
<S> <C> <C>
Net sales $4,403,640 $ 94,119
Cost of goods sold 1,799,068 39,530
- -----------------------------------------------------------------------------------------------------------
Gross profit 2,604,572 54,589
- -----------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses (2,039,736) (349,780)
Proceeds from insurance (net of $69,890 cost of cigars lost). 160,500 -
- -----------------------------------------------------------------------------------------------------------
Operating income 725,336 (295,191)
- -----------------------------------------------------------------------------------------------------------
Interest expense, net of $1,880 and $536 interest income 163,516 7,589
- -----------------------------------------------------------------------------------------------------------
Income before income taxes 561,820 (302,780)
- -----------------------------------------------------------------------------------------------------------
Income taxes 126,000 -
- -----------------------------------------------------------------------------------------------------------
Net Income (loss) 435,820 (302,780)
===========================================================================================================
Net income (loss) per common share $0.08 ($0.06)
===========================================================================================================
Weighted average number of common shares outstanding 5,576,509 5,090,000
===========================================================================================================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-12
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
SERIES B 8% CONVERTIBLE ADDITIONAL EARNINGS
COMMON STOCK PREFERRED STOCK PAID-IN ACCUMULATED STOCKHOLDERS
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock 2,600,000 $ 260 $ (50) - $ 210
Issuance of common stock
for professional services 25,000 2 4,998 - $ 5,000
Issuance of common stock
for cash 2,465,000 247 869,753 - $ 870,000
Net Loss - - - (302,780) $ (302,780)
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 5,090,000 $ 509 $ - $ - $ 874,701 $(302,780) $ 572,430
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 5,575,310 $ 557 $ - $ - $ 936,253 $(221,627) $ 715,183
- -----------------------------------------------------------------------------------------------------------------------------
Issuance of Common Stock
in connection with a
re-capitalization of Notes
Payable and Notes Payable
Stockholders 328,584 33 1,984,648 1,984,681
Issuance of Series B 8%
Convertible Preferred Stock,
net of expenses 56,000 6 2,426,661 2,426,667
Net Income - - - 435,820 435,820
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 5,903,894 $ 590 56,000 $ 6 $5,347,562 $ 214,193 $5,562,351
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-13
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS PERIOD ENDED
<TABLE>
<CAPTION>
September 30, September 30,
1997 1996
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 435,820 $ (302,780)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization 51,978 18,000
Changes in operating assets and liabilities:
Increase in accounts receivable (818,436) (92,855)
Increase in prepaid expenses and other current assets (11,915) (3,656)
Increase in inventory (1,339,742) (830,645)
Increase in other assets (77,675) (59,427)
Increase in advances to tobacco farmers (435,863) -
Increase in accounts payable 299,779 20,240
Increase in accrued expenses and other current liabilities 369,784 70,647
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (1,526,270) (1,180,476)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows used in investing activity:
Purchase of property plant and equipment (515,857) (221,396)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES (515,857) (221,396)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of notes payable - 150,000
Proceeds from issuance of notes payable - stockholders 1,975,000 281,273
Proceeds (repayments) of loans by related party (133,779) 106,744
Repayment of notes payable (965,319) -
Proceeds from issuance of common stock - 875,210
Proceeds from issuance of Series B convertible preferred stock 2,426,667 -
Proceeds from issuance of Debentures 200,000 -
Deferred debt issuance costs (26,717) -
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 3,475,852 1,413,227
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 1,433,725 11,355
- ---------------------------------------------------------------------------------------------------------------------------------
Cash at beginning of the period 245,939 -
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF THE PERIOD $ 1,679,664 $ 11,355
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
F-14
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles applicable to interim financial
statements and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Tamboril Cigar Company (the "Company"), the
accompanying financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1997.
Furthermore, all adjustments were of a normal recurring nature.
F-15
<PAGE>
2. INVENTORY:
- --------------
Inventory consists of the following:
<TABLE>
September 30, December 31,
1997 1996
<S> <C> <C>
Raw Materials $1,185,212 $454,789
Finished Goods 968,468 359,149
---------- --------
$2,153,680 $813,938
========== ========
</TABLE>
As of September 30, 1997, approximately $ 2,145,854 of the Company's inventory
is located in the Dominican Republic.
