U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: August 31, 2000
Commission file number: 0-26186
CHESHIRE DISTRIBUTORS, INC
(Exact name of registrant as specified in its charter)
Delaware 84-1209978
-------- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization
1599 Post Road East, Westport, CT 06880
----------------------------------------
(Address of principal executive offices)
(203) 255-4116
-------------------------------
(Registrant's telephone number)
Indicate by check mark whether the registrant(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act of
1934 during the preceding 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
----- -----
As of November 30, 2000, 11,048,815 shares of common stock, par value $0.001 per
share, were outstanding.
<PAGE>
INDEX
-----
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets, August 31, 2000
(unaudited) and December 31 1999 3
Consolidated Condensed Statements of Operations
(unaudited) for the six and three months ended August
31, 2000 4
Consolidated Condensed Statements of Stockholders'
Deficit (unaudited) for the six months ended August 31,
2000 5
Consolidated Condensed Statement of Cash Flows
(unaudited) for the six months ended August 31, 2000 6
Notes to consolidated condensed (unaudited) financial
statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 16
PART II. OTHER INFORMATION 17
Signatures 18
2
<PAGE>
<TABLE>
CHESHIRE DISTRIBUTORS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
<CAPTION>
August 31, 2000 December 31,
(unaudited) 1999
--------------- ------------
<S> <C> <C>
ASSETS
Current Assets
--------------
Cash and cash equivalents .............................. $ 1,834,715 $ --
Trade accounts receivable, net ......................... 3,302,387 --
Inventories ............................................ 4,014,791 --
Prepaid expenses ....................................... 6,570 --
Note receivable from selling shareholders .............. 203,606 --
------------ ------------
Total Current Assets ................................ 9,362,069 --
------------ ------------
Property and equipment, net ............................ 895,647 --
Goodwill, net .......................................... 7,268,851 --
Deferred loan costs and other, net ..................... 473,349 --
------------ ------------
Total Assets ........................................ $ 17,999,916 $ --
============ ============
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
-------------------
Bank overdraft ......................................... $ 382,806 $ --
Accounts payable ....................................... 3,713,198 440
Accounts payable - related party ....................... -- 500
Accrued expenses ....................................... 153,313 --
Short term notes payable ............................... 4,209,669 --
Notes payable to selling shareholders .................. 9,000,000 --
------------ ------------
Total Current Liabilities ........................... 17,458,986 940
------------ ------------
Other Liabilities
-----------------
Long term notes payable ................................ 1,859,548 --
------------ ------------
Total Liabilities ................................... 19,318,534 940
------------ ------------
Stockholders' Deficit
---------------------
Common Stock, $0.001 par value:
Authorized: 100,000,000 shares,
issued and outstanding, 10,365,456 and 137,283 shares,
respectively ......................................... 10,365 6,863
Additional paid in capital ............................. 1,081,377 15,884
Accumulated deficit .................................... (2,262,915) (23,687)
Accumulated other comprehensive loss ................... (147,445) --
------------ ------------
Total Stockholders' Deficit .......................... (1,318,618) (940)
------------ ------------
Total Liabilities & Stockholders' Deficit .............. $ 17,999,916 $ --
============ ============
The accompanying notes are an integral part of the consolidated condensed financial statements.
