U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ....................... to .....................
Commission file number 0-22573
TAMBORIL CIGAR COMPANY
---------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Delaware 65-0774638
-------------------------- ------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
18349 NE 4th Court
Miami, FL 33179
----------------------------------
(Address of principal executive offices)
(305) 653-3201
----------------------------------
(Issuer's telephone number)
Not Applicable
----------------------------------
(Former name, former address and former
fiscal year if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No___.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check wither the registrant filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 13,356,632 shares of Common Stock,
par value $.0001 per share Transitional Small Business Disclosure Format (check
one): Yes [ ] No [X]
Page 1 of 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 600 $ 425,908
Accounts receivable -- Less allowance for doubtful accounts
of $ 43,536 and $ 102,000 at September 30, 1998 and December
31, 1997, respectively 20,717 1,424,668
Inventory 4,064,386 2,447,650
Advances to suppliers 299,846 1,098,326
Prepaid expenses and other current assets 3,631 69,112
---------------- ----------------
Total current assets 4,389,180 5,465,664
---------------- ----------------
Property and equipment 1,382,541 1,173,552
---------------- ----------------
Other assets 46,917 160,545
TOTAL ASSETS $ 5,818,638 $ 6,799,761
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowing 1,325,372 -
Current maturities of long-term debt 207,252 7,252
Accounts payable 853,632 557,262
Accrued expenses and other current liabilities 535,593 240,716
Notes payable - stockholder 156,650 -
---------------- ----------------
Total current liabilities 3,078,499 805,230
---------------- ----------------
-
Long-term debt 20,677 225,534
---------------- ----------------
Total liabilities 3,099,176 1,030,764
---------------- ----------------
Stockholders' Equity
Series B 8% convertible preferred stock - $.0001
par value; $50 stated value; authorized 116,000
shares, issued and outstanding 33,227 and 56,000 shares 3 6
Common Stock - $.0001 par value; authorized
20,000,000 shares issued and outstanding
13,356,632 and 5,903,894 shares 1,336 590
Additional paid-in capital 6,282,234 6,160,465
Accumulated other comprehensive loss (550,727) (110,036)
Accumulated deficit (3,013,384) (282,028)
---------------- ----------------
Stockholders' Equity 2,719,462 5,768,997
---------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,818,638 $6,799,761
================ ================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
Page 2 of 15
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Operations
(UNAUDITED)
For the Three Month Period Ended
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 60,091 $ 1,864,652
Cost of goods sold
311,754 892,688
------------------------- ------------------------
Gross profit
(251,663) 971,964
Selling, general and administrative expenses
582,597 541,325
------------------------- ------------------------
Income (loss) from operations
(834,260) 430,639
Interest expense
109,381 81,478
------------------------- ------------------------
Net income (loss) before income taxes
(943,641) 349,161
Provision for income taxes
- 126,000
------------------------- ------------------------
Net income (loss) $ (943,641) $ 223,161
========================= ========================
Income (loss) per common share Basic $ (0.10) $ (0.11)
========================= ========================
========================= ========================
Weighted average number of common shares
used in computing income (loss) per share
Basic
10,468,789 5,578,843
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
Page 3 of 15
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Operations
(UNAUDITED)
For the Nine Month Period Ended
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Net sales $ 309,906 $ 4,403,640
Cost of goods sold
609,095 1,799,068
--------------------------- ------------------------
Gross profit
(299,189) 2,604,572
Selling, general and administrative expenses
2,321,486 1,879,236
--------------------------- ------------------------
(Income) loss from operations
(2,620,675) 725,336
Interest expense
172,169 163,516
--------------------------- ------------------------
Net income (loss) before income taxes
(2,792,844) 561,820
Provision for income taxes
(184,000) 126,000
--------------------------- ------------------------
Net income (loss) $ (2,608,844) $ 435,820
=========================== ========================
Income (loss) per common share Basic $ (0.39) $ (0.07)
=========================== ========================
Weighted average number of common shares
used in computing income (loss) per share
Basic 7,469,879 5,576,509
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
Page 4 of 15
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Cash Flows
(UNAUDITED)
For the nine months ended
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Comprehensive income (loss) $ (3,049,535) $ 435,820
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization
141,767 51,978
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable
1,403,951 (818,436)
(Increase) decrease in other current assets
65,477 (11,915)