3. PROPERTY AND EQUIPMENT:
- ---------------------------
Property and equipment, at cost, consists of the following:
<TABLE>
September 30, December 31, Estimated
1997 1996 Useful Life
<S> <C> <C> <C>
Machinery and equipment $378,491 $176,821 5 to 7 years
Land 98,074 97,691
Buildings and building improvements 4,234 41,206 20 years
Furniture and fixtures 25,053 16,194 5 years
Computers 9,530 11,118 5 years
Leasehold improvements 73,945 41,092 Term of lease
Construction in progress 310,652
-------- --------
899,979 384,122
Less accumulated depreciation 71,409 24,324
-------- --------
$828,570 $359,798
======== ========
</TABLE>
Approximately $ 737,962 of the Company's property and equipment, net of $ 43,287
accumulated depreciation, is located in the Dominican Republic.
F-16
<PAGE>
4. LONG-TERM DEBT:
- -------------------
Long-term debt consists of the following:
<TABLE>
September 30, December 31,
1997 1996
<S> <C> <C>
Notes payable
Due April 1998 - interest at 10 % per annum $50,000
Due October 1998 - interest at 10% per annum 200,000
--------
250,000
Notes payable - Stockholders
Due August 1998 - interest at 10 % per annum 275,000
Due September 1998 - interest at 10 % per annum 100,000
Due October 1998 - interest at 10 % per annum 150,000
Due December 1998 - interest at 10 % per annum 200,000
--------
725,000
8 % Convertible Debentures
Due September 1998 $200,000
-------- --------
$200,000 $975,000
======== ========
</TABLE>
On September 23, 1997, the Company sold $ 200,000 face amount of its 8 %
Convertible Debentures (" Debentures"), such Debentures mature on September of
1999, and are convertible prior to maturity into shares of the Company's Common
Stock. (See Note 5).
On September 30, 1997, the Company reached an agreement with the holders of the
Company's Notes Payable and Notes Payable - Shareholders, by which the Company
repaid an aggregate of $1,150,000 of its outstanding notes payable and accrued
interest. The remaining notes payable in an aggregate amount $1,984,681 were
exchanged for 328,584 shares of its common stock and 328,584 warrants to
purchase its common stock (See Note 5).
5. STOCKHOLDERS' EQUITY:
- -------------------------
On April 16, 1996, the Company issued 25,000 shares of common stock to its
attorney in exchange for services valued at $5,000. On October 23, 1996, the
Company issued 116,972 shares of common stock to the stockholders of Idaho
Leadville Mines Co. in a transaction accounted for as a reverse acquisition (See
Note 2).
F-17
<PAGE>
On July 1, 1997, the Company entered into a distribution agreement with Hubbard
Imports. Part of the compensation to Hubbard under the agreement was the
issuance by the Company of 200,000 warrants to purchase shares of common stock
of the Company at an exercise price of $5.85. The issuance of these Warrants to
Hubbard was made contingent upon Hubbard and the Company entering into a second
agreement relating to the manufacturing by the Company of private label cigars
under the brand name Hamilton Reserve(TM) (the "Cigar Production Agreement").
The Company and Hubbard entered into the Cigar Production Agreement on October
1, 1997. Accordingly, on October 1, 1997, the Company recorded a charge to
operations of $184,000 for the issuance of these Warrants ($0.92 per Warrant).
On September 22, 1997, the Company entered into a Convertible Debenture and
Convertible Preferred Stock Purchase Agreement with several purchasers, pursuant
to which the Company agreed to sell and the purchasers agreed to buy, up to an
aggregate of $200,000 face amount of the Company's 8% Convertible Debentures
(the "Debentures") and $5,800,000 stated amount of the Company's Series B
Convertible Preferred Stock (the "Series B Preferred Stock"). In connection with
the authorization of the Series B Convertible Preferred Stock, the Company
cancelled its previously authorized Series A Preferred Stock, of which no shares
were ever issued. On September 23, 1997, the Company sold $200,000 face amount
of the Debentures and 56,000 shares ($2,800,000 stated amount) of the Series B
Preferred Stock and issued a total of 225,000 warrants to purchase shares of its
Common Stock at an exercise price of $5.89 per share.