</TABLE>
3
<PAGE>
<TABLE>
CHESHIRE DISTRIBUTORS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (1)
(unaudited)
<CAPTION>
For the six months For the three
ended August 31, months ended
2000(2) August 31, 2000
------------------ ---------------
<S> <C> <C>
Sales ............................................... $ 47,412,967 $ 29,949,507
Cost of Sales ....................................... 45,472,176 28,652,351
------------ ------------
Gross Profit ...................................... 1,940,791 1,297,156
Selling, general and administrative expenses ........ 1,706,745 1,131,956
epreciation and amortization ........................ 242,945 118,274
------------ ------------
Operating Expenses ................................ 1,949,690 1,250,230
------------ ------------
Income (loss) from operations ....................... (8,899) 46,926
Other income (expense)
Interest expense and other financing charges ........ (428,774) (198,703)
Interest income ..................................... 93,398 54,504
Non cash financing charges .......................... (537,745) (272,366)
Foreign currency exchange gain (loss) ............... (183,875) 52,432
Other ............................................... 155 155
------------ ------------
(1,056,841) (363,978)
------------ ------------
Loss before income taxes ............................ (1,065,740) (317,052)
Income taxes - foreign .............................. 217,265 153,506
------------ ------------
Net loss ............................................ $ (1,283,005) $ (470,558)
============ ============
Net loss per share, basic and diluted ............... $ (0.12) $ (0.05)
Weighted average number of common shares outstanding:
Basic and diluted ................................. 10,365,243 10,365,456
============ ============
</TABLE>
(1) Since Cheshire commenced operations during August 1999, no comparable
statements of operations for the three and six month periods ended August
31, 1999 are presented.
(2) Includes the results of Cardoso from April 7, 2000 (the date of
acquisition).
The accompanying notes are an integral part of the consolidated condensed
financial statements.
4
<PAGE>
<TABLE>
CHESHIRE DISTRIBUTORS, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIT
(unaudited)
<CAPTION>
-------------------------
Common Stock
-------------------------- Accumulated
Additional other
Number of paid-in Accumulated comprehensive
shares Amount capital deficit loss Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance March 1, 2000 .......... 10,365,000 $ 10,365 $ 229,371 ($ 979,910) -- ($ 740,174)
Shares Issued May 2000 ......... 456 $ 0 $ 4,070 -- -- $ 4,070
Valuation of non-cash conversion
feature and warrants on debt
instruments .................... -- -- $ 847,936 -- -- $ 847,936
Comprehensive Loss:
Net loss for the period ...... -- -- -- ($1,283,005) -- ($1,283,005)
Foreign currency translation
adjustment ................... -- -- -- -- ($ 147,445) ($ 147,445)
------------
Total comprehensive loss ....... -- -- -- -- -- ($1,430,450)
---------------------------------------------------------------------------------------------
Balance August 31, 2000 ........ 10,365,456 $ 10,365 $ 1,081,377 ($2,262,915) ($ 147,445) ($1,318,618)
=============================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated condensed
financial statements.
5
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (1)
(unaudited)
For the six months
ended August 31,
2000 (2)
------------------
Cash Flows from Operating Activities
------------------------------------
Net loss ............................................... $(1,283,005)
Adjustments to reconcile net loss to net cash flows from
operations:
Depreciation and amortization ........................ 242,945
Non-cash financing charges ........................... 537,745
Foreign currency exchange loss ....................... 183,875
Changes in assets and liabilities, net of the affects of
acquisition:
(Increase) decrease in:
Accounts receivable .................................. 399,085
Prepaid expenses and other ........................... (6,024)
Receivable from affiliates ........................... 104,243
Inventories .......................................... 275,204
Decrease in:
Accounts payable and bank overdraft .................. (887,472)
Accrued expenses ..................................... (85,703)
-----------
Net cash used in operating activities ................ (519,107)
-----------
Cash flows from investing activities
------------------------------------
Purchase of property and equipment ................... (79,202)
Net cash acquired in business acquisition ............ 1,495,946
-----------
Net cash provided by investing activities .......... 1,416,744
-----------
Cash flows from financing activities
------------------------------------
Proceeds from debt ................................... 2,064,683
Repayment of debt .................................... (1,048,102)
Deferred loan costs .................................. (43,673)
Issuance of common stock ............................. 4,070
-----------
Net cash provided by financing activities .......... 976,978
-----------
Effect of exchange rate changes on cash and cash
equivalents ............................................ (46,247)
-----------
Net increase in cash and cash equivalents .......... 1,828,368
Cash and cash equivalents, beginning of period ..... 6,347
-----------
Cash and cash equivalents, end of period ........... $ 1,834,715
===========
(1) Since Cheshire commenced operations during August 1999, no comparable
statements of cash flows for the period ended August 31, 1999 are
presented.