(Increase) decrease in advances to suppliers
798,484 (435,863)
Increase in inventory
(1,616,736) (1,339,742)
(Increase) decrease in other assets
113,628 (77,675)
Increase in accounts payable
296,370 299,779
Increase in accrued expenses and other current
liabilities 294,877 369,784
---------------------- ----------------------
Net cash used in operating activities (1,551,717) (1,526,270)
---------------------- ----------------------
Cash flows used in investing activity - purchase of
property and equipment (350,756) (515,857)
Cash flows from financing activities:
Short term borrowing from bank 1,325,372 -
Proceeds from issuance of notes payable -
stockholders 156,650 1,975,000
Repayments of loans by related parties
- (133,779)
Repayment of notes payable
- (965,319)
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)
Repayment of long-term debt
(4,857) -
---------------------- ----------------------
Cash provided by financing activities
1,477,165 3,475,852
---------------------- ----------------------
---------------------- ----------------------
Net decrease in cash
(425,308) 1,433,725
---------------------- ----------------------
Cash at beginning of the period
425,908 245,939
-----------------------------------------------
Cash at end of the period $ 600 $ 1,679,664
-----------------------------------------------
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
Page 5 of 15
<PAGE>
Tamboril Cigar Company and Subsidiaries
Consolidated Statement of Changes in Equity
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Convertible
Preferred Stock
Common Stock
Comprehensive Shares Amount
Income
(Loss)
Shares Amount
<S> <C> <C> <C>
Balance at December 31, 1996 $ - - $ - 5,575,310 $ 557
Issuance of Common Stock
in connection with a
re-capitalization of Notes
Payable and Notes Payable
Stockholders $ - - $ - 328,584 $ 33
Issuance of Series B 8%
convertible preferred stock,
net of expenses - 56,000 6 - -
Recognition of beneficial
conversion feature of
preferred stock - - - - -
Net Income - - - - -
Balance at September 30, 1997 $ - 56,000 $ 6 5,903,894 $ 590
Balance at December 31, 1997 $ - 56,000 $ 6 5,903,894 $ 590
Net Loss (2,608,844) - - - -
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment (440,691) - - - -
Conversion of Series B 8% convertible
preferred stock. - (1,320) - 25,563 3
Dividend on 1320 shares of Series B
8% convertible preferred stock. - - - - -
Conversion of Series B 8% convertible
preferred stock. - (1,560) (1) 47,133 5
Dividend on 1560 shares of Series B
8% convertible preferred stock. - - - - -
Conversion of Series B 8% convertible
preferred stock. - (19,893) (2) 7,380,042 738
Dividend on 19,893 shares of Series
B 8% convertible preferred stock. - - - - -
Balance at September 30, 1998 (3,049,535) 33,227 $ 3 13,356,632 $1,336
(RESTUBBED TABLE)
Additional Accumulated Accumulated Stockholders
Paid-in Other Deficit Equity
Capital Comprehensive
Income (Loss)
<C> <C>
Balance at December 31, 1996 $ 936,253 $ - $ (221,627) $ 715,183
Issuance of Common Stock
in connection with a
re-capitalization of Notes
Payable and Notes Payable
Stockholders 1,984,648 - - 1,984,681
Issuance of Series B 8%
convertible preferred stock,
net of expenses 2,426,661 - - 2,426,667
Recognition of beneficial
conversion feature of
preferred stock 812,903 - (812,903) -
Net Income - - 435,820 435,820
Balance at September 30, 1997 6,160,465 $ - (598,710) $ 5,562,351
Balance at December 31, 1997 6,160,465 $(110,036) (282,028) $ 5,768,997
Net Loss - - (2,608,844) (2,608,844)
Comprehensive income (loss)
Change in cumulative foreign
currency translation adjustment - (440,691) - (440,691)
Conversion of Series B 8% convertible
preferred stock. 3,552 - - 3,555
Dividend on 1320 shares of Series B
8% convertible preferred stock. - - (3,555) (3,555)
Conversion of Series B 8% convertible
preferred stock. 5,121 - - 5,125
Dividend on 1560 shares of Series B
8% convertible preferred stock. - - (5,125) (5,125)
Conversion of Series B 8% convertible
preferred stock. 113,096 - - 113,832
Dividend on 19,893 shares of Series
B 8% convertible preferred stock. - - (113,832) (113,832)
Balance at September 30, 1998 6,282,234 (550,727) $(3,013,384) $ 2,719,462
</TABLE>
Page 6 of 15
<PAGE>
TAMBORIL CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles applicable to interim financial
statements and do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Tamboril Cigar Company ("Company"), the
accompanying financial statements reflect all adjustments necessary to present
fairly the financial position of the Company as of September 30, 1998. All
dollar amounts are U.S. dollars unless otherwise indicated. The conversion rate
of Dominican pesos into US dollars during the period ended September 30, 1998
varied; on the balance sheet, and throughout this 10-QSB, the rate of 15.5
Dominican pesos to 1 US dollar is used.
2. INVENTORY:
Inventory consists of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw Materials $2,751,676 $1,729,092
Finished Goods 1,272,810 718,558
------------- ------------
$4,064,386 $2,447,650
============= ============
As of September 30, 1998, approximately $3,876,000 of the Company's inventory is
located in the Dominican Republic.
3. SHORT-TERM BANK BORROWING
Effective March 3, 1998, the Company negotiated a credit agreement with
the Banco Popular Dominicano, which provides for advances up to Dominican
Republic ("RD") $25,000,000 (US $1,612,903) for the purchase of tobacco.