On September 30, 1997 the Company issued 328,584 shares of its common stock and
328,584 warrants to purchase its common stock in exchange for $ 1,984,681 of its
Notes Payable and Notes Payable to Stockholders.
The Debentures are convertible into shares of the Company's common stock at the
lowest of $4.71 per share, or 77 1/2% of the average per share market value for
the five trading days immediately preceding the conversion date.
The Series B Preferred Stock are convertible at their stated value into shares
of the Company's common stock at the lowest of $4.71 per share, or 77 1/2% of
the average per share market value for the five trading days immediately
preceding the conversion date. The Series B Preferred Stock pay a cumulative
dividend of eight percent and have the right to receive dividends and a
preference upon liquidation superior to the rights of holders of common stock.
The Warrants are exercisable at any time up to the fifth anniversary of their
issuance. The Warrants are exercisable at an exercise price of $5.89 and $5.85
per share.
6. COMMITMENTS AND CONTINGENCIES:
- ----------------------------------
F-18
<PAGE>
As of September 30, 1997 the Company has entered into firm financing and
purchase agreements with several tobacco growers in the Dominican Republic.
Under the terms of such agreements, the Company will advance to the growers
financing for the planting and harvesting of the tobacco and the growers will
sell their tobacco exclusively to the Company. As of September 30, 1997 the
Company has advanced $ 617,451 and has committed to advance an additional
$1,300,000, to purchase approximately $4,000,000 of tobacco.
In early July, 1997, Carlin Equities Corporation commenced an action in the
United States District Court, Southern District of New York, captioned Carlin
Equities Corp. v. Tamboril Cigar Company, Docket No. 97 Civ.4988 (the "Carlin
Action") for breach of contract seeking compensation for various fees and
commissions and in lieu of the issuance of warrants to purchase the Company's
common stock of an unspecified amount but at least $1,680,000. Although the
Company believes that Carlin's claim lack merit and intends to vigorously defend
itself against all claims made by in the Carlin Action, there can be no
assurance that the Company will prevail in the litigation.
7. EARNINGS PER COMMON SHARE
Earnings per common share are computed by dividing net income by the average
number of common shares and common stock equivalents outstanding during the
year. The weighted average number of common shares outstanding during the
nine-month and the three-month periods ended September 30, 1997 were
approximately 5,576,509 and 5,578,843, respectively. The number of common shares
outstanding during the nine-month and the three-months periods ended September
30, 1996 were 5,090,000, which represents the number of shares outstanding as of
September 30, 1996.
Common stock equivalents are the net additional number of shares which would be
issuable upon the conversion of the Debentures or the Convertible Preferred
Stock or upon the exercise of the Warrants (See Note 5) assuming that the
Company reinvested the proceeds to purchase additional shares at market value.
Common stock equivalents had no material effect on the computation of earnings
per share for the three-month and the nine-month period ended September 30,
1997. No common stock equivalents were outstanding as of September 30, 1996.
8. MAJOR CUSTOMER
During the quarter ended September 30, 1997, the Company entered into a
Distribution Agreement with Hubbard Imports. Under the terms of the Distribution
Agreement the Company is expected to sell approximately $5,000,000 of cigars to
Hubbard during the year 1997. Sales to Hubbard for the nine month period ended
September 30, 1997 amounted to $2,669,715 (61% of total sales).
Hubbard will be the exclusive importer of the Company's brands into the United
States through December 31, 2000. Annual minimum sales commitments will be set
by mutual agreement on a yearly basis.
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Issuer's Amended and Restated Certificate of Incorporation and By-laws
contain provisions eliminating the personal liability of a director to the
Issuer and its stockholders for certain breaches of his or her fiduciary duty of
care as a director. This provision does not, however, eliminate or limit the
personal liability of a director (i) for any breach of such director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Delaware statutory provisions making directors personally
liable, under a negligence standard, for unlawful dividends or unlawful stock
repurchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. This provision offers persons who serve
on the Board of Directors of the Company protection against awards of monetary
damages resulting from breaches of their duty of care (except as indicated
above), including grossly negligent business decisions made in connection with
takeover proposals for the Company. As a result of this provision, the ability
of the Company or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care has been limited. However,
the provision does not affect the availability of equitable remedies such as an
injunction or recision based upon a director's breach of his duty of care. The
Securities and Exchange Commission (the "Commission") has taken the position
that the provision will have no effect on claims arising under the federal
securities laws.