(2) Includes the cash flows of Cardoso from April 7, 2000 (the date of
acquisition).
The accompanying notes are an integral part of the consolidated condensed
financial statements.
6
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1 MANAGEMENT'S REPRESENTATION OF INTERIM FINANCIAL INFORMATION
Cheshire Distributors, Inc. ("Cheshire" or "the Company") has prepared
the accompanying consolidated condensed financial statements without
audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
as allowed by such rules and regulations, and management believes that
the disclosures are adequate to make the information presented not
misleading. These consolidated condensed financial statements include
all of the adjustments, which, in the opinion of management, are
necessary to a fair presentation of financial position and results of
operations.
During June 2000 the Company changed its fiscal year to the last day of
February to conform to the fiscal year of Cardoso, its subsidiary,
which represents substantially all of the operating revenues of the
Company. These statements contain the consolidated operating results of
the Company and Cardoso for the three months ending August 31, 2000 as
well as the operating results of the Company for the six months ending
August 31, 2000 consolidated with the operating results of Cardoso for
the period, from the purchase date, April 7, 2000 through August 31,
2000.
Since Cheshire commenced operations during August 1999, no comparable
statements of operations or cash flows for the periods ended August 31,
1999 are presented.
2 MERGER
On February 18, 2000, the Company's predecessor issuer, Pacific
Development Corporation ("Pacific"), a Colorado corporation, issued
10,000,000 shares in consideration of the merger of Cheshire
Distributors, Inc., a Delaware Corporation into Cheshire Holdings,
Inc., a wholly owned subsidiary of Pacific. Cheshire Holdings, Inc. is
considered the acquirer for accounting purposes because the former
shareholders of Cheshire Distributors, Inc. became the controlling
shareholders of Pacific. Immediately after the closing, there were
10,365,000 Pacific shares outstanding.
On March 24, 2000, Pacific and Cheshire Holdings, Inc. were merged into
a single corporation existing under the laws of the state of Delaware,
with Cheshire Holdings, Inc. being the surviving corporation. The name
of the surviving corporation was changed to Cheshire Distributors, Inc.
Each share of Pacific Development Corporation's issued and outstanding
common stock was automatically converted into shares of Cheshire
Distributors, Inc.'s common stock. Pacific was formed for the purpose
of acquiring an operating business and at the time of the merger, had
no significant assets or liabilities. The transaction has been
accounted for as a recapitalization of Cheshire Distributors, Inc.,
which is the acquirer of Pacific for accounting purposes.
7
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
All share and per share amounts have been restated to reflect share
adjustment terms contained in the governing agreements. The February
18, 2000 merger of the Company with Pacific described above resulted in
an exchange ratio of 4,957.858 to 1 shares of Pacific common stock for
each Cheshire share previously outstanding.
8
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
3 NOTES PAYABLE
The Company has the following notes outstanding at August 31, 2000:
$350,000 face amount 7% unsecured promissory note,
convertible into shares of stock at a rate of $3.50 per
share until maturity, which was November 18, 2000. An
extension of the due date for this note is currently
being negotiated. $350,000
$150,000 face amount 6% unsecured promissory note,
convertible into shares of common stock at 75% of the
fair value of each share of the Company's common stock
until maturity, which is December 21, 2001. $150,000
$40,000 term loan payable to a bank, with interest at
9%, secured by a pledge of bank account belonging to
shareholders of the Company, originally due June 26,
2000. This note has been extended, under the same terms,
with interest at 9.5%, and is due December 26,2000. $40,000
$1,400,000 face amount 6% unsecured promissory note,
convertible into shares of common stock at 80% of the
market value of each share of the Company's common stock
until maturity, which is March 22, 2003. $400,000 of
this debt has been repaid leaving a current outstanding
balance of $1,000,000. $1,000,000
$320,000 face amount 6% unsecured promissory note
convertible into shares of common stock at 72% of the
market value of each share of the Company's common stock
until maturity, which is May 17, 2003 $320,000
$205,000 face amount 6% unsecured promissory note
convertible into shares of common stock at 72% of the
market value of each share of the Company's common stock
until maturity, which is May 17, 2003. $205,000
$175,000 face amount 6% unsecured promissory note
convertible into shares of common stock at 72% of the
market value of each share of the Company's common stock
until maturity, which is May 17, 2003. $175,000
$200,000 face amount 14% unsecured promissory note
convertible into shares of common stock at a fixed price
of $3.50 per each share of the Company's common stock
until maturity, which is May 31, 2001. $200,000
$9,000,000 face amount promissory note, secured by the
shares of Cardoso, for the purchase of the shares of
Cardoso. Maturity was October 7, 2000, and has been
extended to December 31, 2000. (see Note 4) $9,000,000
$3,361,992 face amount 8% unsecured promissory note.