Interest is based on the prime rate in the Dominican Republic, which was 30% at
September 30, 1998, and is adjusted and payable monthly. As of September 30,
1998, the Company had borrowed RD$19,720,000 (US $1,272,258) at an average rate
of 34%. Borrowing under the agreement is secured by tobacco inventories.
On July 28, 1998, the Company entered into a credit agreement with the
Banco Gerencial and Fiduciario which provides for advances up to RD $6,000,000
(US $375,000). Interest is based on the prime rate in the Dominican Republic and
is adjusted and payable monthly. Borrowing under such agreement is payable on 90
day demand and is secured by the factory building in the Dominican Republic. As
of September 30, 1998, the balance was $53,114. See Item 5 "Other Information".
4. LONG-TERM DEBT
At September 30, 1998 and at December 31, 1997, long-term debt consisted of the
following:
Page 7 of 15
<PAGE>
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Loan payable to in monthly installments of $839 through December 2001,
including interest at 9.35% per annum $ 27,929 $ 32,786
8% convertible debenture due September 1999 ("Convertible
Debentures") 200,000 200,000
---------- ---------
227,929 232,786
---------- ---------
Less: Current portion 207,252 7,252
Long term debt $ 20,677 $225,534
========== =========
</TABLE>
On September 22, 1997, the Company entered into a Convertible Debenture
and Convertible Preferred Stock Purchase Agreement ("Purchase Agreement") with
several purchasers (See Note 7) pursuant to which the Company agreed to sell up
to an aggregate of $200,000 of the Convertible Debentures. The Convertible
Debentures are convertible prior to maturity into shares of the Company's common
stock. Interest, which is payable quarterly, is currently in arrears. Under the
terms of the Purchase Agreement, the Company's failure to pay interest on
December 31, 1997, March 31, 1998 and June 30, 1998 constituted events of
default. In an event of default, the holders of the Convertible Debentures have
the right to declare the Debentures, including accrued interest and an
adjustment amount as defined under the Purchase Agreement, payable on demand.
Additionally, in an event of default, the interest rate is increased from 8% to
16%. Based on the default, the Debentures have been classified as current in the
September 30, 1998 balance sheet.
5. NOTES PAYABLE - STOCKHOLDER
As of September 30, 1998, Notes payable stockholder consists of the following:
Note payable - Jenadosa Holdings Limited
Due on demand - bearing interest at 10% per annum $ 100,000
Due on demand - bearing interest at 10% per annum 56,650
---------
$ 156,650
=========
6. MAJOR CUSTOMER
On July 7, 1997, the Company entered into a distribution agreement
("Distribution Agreement") and on October 1, 1997 entered into a Cigar
Production Agreement ("Production Agreement") with Hubbard Imports, a Florida
partnership ("Hubbard"). Under the terms of the Distribution Agreement, Hubbard
became the exclusive distributor in the United States for the Company's
products. On March 20, 1998 the Company informed Hubbard of the Company's
intention to terminate both the distribution and the Production Agreement as a
result of Hubbard's failure to meet agreed-upon levels of distribution as set
forth in the Production Agreement. In June 1998, an agreement was reached with
Hubbard pursuant to which the Company exchanged approximately $660,000 of the
Hamilton House Select (TM) cigars that it had in inventory for an equal dollar
amount of Tamboril (TM) cigars held by Hubbard Imports. As a result of such
exchange, the Company incurred a charge to cost of sales of approximately
$200,000 as an adjustment of the carrying cost of the inventory. Additionally,
Hubbard paid the Company approximately $226,000 of Hubbard's previous
indebtedness to the Company and has since paid the remaining (approximately)
$148,000.
Page 8 of 15
<PAGE>
From the commencement of the Production Agreement until December 31,
1997, substantially all of the Company's sales were made to Hubbard. The Company
made sales of approximately $8,000 to Hubbard during the nine months ended
September 30, 1998.
7. STOCKHOLDERS' EQUITY
On September 22, 1997, the Company entered into the Purchase Agreement
with Infinity Emerging Opportunities Limited ("Infinity"), Summit Capital
Limited ("Summit"), and Glacier Capital Limited ("Glacier") (collectively, the
"Purchasers"), pursuant to which the Company agreed to sell to the Purchasers
(i) up to an aggregate of $200,000 of the Company's Debentures, (ii) up to
116,000 shares of the Company's Series B 8% convertible preferred stock, par
value $0.0001 and stated value $50.00 per share (a total of $5,800,000 stated
amount) ("Series B Preferred Stock"), and (iii) 225,000 warrants to purchase
shares of the Company's common stock at an exercise price of $5.89 per share
("Warrants"). On September 23, 1997, the Company issued and sold to the
Purchasers (a) $200,000 face amount of the Debentures, (b) 56,000 shares of
Series B Preferred Stock (a total of $2,800,000 stated amount), and (c) 225,000
Warrants.