In addition, the Amended Certificate and By-Laws provide mandatory
indemnification rights, subject to limited exceptions, to any person who was or
is party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by reason of the fact that such person is
or was a director or officer of the Company, or is or was serving at the request
of the Company as a director or officer of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise. Such
indemnification rights include reimbursement for expenses incurred by such
person in advance of the final disposition of such proceeding in accordance with
the applicable provisions of the Delaware General Corporation Law.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Company has, pursuant to the Registration Rights Agreement, agreed to
pay all expenses of this Offering, other than fees, commissions, discounts and
expenses of any underwriters engaged by the Selling Shareholders. The estimated
expenses of this Offering are:
Registration Fees $ 2,276
Blue Sky Filing Fees 2,500
Attorney's Fees 25,000
Accountant's Fees 20,000
Printing and Copying 25,000
Miscellaneous 5,000
----------------------- -------
TOTAL $79,776
II-1
<PAGE>
Item 26. RECENT SALES OF UNREGISTERED SECURITIES.
Tamboril Cigar International, Inc., was originally founded under the name
"Conquistador Cigar Company" in the State of Delaware in 1996. "Conquistador"
changed its name to "Tamboril Cigar Company" in June of 1996 and to "Tamboril
Cigar International, Inc. ("TCI")" in January of 1997. TCI is currently the
principal U.S.-based operating subsidiary of the Company.
In connection with the founding of the company now known as TCI, 2,600,000
shares of common stock, par value $.0001 per share ("TCI Common Stock") were
issued to its founders in March and April 1996. These founders were Ian
Markofsky (through Viking Investment Group II, Inc.), Abraham Shafir, David S.
Rector, Anthony Markofsky and Thomas E. Knudson. As TCI was then a start-up
company with no assets or business, the shares issued to the founders were
valued at par, or $.0001 per share. Since the founders' shares were issued
pursuant to certain exemptions from registration contained in Sections 4(2) and
4(6) of the Securities Act, the shares were "restricted securities" (as defined
by the Securities Act) which were issued with an appropriate restrictive legend.
From April 15, 1996 through October 23, 1996, in order to raise its initial
working capital to begin its business, TCI conducted an offering under Rule 504
of Regulation D under the Securities Act. In connection with the Rule 504
offering, TCI sold 2,833,338 shares of TCI Common Stock to domestic and foreign
accredited investors at a price of $.35 per share, for proceeds to TCI of
$990,000. TCI also issued 25,000 restricted shares of TCI Common Stock to its
legal counsel in satisfaction of legal fees due and owing in the amount of
$5,000, which valued such shares at $.20 per share. These 25,000 shares were
issued in reliance upon the exemption from registration pursuant to Rule 701
under the Securities Act.
On October 23, 1996, TCI entered into an Acquisition Agreement and Plan of
Reorganization (the "Agreement") with Idaho Leadville Mines Company, a company
organized and existing under the laws of the State of Washington ("Idaho
Leadville"). Under the terms of the Agreement, the shareholders of TCI
exchanged each of their shares of TCI Common Stock for one share of Idaho
Leadville's common stock, so that 5,458,338 shares of Idaho Leadville stock were
issued to the shareholders of TCI on a one-share-for-one-share basis and TCI
became a wholly-owned subsidiary of Idaho Leadville. Therefore, the founders of
TCI received 2,600,000 restricted shares of Idaho Leadville common stock, the
purchasers of TCI Common Stock in TCI's offering under Rule 504 received
2,833,338 unrestricted shares of Idaho Leadville common stock, legal counsel to
TCI received 25,000 restricted shares of Idaho Leadville common stock and the
prior shareholders of Idaho Leadville retained the 116,972 shares of Idaho
Leadville common stock that they held prior to the Agreement.
In connection with the reorganization effected under the Agreement, Idaho
Leadville changed its name to "Tamboril Cigar Company" and changed its state of
incorporation to Delaware.