This note, payable by Cardoso, is payable in US dollars.
No maturity date has been set for this note. (see note
5) $3,361,992
$100,000 face amount 10% unsecured promissory demand
note payable to a principal shareholder. No maturity
date has been set for this note. $100,000
9
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
$100,000 face amount 15% unsecured promissory note
payable October 9, 2000. Additional funds have been
advanced by this note holder and the prior note has been
rolled into a new note for $156,500 bearing interest at
the rate of 20% which is due on January 24, 2001 $100,000
$50,000 face amount 20% unsecured promissory note
payable October 9, 2000. This note has matured and
repayment terms are being renegotiated. $50,000
$18,121 of other notes, including capital leases of
$9,500, payable over various terms, from one to three
years. $17,225
-----------
Total notes outstanding ($13,209,669 current,
$1,859,548 long term) $15,069,217
===========
In addition to conversion privileges contained in
certain of the above outstanding debt instruments, the
Company has granted the following outstanding warrants
to purchase common shares:
Three year warrant to purchase approximately 116,708
shares of the Company's common stock for total
proceeds of $500,000 if exercised by October 1, 2001,
and for total proceeds of $600,000 if exercised
between October 1, 2001 and October 1, 2002.
Two year warrant to purchase common shares at an
amount equal to the number of common shares into which
the above $150,000 face amount note is converted.
Warrant exercise price will be equal to 75% of the
fair market value of the Company's common stock at the
date of exercise.
For the quarter and six months ended August 31, 2000,
the Company recorded $272,366 and $537, 745 respectively
in non-cash financing costs related to conversion
privileges and warrants contained in certain of the
above outstanding debt instruments, based on the
approximate fair value of these conversion privileges
and warrants.
4 ACQUISITION
On April 7, 2000, the Company closed the first
installment of $1,000,000 of the purchase of the
outstanding shares of common stock of Cardoso Cigarette
Depot (Pty.) Limited, pursuant to the Stock Purchase
Agreement originally dated September 23, 1999, between
the Company and Eduardo P.V. Cardoso and Alberteina
Cardoso ("Sellers") and Cardoso, as amended by the
Amended Stock Purchase Agreement dated April 7, 2000
(collectively, the "Purchase Agreement"). All of the
shares of the Sellers have been placed in escrow,
pending full payment for their shares in Cardoso.
Additionally, the Sellers have given the Company their
proxy to vote their shares at any general or special
meeting of the shareholder's of Cardoso until October 7,
2000, which has been extended to December 31, 2000.
10
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
The purchase agreement provided that the total purchase
price of $10,000,000 is payable in cash in installments
of $1,000,000 at closing (April 7, 2000), a second
installment of $2,000,000 on or before the twenty-first
day after the closing (May 1, 2000) and a final
installment of $7,000,000 on or before the date which is
six months after the closing date (October 7, 2000). The
$1,000,000 April 7th installment was paid with funds
raised through the issuance of additional debt
securities. An amendment to the Agreement in May 2000
provides for the entire balance of $9,000,000 to be
repaid on or before October 7, 2000. This has been
extended to December 31, 2000. Interest, at the annual
rate of 11% has been charged on the $2,000,000
originally due on May 1, 2000, for the period from May
1, 2000 through August 31, 2000.