Dividends on the Series B Preferred Stock, which are payable quarterly,
are currently in arrears. Under the terms of the Series B Preferred Stock and
the Purchase Agreement, the Company's failure to pay dividends on December 31,
1997, March 31, 1998 and June 30, 1998 constituted an event of default. In an
event of default, the Series B 8% Preferred Stock dividend rate increases from
8% to 16%. Additionally, in an event of default, the Company is required to pay
liquidated damages in an amount equal to 1% of the stated amount outstanding as
of the date of default and on each anniversary thereafter. Based on the default,
selling, general and administrative expenses have been charged $255,000 of
expenses related to the liquidated damages under the Purchase Agreement.
On February 19, 1998, the Company issued 25,563 shares of Company's
common stock in a conversation of 1,320 shares of the Series B Preferred Stock,
including $3,555 of accrued dividends on those 1,320 shares.
On April 2, 1998, the Company issued 47,133 shares of the Company's
common stock in a conversion of 1,560 shares of the Series B Preferred Stock,
including $5,125 of accrued dividends on those 1,560 shares.
On August 5, 1998, the Company issued an aggregate of 7,380,042 shares of
its common stock, par value, .0001 per share to Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited pursuant to a
conversation, by each, of $331,550 aggregate stated amount of the Company's
Series B Convertible Preferred Stock and $37,944 in accrued dividends on such
shares. The shares of common stock issued to the investors represent 56% of the
issued and outstanding common stock of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion relates to the consolidated results of
operations and financial condition of the Company and its two principal
operating subsidiaries, Tamboril Cigar International Inc. ("TCI") and Tabacalera
Tamboril S.A. ("Tabacalera").
The Company previously entered into a Distribution Agreement dated July
7, 1997 ("Distribution Agreement") and a Cigar Production Agreement dated
October 1, 1997 ("Production Agreement") (the Distribution Agreement and the
Production Agreement being sometimes referred to herein as the "Hubbard
Agreements") with Hubbard Imports, a Florida partnership ("Hubbard"). Under the
Distribution Agreement, the Company appointed Hubbard as exclusive distributor
in the United States for the Company's Tamboril/TM/, Cordova/TM/ and Fore/TM/
cigar products. Under the Production Agreement, the Company agreed to
manufacture for Hubbard a line of Hamilton House Select/TM/ cigars. Both Hubbard
Agreements provided for minimum purchase commitments from Hubbard in 1997 and
stated that Hubbard would, in January of each year beginning with 1998,
Page 9 of 15
<PAGE>
undertake to purchase a mutually agreed upon number of cigars in the calendar
year beginning each January.
In January of 1998, Hubbard failed to agree to minimum purchase
requirements under the Hubbard Agreements, and Hubbard did not order any cigars
from the Company after December 31, 1997, Hubbard's failure to agree upon and
make minimum purchase requirements, as well as deficiencies in Hubbard's
inventory controls and sales reporting systems (of which Hubbard failed to
notify the Company), resulted in an abrupt, unanticipated disruption of the
Company's sales and distribution from early 1998 to the present. Because Hubbard
was the exclusive distributor for the Company in the US, this resulted in the
Company having no U.S. distribution channel, and had a material adverse impact
on the Company's sales and profitability in the nine month period ended
September 30, 1998.
The negative impact of the Hubbard situation was exacerbated by
developments in the overall market for cigars. The market for sales in the
United States of premium cigars was negatively impacted in early 1998 by excess
inventories at the wholesale and retail levels. The Company was particularly
hurt by this excess inventory because its brands are relatively new and have
limited brand recognition. The market remains soft, and the Company does not
expect that normal order levels for its cigars will be reestablished.
Liquidity and Capital Resources
- -------------------------------
As previously stated, the loss of Hubbard as a distributor, and the
overall weakness in the demand for cigars, negatively impacted the Company's
sales, profitability and liquidity. These difficulties increased in severity
during the first none months of 1998, such that the Company eventually became
unable to meet its financial obligations to its employees and suppliers as they
became due. As a result, the Company lost employees and suppliers, and numerous
employees and suppliers filed lawsuits against the Company in connection with
these events. See "Litigation."
During the first three quarters of 1998 the Company actively recruited
local and regional distributors to replace Hubbard. Although the Company
undertook these efforts to rebuild its distribution network, the Company did not
succeed in these efforts due to the various difficulties described above and a
continuing soft market for cigars. Also during that period, Management sought
sources of financing for the Company in order to alleviate some of its financial
difficulties. The Company was successful in obtaining a line of credit of
approximately RD$6,000,000 (US$375,000). See note 3 to the Consolidated
Financial Statements.
As a result of having lost its distribution network and its related
financial difficulties, including its inability to pay employees and suppliers,
the Company has ceased operations. Management does not expect the Company to be
able to, nor does it presently plan to, resume operations. Management does not
believe that it is feasible to attempt to generate demand for the Company's
products or reestablish a distribution network, given the Company's inability to
manufacture due to its problems with employees and suppliers. Management's
present plans for the Company include a possible sale of the Company's remaining
tobacco inventory, stocks of finished cigars, intellectual property and other
assets. Management is seeking persons who may be interested in acquiring these
assets. Any purchase of the Company's assets likely would be contingent upon
resolution of the various lawsuits against the Company (see "Legal Proceedings")
and release of liens against the inventory securing certain debt of the Company
(see Footnotes 3, 4 and 5 to the Financial Statements).