On September 22, 1997 the Company entered into the Purchase Agreement with
the Purchasers and the Registration Rights Agreement with the Selling
Shareholders. Pursuant to the Purchase Agreement, the Company issued $200,000
aggregate face amount of Convertible
II-2
<PAGE>
Debentures, $2,800,000 aggregate stated amount of Series B Shares and 105,000
Warrants to the Purchasers. An aggregate of 120,000 Warrants were issued to the
Placement Agent and Brown Simpson. The issuance of the Convertible Debentures,
the Series B Shares and the Warrants were exempt from registration pursuant to
the exemptions from registration available under Sections 4(2) and 4(6) of the
Securities Act and Rule 506 of Regulation D thereunder.
On September 30, 1997, the Company agreed with various lenders to
recapitalize the unpaid principal and interest of loans from such lenders by
issuing shares of its Common Stock and warrants to purchase Common Stock to such
Lenders is full satisfaction of the Company's debts. In connection with such
recapitalization the Company has issued 328,584 shares of Common Stock and
328,584 Warrants exercisable for a period of five years expiring September 30,
2002 at an exercise price of $5.89 per share. The average per share market
value for the five trading days preceding September 23, 1997 at $4.71 per share
and the warrants were valued at $1.33 per warrant pursuant to the Black-Scholes
Method. Accordingly, one share of Common Stock and one warrant were issued for
each $6.04 of outstanding principal and interest on the debt. The Lenders are
all sophisticated, institutional accredited investors and the shares and
warrants are "restricted securities" as defined in Rule 144 under the Securities
Act. The issuance of these Shares and warrants were made in reliance upon the
exemptions in Sections 4(2) and 4(6) of the Securities Act and Regulation D
thereunder. The Company has agreed to grant certain "piggyback" registration
rights to register the shares of Common Stock issued to the Lenders and issuable
under their warrants in the first registration statement filed by the Company
other than this Registration Statement.
II-3
<PAGE>
Item 27. 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****
II-4
<PAGE>
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.
II-5
<PAGE>
Item 28. UNDERTAKINGS
The Company hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a post-
effective amendment to this registration statement to:
(I) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or change material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities offered,
and the offering of the securities at that time to be the initial bona fide
offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Miami,
State of Florida on January 8, 1998.
(Registrant) TAMBORIL CIGAR COMPANY
By: /s/ Anthony Markofsky
_____________________________________________________________________________
Anthony Markofsky, President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
January 8, 1998 /s/ Anthony Markofksy
-------------------------------------------
Anthony Markofsky
President, and Principal Executive Officer
and Director
January 8, 1998 /s/ Thomas E. Knudson
--------------------------------------------
Thomas E. Knudson
Vice President and Director
January 8, 1998 /s/ David S. Rector
____________________________________________
David S. Rector
Secretary and Director
January 8, 1998 /s/ Abraham Shafir
____________________________________________
Abraham Shafir
Director
January 8, 1998 /s/ Jean-Francois Perrault
____________________________________________
Jean-Francois Perrault
Director
January 8, 1998 /s/ Aric Frons
____________________________________________
Aric Frons
Director
January 8, 1998 /s/ Pedro Mirones
--------------------------------------------
Pedro Mirones
Vice President, Principal Financial
Officer and Principal Accounting Officer
II-7
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Tamboril Cigar Company
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated January 24, 1997 on the
consolidated financial statements of Tamboril Cigar Company and Subsidiaries as
of December 31, 1996 and for the period from April 15, 1996 (date operations
commenced) to December 31, 1996 which appear in such Prospectus. We also consent
to the reference to our firm under the caption "Experts" in such Prospectus.
GOLDSTEIN GOLUB KESSLER & COMPANY, P.C.
New York, New York
January 9, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF COUNSEL
To the Board of Directors
of Tamboril Cigar Company
We hereby consent to the use in the Prospectus to be included in the
Registration Statement on Form SB-2 being filed by Tamboril Cigar Company of our
opinion dated September 23, 1997 in connection with the Convertible Debenture
and Convertible Preferred Stock Purchase Agreement of even date therewith. We
also hereby consent to the reference to our firm under the caption "Interests of
Counsel" in such Prospectus.
KAPLAN GOTTBETTER & LEVENSON, LLP
January 9, 1998