Assuming the Cardoso acquisition had occurred at the
beginning of the fiscal year, pro forma consolidated
results would be:
For the six months ended August 31, 2000
----------------------------------------
Net sales $60,121,153
Net loss ($2,812,382)
Net loss per share (basic and diluted) ($0.27)
For the year ended February 29, 2000
------------------------------------
Net sales $136,192,528
Net loss ($2,347,733)
Net loss per share (basic and diluted) ($0.23)
The pro forma results for the six month period ended
August 31, 2000, have been charged with approximately
$191,000 in amortization of goodwill, $610,000 of
interest expense for the loans to finance the
acquisition, $885,000 in non-cash costs of financing for
the loans to finance the acquisition and $347,000
foreign currency loss for the increased cost in Rand to
repay the US dollar denominated loan. The selling
shareholder has agreed to guaranty the Company against
any currency loss incurred for this debt after February
29, 2000.
The pro forma results for the year ended February 29,
2000 have been charged with approximately $379,000 in
amortization of goodwill, $730,000 of interest expense
for the loans to finance the acquisition and $1,769,000
in non-cash financing costs.
5 FOREIGN EXCHANGE LOSS
A US $ denominated loan, with a balance of $3,361,992 on
August 31, 2000 is a debt of Cardoso repayable in US
dollars. As the South African Rand has declined in value
against the US dollar, a foreign exchange loss has been
incurred. For the period from April 7 to August 31, 2000
this amounted to $183,875
11
<PAGE>
CHESHIRE DISTRIBUTORS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
6 SUBSEQUENT EVENT
The prior financing agreement with H.D. Brous & Co.,
entered into in June 2000, was not completed in the time
called for in the agreement. Although there can be no
assurance that it will succeed, the Company is in the
process of negotiating other financial agreements which,
upon completion, should be sufficient to pay the
purchase consideration note payable for the Cardoso
acquisition. Final terms of the new financial agreements
have not been settled, however, it is anticipated that
these agreements can be finalized shortly.
12
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report, including the Management's
Discussion and Analysis and other sections, contains
forward looking statements that are subject to risks and
uncertainties and which reflect management's current
beliefs and estimates of future economic circumstances,
industry conditions, company performance and financial
results. Forward looking statements include information
concerning the possible or assumed future results of
operations of the Company and those statements preceded
by, followed by or include the words "future,"
"position," "anticipate(s)," "expect," "believe(s),"
"see," "plan," "further improve," "outlook," "should" or
similar expressions. For these statements, we claim the
protection of the safe harbor for forward-looking
statements contained in the Private Securities
Litigation Reform Act of 1995. You should understand
that the following important factors, in addition to
those discussed elsewhere in this document and in our
other filings with the Securities and Exchange
Commission, could affect the future results of the
Company and could cause those results to differ
materially from those expressed in our forward looking
statements: changing market conditions with regard to
cigarettes and the demand for the Company's products,
domestic regulatory risks, competitive and other risks
over which the Company has little or no control and our
ability to obtain financing to pay the balance of the
purchase price for the shares of Cardoso. Any changes in
such factors could result in significantly different
results. Consequently, future results may differ from
management's expectations. Moreover, past financial
performance should not be considered a reliable
indicator of future performance.
Results of Operations
---------------------
On February 18, 2000, Cheshire reverse-merged into
Pacific, a fully reporting over-the-counter, bulletin
board ("OTC BB") Company, with Cheshire Distributors
Inc., the surviving entity.
On April 7, 2000 Cheshire purchased the outstanding
shares of Cardoso Cigarette Depot (Pty.) Limited
("Cardoso"), a major tobacco, confectionery and cosmetic
distributor, and one of the largest privately held
companies in South Africa.
Financial statements of Cardoso and pro forma
information related to the acquisition were included in
Form 8 K/A filed June 28, 2000.
Cheshire plans to raise sufficient capital to enable it
to pay the note for remainder of the purchase price of
Cardoso before the end of the company's fiscal year end.
After the full purchase price has been paid, management
believes that significant operational improvements can
be put into place to improve the Company's performance.