Results of Operations for the Three-Month and the Nine-Month Period ended
- -------------------------------------------------------------------------
September 30, 1998 as Compared to the Three-Month Period and the Six-Month
- --------------------------------------------------------------------------
Period ended September 30, 1997
- -------------------------------
Net sales for the three months and nine months ended September 30, 1998
were $60,901 and $309,906, respectively, which represented a decline of
$1,7804,652 and $4,093,734, from sales of $1,854,652 and $4,403,640 in the three
months and nine months ended September 30, 1997. In the nine months ended
September 30, 1997, the Company was distributing its cigars through retail
tobacconists and regional distributors that had been organized by the Company's
in-house sales and marketing staff. Upon entering into the Distribution
Page 10 of 15
<PAGE>
Agreement with Hubbard, Hubbard was named the Company's exclusive United States
distributor and the Company, accordingly, discontinued all direct sales efforts.
Upon the unexpected cessation of cigar purchases by Hubbard and the resulting
termination of the Distribution Agreement in early 1998, the Company was left
with no distribution network for its products. The sales of $309,906 in the nine
months ended September 30, 1998 represent the Company's efforts after the month
of March, 1998 to reestablish a distribution network of retail tobacconists and
regional distributors under the direction of Company staff. In an effort to
provide support for the new distributors, the Company allowed distributors to
return slow moving merchandise and replaced such merchandise with other types of
merchandise. Additionally, the Company reduced its selling prices to achieve
more favorable price points to the distributors. In conjunction with such price
reduction, the Company provided its distributors with a floor plan protection to
allow the distributors to move its cigar inventories. The Company has since
discontinued those efforts to rebuild its distribution network, due to the sharp
and continuing decrease in demand for cigars in the market generally and the
Company's other difficulties, including its employee and supplier problems and
the various lawsuits against the Company. See "Liquidity and Capital Resources"
and "Legal Proceedings".
Gross losses for the three months and nine months ended September 30,
1998 were $251,663 and $299,189, respectively, compared to gross profit of
$971,964 and $2,604,572 in the comparable periods of the prior year. This
significant reduction was due primarily because (a) with the low level of sales,
cost of goods sold increased disproportionately due to under absorption of
overhead, (b) there were increased levels of promotional merchandise provided to
distributors, and (c) there was a sharp increase in returned merchandise,
primarily under the floor plan protection plan provided to distributors.
Selling, general and administrative expense in the three months and nine
months ended September 30, 1998 were $587,597 and $2,231,486, respectively, up
8% and 24% from $541,325 and $1,879,236 in the three months and nine months
ended September 30, 1997. This increase was due primarily to costs of
approximately $28,000 per month for "liquidated damages" due to events of
default under the Company's Series B Convertible Preferred Shares, see "Item 3.
Defaults Upon Senior Securities", as well as increased bad debt write-offs and
increased professional and consulting fees, resulting from the Company's need to
engage professional and consultants to assist with its financial, legal and
related difficulties.
Losses from operations in the three months and nine months ended
September 30, 1998 were $943,641 and $2,608,844, as compared to income from
operations of $223,161 and $435,820 in the three months and nine months ended
September 30, 1997. This was occasioned by the lack of sales due to the
cessation of purchases from the Company by Hubbard. The Company's efforts, since
discontinued, to rebuild its distribution network resulted in increased
expenditure levels and an extreme reduction in gross profit percentage, due
primarily to discounted sales, increased returns of merchandise, increased
promotional efforts and increased unit costs.
The Company's interest expense for the three months and nine months ended
September 30, 1998 were $109,381 and $172,169, respectively, as compared to
$81,478 and $163,516 for the three-months and nine months ended September 30,
1997. Interest expense in subsequent quarters will increase, as the Company
intends to borrow to alleviate some of its case flow difficulties. See
"Liquidity and Capital Resources".
Net loss in the three months and nine months ended September 30, 1998
were $943,641 and $2,608,844, respectively, as compared to net income of
$223,161 and $435,820 in the three months and nine months ended September 30,
1997. The substantial decrease in sales in the quarter was the primary reason
for the increase in the net loss.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1998, cash on hand was $600, which if not augmented
would not be sufficient to fund the Company's operations. The Company obtained
loans aggregating approximately $2,194,500 (Banco Popular $1,562,500, Banco
Fiduciario $375,000 and a note from Jenadosa Holdings of approximately $257,000)
Page 11 of 15
<PAGE>
in the nine months ended September 30, 1998 (see footnote 3 and footnote 5 of
the footnotes to the consolidated financial statements). Without these loans,
the Company would not have been able to meet its obligations as they came due.
The Company's cash position has been materially negatively impacted by the
cessation of purchases from the Company by Hubbard, and weak demand for the
Company's products.
The Company's line of credit from Banco Popular in the Dominican Republic
is for $1,612,903 which may only be used for tobacco purchases and a credit
facility from Banco Fiducario of approximately $400,000 encumbering its
Dominican building.
Borrowing as of September 30, 1998 to date under the Banco Popular line
of credit totals approximately RD$1,272,258 at an average interest rate of 34%.
Interest is at prime in the Dominican Republic, which was thirty percent (30%)
per annum as of September 30, 1998.
Management intends to explore sales of tobacco from its inventories to
other manufacturers to enhance liquidity. Management's goals in such sales are
to raise approximately $400,000 to $500,000. There can be no assurance that
management will be successful in locating buyers at prices advantageous to the
Company or at all. Failure to do so would further exacerbate the Company's
liquidity crisis.
From its inception in April of 1996, the Company's cash used in
operations has exceeded its cash generated from operations, as the Company has
increased inventories and staff in the effort to establish the Company's brands
and achieve initial market penetration. The Company has financed these expanding
operations from its financing activities, which have included loans, sales of
common stock and a $3 million financing completed in September 23, 1997, which
consisted of an institutional placement of convertible debentures and
convertible preferred stock.
The Company had negative cash flows from operations of $1,551,717 in the
nine months ended September 30, 1998, which is approximately the same as cash
flows from operations of $1,526,270 in the first nine months of 1997. The
principal causes of negative cash flows were large increases in inventory of
$1,616,736 and a net loss of cash inflows from financing activities during the
nine months ended September 30, 1998. Major cash inflows in the nine months
ended September 30, 1997 consisted of $1,325,372 in short term borrowing.
Cash on hand at September 30, 1998 was $600 compared with $1,679,664 on
September 30, 1997. The Company intends to generate additional cash through
sales of its excess inventory of aged tobacco and additional borrowing. The
absence of sales of products through any distribution network and associated
cash flow has and will continue to materially negatively impact the Company's
liquidity and its ability to pay its expenses as they come due.
The Company is currently in default of certain terms of the Purchase
Agreement pursuant to which the $3 million financing was completed. See "Item 3.
Defaults Upon Senior Securities". The effect of such default is to increase the
interest rate on the $200,000 principal amount of convertible debentures from 8%
to 16% and to require the Company to pay the Purchasers under the Purchase
Agreement "liquidated damages" in an amount equal to 1% of the aggregate stated
amount of the Series B Shares issued and outstanding for each month in which the
Company remains in default. On July 30, 1998, the Company issued an aggregate of
7,380,042 shares of its common stock to Infinity Emerging Opportunities Limited,
Summit Capital Limited and Glacier Capital Limited pursuant to a conversion by
each of $331,550 in aggregate stated amount of the Company's Series B
Convertible Preferred Stock and $37,944 in accrued dividends on such shares. The
shares of common stock issued to these investors represent 56% of the issued and
outstanding common stock of the Company.
Page 12 of 15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 5, 1998, the Company entered into a settlement agreement with
Hubbard. Pursuant to the settlement agreement with Hubbard, the Distribution
Agreement and the Production Agreement were terminated. Hubbard agreed to pay
the Company the sum of $373,920 in respect of prior invoices. Payment of
$225,721 has been paid, with the remainder due on or before December 15, 1998.
Hubbard agreed not to contest the Company's previous cancellation of certain
common stock purchase warrants that had been issued to Hubbard, and the parties
exchanged mutual releases.
On July 15, 1998, the Company obtained a favorable jury verdict in the
case of Carlin Equities Corporation v. Tamboril Cigar Company. In the case,
which was tried in the United States District Court for the Southern District of
New York, Carlin instituted legal action in July 1997 alleging that it was
entitled to approximately $1,680,000 plus certain common stock purchase warrants
in respect of fees under an agreement in which Carlin was to serve as placement
agent for the Company in connection with a proposed private placement financing.
Carlin did not raise any capital for the Company, and the Company sought
financing elsewhere. The jury found that the Company did not owe Carlin any
commission on the financing it did obtain. Furthermore, the jury found that
Carlin had breached the agreement by failing to perform its obligations to the
Company. Even though the jury found for the Company on its counterclaim that
Carlin breached the agreement, no damages were awarded to the Company.