This is planned to include tightened cost controls,
updated and integrated information systems, expanded
product lines as well as territorial expansion. In
addition, management has been approached by and expects
to be able to acquire other distributors in South Africa
in order to enhance its market position and provide
expanded growth and profitability.
13
<PAGE>
Sales for the three and six-month periods ended August
31, 2000 were $29.9 million and $47.4 million all of
which were derived from the Company's Cardoso subsidiary
from the acquisition date of April 7, 2000. While
preacquisition comparative figures are not included for
the same period of the prior year, sales are in line
with management's expectations for this period.
Cardoso's sales generally do not vary substantially on a
seasonal basis. An exception is that the first quarter
generally has lower sales and the fourth quarter higher
sales due to customer's purchasing somewhat greater
quantities in the fourth quarter in anticipation of
annual excise tax increases which traditionally have
occurred in March of each year. For the fiscal year
ended February 29, 2000, Cardoso's sales were $136.2
million.
For the three month period ending August 31, 2000 gross
profit of $1.3 million was earned by Cardoso at the rate
of 4.3% of sales. For the six month period the gross
profit earned was $1.9 million or 4.1% of sales. While
preacquisition comparative figures are not included for
the same period of the prior year, these results are
within the anticipated range covered by normal market
price fluctuations. For the fiscal year ended February
29, 2000, Cardoso's gross margin was 3.9% on sales of
$136.2 million.
For the six month period ending August 31, 2000, total
operating expenses, which includes selling, general and
administrative expenses, depreciation and amortization,
as well as amortization of goodwill incurred in the
purchase of Cardoso was $1.9 million or 4.1% of sales;
2.4% represents costs of the Cardoso subsidiary and 1.7%
of Cheshire. For the three month period ending August
31, 2000 total operating expenses were $1.3 million or
4.2% of sales; 2.5% represents costs of the Cardoso
subsidiary and 1.7% of Cheshire. While preacquisition
comparative figures are not included for the same period
of the prior year, these results are in line with
management's expectations for this period. For the
fiscal year ended February 29, 2000, comparable Cardoso
costs were 2.13% of sales.
As a result of the above, the income from operations for
the second quarter ended August 31, 2000 was $46,926 or
0.15% of sales and a loss from operations of $8,899 or
0.02% of sales for the six months. For the fiscal year
ended February 29, 2000, Cardoso's income from
operations was $2.4 million or 1.76% of sales.
Other income and expenses for the six and three month
periods ending August 31, 2000 amount to net expense of
$1,056,841and $363,978 or 2.23% and 1.22% of sales, all
of which relate to financing activities of the Company.
Net interest expense for the six month period equaled
$335,376 or 0.71% of sales and for the three month
period amounted to $144,199 or 0.48% of sales.
For the six month and three month periods non-cash
financing costs, arising out of options and warrants
granted in the negotiation of debt transactions by
Cheshire were $537,745 or 1.13% of sales and $272,366
or 0.91% of sales respectively.
14
<PAGE>
Foreign currency exchange loss of $183,875 or 0.39% of
sales for the six months and a gain of $52,432 or
0.18% of sales for the three months arise from foreign
exchange rate changes related to Cardoso's foreign
denominated debt.
As a result of the above items, a loss before income
taxes for the six months ended August 31, 2000 amounted
to $1,065,740. For the three month period ended August
31, 2000 the loss was $317,052. South African income
taxes on Cardoso's profit for the six months was
$217,265, resulting in a net loss for the Company of
$1,283,005. For the three month period ended August 31,
2000 South African income taxes on Cardoso's profits was
$153,506 resulting in a net loss for the Company of
$470,558.