During fiscal 1998, due to the collapse of the Company's distribution
network and resulting material adverse effect on its cash flow, the Company's
manufacturing subsidiary, Tabacalera, was unable to meet its employees' payroll
or pay suppliers as invoices became due. As a result, many of its employees and
suppliers have filed suit in the Dominican Republic. Under the laws of the
Dominican Republic, the employees who have sued Tabacalera have an automatic
provisional lien on the Company's and its subsidiaries' assets. The amounts
claimed in the lawsuits are: (a) in the lawsuit filed by employees other than
Mr. Shafir, recovery of approximately RD$1.2 million ($77,419) is sought; (b) in
a lawsuit by Mr. Shafir, a former officer of the Company, recovery of
approximately RD$25.8 million ($1,664,516) is sought under an agreement that is
disputed by the Company; and (c) in lawsuits filed by suppliers, an aggregate of
approximately RD$1-2 million (US$65,000-130,000) is sought. The Company is
presently litigating these suits in the Dominican Republic. The Company expects
to seek to settle the employee claims (other than Mr. Shafir's claim) as it
acquires the funds to do so. The Company disputes Mr. Shafir's claims, and
believes that it has substantial valid counterclaims against Mr. Shafir, which
it intends to prosecute vigorously.
Apremont, Inc. filed an eviction action against the Company on September
15, 1998 for nonpayment of rent on space occupied by the Company. Apremont filed
a complaint for damages for breach of lease, but did not specify the amount of
damages.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) On July 30,1998, the Company issued an aggregate of 7,380,042 shares of its
common stock, par value $.0001 per share, to Infinity Emerging Opportunities
Limited, Summit Capital Limited and Glacier Capital Limited pursuant to a
conversion of $331,550 aggregate stated amount of the Company's Series B
Convertible Preferred Stock ("Series B Shares") and $37,944 in accrued dividends
on such Series B Shares. Infinity, Summit and Glacier invested $3,000,000 in the
aggregate in the Company's placement of Series B Shares and 8% Convertible
Debentures ("Debentures") that was completed in September of 1997. The shares of
common stock issued to the investors pursuant to the current conversions
represent 56% of the issued and outstanding common stock of the Company
(post-issuance), with 13,356,632 shares outstanding after the conversions. To
date, Infinity, Summit and Glacier have converted an aggregate of $369,494 of
the stated amount of the Series B Shares, together with the associated
dividends. The remaining stated amount of Series B Shares outstanding is
$2,324,450 and the $200,000 principal amount of Debentures remains outstanding.
Page 13 of 15
<PAGE>
Of the 7,380,042 shares, 5,252,738 shares were issued without
registration under the Securities Act of 1933, as amended ("Act"). These shares
were issued pursuant to Section 4(2) of the Act by reason of the issuance of the
shares being a transaction by an issuer not involving any public offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company remains in default of its $200,000 face amount of the
Company's 8% Convertible Debentures due September 22, 1999 and $2,800,000
aggregate stated amount of the Company's Series B Convertible Preferred Stock,
as previously disclosed in the Company's Form 10-QSB for the quarterly period
ended March 31, 1998 and June 31, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On August 4, 1998, Tom Knudson resigned as a member of the Board of
Directors of the Company.
Due to the adverse events described in Managements' Discussion and
Analysis, the Company is operating with a skeletal staff of very few employees
and extremely limited financial resources. Also, the Company's cigar
manufacturing subsidiary and most of its corporate records are located in the
Dominican Republic, where the Company no longer has the employees needed to
locate and compile information. As a result, the Company has had difficulty
obtaining the necessary information to prepare this 10-QSB, and, in some cases,
especially regarding matters in the Dominican Republic, was not able to obtain
complete information.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
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 ("Purchase Agreement").**
4.2 Form 8% Convertible Debenture**
4.3 Certificate of Designation of the Companies Series B Preferred Stock**
Page 14 of 15
<PAGE>
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 Distribution Agreement between the Company and Hubbard Imports*
21 Subsidiaries of the Company*
23.1 Consent of Goldstein Golub Kessler & Co., PC, independent certified
public accountants*
23.2 Consent of Kaplan Gottbetter & Levenson, LLP, counsel to registrant*
99 Press release dated October 1, 1997**
99.1 Press release dated August 11, 1998
99.2 Press release dated August 17, 1998
* Incorporated by reference to the Registrant's
Registration Statement on Form 10-SB filed with the
Commission on May 15, 1997, as amended.
** Incorporated by reference to the Company's Current
Report on Form 8-K filed with the Commission on
October 1, 1997.
(b) None.
</TABLE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, hereunto duly
authorized.
TAMBORIL CIGAR COMPANY
/s/ Alan Goldberg
-----------------------------------
Alan Goldberg
President, Chief Executive Officer
Chief Accounting Officer,
and Principal Accounting Officer
Page 15 of 15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 600
<SECURITIES> 0
<RECEIVABLES> 64,253
<ALLOWANCES> (43,536)
<INVENTORY> 4,064,386
<CURRENT-ASSETS> 350,394
<PP&E> 1,382,541
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,818,638
<CURRENT-LIABILITIES> 3,099,176
<BONDS> 0
0
3
<COMMON> 1,336
<OTHER-SE> 2,718,123
<TOTAL-LIABILITY-AND-EQUITY> 5,818,638
<SALES> 60,091
<TOTAL-REVENUES> 60,091
<CGS> 311,754
<TOTAL-COSTS> 582,597
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,381
<INCOME-PRETAX> (943,641)
<INCOME-TAX> 0
<INCOME-CONTINUING> (943,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (943,641)
<EPS-BASIC> (.10)
<EPS-DILUTED> (.10)
</TABLE>
CRL CORRECT: TAMBORIL CIGAR SETTLES DISPUTE WITH HUBBARD IMPORTS
July 17 1998 17:12
(The following is a reformatted version of a press release issued by Tamboril
Cigar Co.)
TAMBORIL CIGAR COMPANY ANNOUNCES SETTLEMENT OF DISPUTE WITH HUBBARD IMPORTS;
FAVORABLE JURY VERDICT IN CARLIN EQUITIES LITIGATION
Miami, FL - TAMBORIL CIGAR COMPANY (NASD OTC Bulletin Board Symbol SMKE)
today announced that it has previously entered into a settlement agreement with
Hubbard Imports, which was formerly a distributor of Tamboril's cigars. Pursuant
to the settlement agreement, the parties agreed that the Distribution Agreement
and the Cigar Production Agreement between the parties are terminated. Hubbard
agreed to pay Tamboril the sum of $373,920 in respect of prior invoices. Payment
of $225,721 has been paid, with the remainder due on or before December 15,
1998. Hubbard agreed not to contest Tamboril's previous cancellation of certain
common stock purchase warrants that had been issued to Hubbard, and the parties
exchanged mutual releases. Tamboril also announced that it had received a
favorable jury verdict in the case of Carlin Equities Corporation v. Tamboril
Cigar Company. In the case, which was tried in the United States District Court
for the Southern District of New York, Carlin instituted legal action in July
1997 alleging that it was entitled to approximately $1,680,000 plus certain
common stock purchase warrants in respect of fees under an agreement in which
Carlin was to serve as placement agent for Tamboril in connection with a
proposed private placement financing. Carlin did not raise any capital for
Tamboril, and the Company sought financing elsewhere. The jury found that
Tamboril did not owe Carlin any commission on the financing it did obtain.
Furthermore, the jury found that Carlin breached the agreement by failing to
perform its obligations to Tamboril. Even though the jury found for Tamboril on
its counterclaim that Carlin breached the agreement, no damages were awarded to
Tamboril. Paul R. Levenson of Kaplan Gottbetter & Levenson, LLP, lead trial
counsel for Tamboril, stated: "We were very pleased to have successfully
defended this suit. We had great confidence all along in the propriety of the
Company's actions and feel that the jury's verdict bears this out." The Tamboril
Cigar Company manufactures and distributes premium, hand-rolled cigars under the
Tamboril/TM/, Cordova/TM/ and FORE!/TM/ brand names. Its manufacturing
facilities are located in the Dominican Republic and its headquarters and U.S.
sales offices are located in Miami, Florida. The Tamboril Cigar Company's common
stock trades on the NASD OTC Bulletin Board under the trading symbol SMKE. For
further information please contact the Company's Investor Relations at
1-800-227-5409.
NEWS RELEASE
AUGUST 17, 1998
FOR IMMEDIATE RELEASE
- ---------------------
TAMBORIL CIGAR COMPANY ANNOUNCES ISSUANCE OF 7,380,042 SHARES OF COMMON STOCK IN
CONVERSION OF PREFERRED STOCK
Miami, FL--TAMBORIL CIGAR COMPANY (NASD OTC Bulletin Board Symbol SMKE) today
announced that on
August 5, 1998 it issued an aggregate of 7,380,042 shares of its common stock,
par value $.0001 per share, to Infinity Emerging Opportunities limited, Summit
Capital Limited and Glacier Capital Limited pursuant to a conversion of $994,650
aggregate stated amount of Tamboril's Series B Convertible Preferred Stock (the
"Series B Shares") and $113,832.18 in accrued dividends on such Series B Shares.
Infinity, Summit and Glacier invested $3,000,000 in the aggregate in Tamboril's
placement of Series B Shares and 8% Convertible Debentures (the "Debentures")
that was
<PAGE>
completed in September of 1997. The shares of common stock issued to the
investors pursuant to the current conversions represent 56% of the issued and
outstanding common stock of Tamboril(post-issuance), with 13,028,056 shares
outstanding after the conversions. To date, Infinity, Summit and Glacier have
converted an aggregate of $1,138,650 of stated amount of the Series B Shares,
together with the associated dividends. The remaining stated amount of Series B
Shares outstanding is $1,661,350 and the$200,000 principal amount of Debentures
remains outstanding.
The Tamboril Cigar Company manufactures and distributes premium, hand-rolled
cigars under the Tamboril/TM/, Cordova/TM/ and FORE!/TM/ brand names. Its
manufacturing facilities are located in the Dominican Republic and its
headquarters and U.S. sales offices are located in Miami, Florida. The Tamboril
Cigar Company's common stock trades on the NASD OTC Bulletin Board under the
trading symbol SMKE. For further information please contact the Company's
Investor Relations at 1-800-227-5409.