Liquidity and Capital Resources
-------------------------------
The following is a summary of the Company's cash flows
from operating, investing, and financing activities, as
well as the effect of exchange rate changes on cash:
Six months
ended
August 31,
2000
-----------
Operating activities ($519,107)
Investing activities 1,416,744
Financing activities 976,978
Effect of exchange rate changes on cash (46,247)
-----------
Net increase in cash $1,828,368
===========
During the six months ended August 31, 2000, the Company
utilized cash flow in operating activities primarily to
reduce accounts payable and accrued expenses. Cash was
provided by operating activities though decreases in
accounts receivable, receivables from affiliates, and
inventories. During the six months ended August 31,
2000, the Company utilized cash flow in investing
activities to acquire property and equipment. Cash was
provided by investing activities through the acquisition
of Cardoso which had cash on hand in excess of the
initial $1,000,000 purchase installment. During the six
months ended August 31, 2000, the Company utilized cash
flow from financing activities primarily to fund the
repayment of debt and related loan costs. Cash was
primarily provided from new debt issued. During the six
months ended August 31, 2000, exchange rate changes of
the Rand and US Dollar reduced cash and cash
equivalents.
The Company had negative working capital of $8,096,917
as of August 31, 2000. This is primarily due to the
$9,000,000 note to complete the purchase of Cardoso,
which the Company intends to refinance. The Company is
in the process of negotiating financial agreements,
which, upon completion should be sufficient to pay the
purchase consideration note payable for Cardoso. While
management is confident that an agreement will be
reached to complete the purchase of Cardoso, the failure
to raise such funds would result in the Company's breach
of the purchase agreement. Additionally, the $3,361,992
note payable by Cardoso has no fixed maturity date and
is in the process of being renegotiated. Cardoso's
operations, which include working capital lines of
credit from local financial institutions, are sufficient
to cover its operations and repayment of debt.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk includes exchange rate
variability. The Company does not utilize financial
instruments for trading purposes and holds no derivative
financial instruments which could expose the Company to
significant market risk. The Company's exposure to
market risk relates primarily to its investment in
Cardoso.
Cardoso does substantially all of its business in South
African Rand and all of its assets are located in South
Africa. At this time, all products purchased by Cardoso
are produced domestically and paid for in South African
Rand. Cardoso does have an outstanding debt of
$3,361,992 payable in US dollars. As the two currencies
fluctuate in price, relative to each other, this
obligation can become more or less costly to Cardoso in
terms of repayment in Rand. Over the last few years the
Rand has declined in relationship to the US dollar which
has caused an unrealized loss for Cardoso.
In addition, the agreement to purchase Cardoso calls for
all payments to be made in US dollars. The debt to be
incurred, in order to pay for this purchase, is also
planned to be in US dollars. The cash flow to repay this
debt will come from Cardoso. As such, the repayment
obligation will likewise be subject to the same exchange
rate variability. To reduce the Company's risk of such
fluctuations in exchange rates, Cheshire may in the
future purchase foreign exchange contracts in amounts
and with expiration dates in line with it's repayment
obligations of principal and interest or replace part or
all of such debt with new obligations denominated in
South African Rand.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Report on Form 8-K
(a) Exhibit 27 - Financial Data Schedule, filed herewith
electronically
(b) Reports on Form 8-K
a. January 24, 2000, 8K by Pacific Development Corp.,
predecessor issuer to Cheshire Distributors, Inc.
reporting under Item 5, a 1 for 50 reverse split of its
outstanding common shares.
b. March 7, 2000, 8K by Pacific Development Corp. reporting a
change in control of the registrant.
c. April 12, 2000, 8K/A by Cheshire Distributors, Inc.
reporting change of domicile to Delaware and the merger of
Cheshire with Pacific.
d. April 24, 2000, 8K by Pacific Development Corp. reporting
the completion of the first phase of the acquisition of
Cardoso Cigarette Depot (Pty.) Limited.
e. June 5, 2000, 8K by Cheshire Distributors, Inc. reporting
a change in the Company's fiscal year to February 28.
f. June 28, 2000, 8K/A by Cheshire Distributors, Inc.
reporting pro-forma results of the Cardoso acquisition and
financial statements of Cardoso.
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SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHESHIRE DISTRIBUTORS, INC.
By: /s/ Jerry M. Kleinberg
---------------------------------
Chief Financial Officer
Date: December 13, 2000
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