1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-21081
CARIBBEAN CIGAR COMPANY
(Exact name of registrant as specified in its charter)
FLORIDA 65-0613303
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8305 N.W. 27th STREET
SUITE 111
MIAMI, FLORIDA
(Address of principal executive offices)
33122
(Zip Code)
(305) 267-3911
(Issuer's telephone number)
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
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: 6,746,575 shares as of August 18,
1998
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Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
1998 1998
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,263 $ 72,986
Accounts receivable, net of allowance for doubtful
accounts of $58,000 at June 30, 1998 and March 31, 1998 447,881 217,536
Insurance proceeds receivable -- 1,333,418
Inventories 2,807,575 2,938,963
Prepaid expenses and other current assets 429,381 318,000
Net assets held for sale 1,882,509 2,085,991
------------ ------------
Total current assets 5,568,609 6,966,894
Property and equipment, net 1,529,891 1,593,095
Other assets 99,083 107,422
------------ ------------
$ 7,197,583 $ 8,667,411
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,481,458 $ 2,078,114
Short-term borrowings 1,990,153 2,257,714
Accrued litigation and professional fees 222,612 307,500
Other accrued expenses and taxes payable 480,178 610,706
------------ ------------
Total current liabilities 4,174,401 5,254,034
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.001 par value;
2,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.001 value; 10,000,000
shares authorized; June 30, 1998
issued and outstanding - 6,502,452; March
31, 1998 - issued and
outstanding - 6,176,602 6,502 6,177
Additional paid-in capital 11,970,128 11,780,315
Accumulated deficit (8,953,448) (8,373,115)
------------ ------------
Stockholders' equity 3,023,182 3,413,377
------------ ------------
$ 7,197,583 $ 8,667,411
============ ============
The accompanying notes are an integral part hereof.
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Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months
Ended June 30,
-----------------------------
1998 1997
----------- -----------
Sales $ 649,090 $ 2,287,569
Cost of sales 438,655 1,186,909
----------- -----------
Gross profit 210,435 1,100,660
----------- -----------
Operating expenses:
Selling expenses 203,215 694,533
General and administrative expenses 212,821 1,040,719
----------- -----------
416,046 1,735,252
----------- -----------
Loss from continuing operations before interest
(income) expense (205,611) (634,592)
Interest (income) expense 273,110 (11,291)
----------- -----------
Loss from continuing operations (478,721) (623,301)
Income (loss) from discontinued operations (101,612) 16,212
----------- -----------
Net loss $ (580,333) $ (607,089)
=========== ===========
Basic and diluted loss from continuing operations
per common share $ (.08) $ (.12)
Basic and diluted income (loss) from discontinued
operations per common share (.01) --
----------- -----------
Basic and diluted net loss per common share $ (.09) $ (.12)
=========== ===========
Basic and diluted weighted average number of common shares 6,339,527 5,128,852
=========== ===========
The accompanying notes are an integral part hereof.
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Caribbean Cigar Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Three Months
Ended June 30,
-----------------------------
1998 1997
----------- -----------
Continuing Operations:
Cash flows from operating activities:
Net loss from continuing operations $ (478,721) $ (623,301)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization 82,368 101,133
Write-off of leasehold improvements -- 122,483
Common stock issued for services -- 24,198
Interest expense recorded for common stock
issued in connection with notes payable 190,138 --
Increase in accounts receivable (230,345) (103,408)
Decrease in insurance receivable 1,333,418 --
Decrease (increase) in inventory 281,327 (277,707)
Increase in prepaid expenses (261,320) (820,900)
Decrease (increase) in other assets 8,339 (13,419)
Increase (decrease) in accounts payable (596,656) 241,925
Increase (decrease) in accrued expenses (215,416) 176,274
----------- -----------
Net cash provided by (used in) operating activities 113,132 (1,172,722)
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (19,164) (536,309)
Trademark costs -- (1,180)
----------- -----------
Net cash used in investing activities (19,164) (537,489)
----------- -----------
Cash flows from financing activities:
Decrease in short-term borrowings (467,561) --
Advances from officers and directors -- 249,700
Proceeds from convertible debt 150,000 --
Advances to/from related parties -- 36,805
----------- -----------
Net cash provided by (used in) financing activities (267,561) 286,505
----------- -----------
Net decrease in cash from continuing operations (173,593) (1,423,706)
----------- -----------
Discontinued Operations:
Net income (loss) from discontinued operations (101,612) 16,212
Net change in assets held for sale 203,482 (1,414,602)
----------- -----------
Net increase (decrease) in cash from discontinued operations 101,870 (1,398,390)
----------- -----------
Net decrease in cash (71,723) (2,822,096)
Cash and cash equivalents at beginning of period 72,986 2,896,620
----------- -----------
Cash and cash equivalents at end of period $ 1,263 $ 74,524
=========== ===========
Supplemental information:
Cash paid for interest $ 72,618 $ --
=========== ===========
Cash paid for income taxes $ -- $ --
=========== ===========
The accompanying notes are an integral part hereof.
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CARIBBEAN CIGAR COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1998 and 1997, and the results of its operations and cash
flows for the three months ended June 30, 1998 and 1997. Such consolidated
financial statements have been condensed in accordance with the applicable
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 omitted. It is suggested that these condensed financial statements be
read in conjunction with the Company's audited financial statements and notes
thereto for the year ended March 31, 1998 included in its Annual Report filed on
Form 10-KSB, file no. 0-21081, which was filed on July 14, 1998. The results of
operations for the period ended June 30, 1998 are not necessarily indicative of
operating results for the full year.
Note 1. Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). SFAS 128 requires companies with
complex capital structures that have publicly held common stock or common
stock equivalents to present both basic and diluted earnings per share
("EPS") on the face of the income statement. Basic EPS is calculated as
income available to common stockholders divided by the weighted average
number of common shares outstanding during the period. Diluted EPS is
calculated using the "if converted" method for convertible securities and
the treasury stock method for options and warrants as previously prescribed
by Accounting Principles Board Opinion No. 15, "Earnings Per Share." The
effect of shares issuable under the Company's stock plans and shares
issuable upon exercise of warrants are excluded from the calculation of
diluted EPS since the effect is antidilutive. The adoption of SFAS 128,
which also required the restatement of previously reported EPS, did not
have a material impact on the Company's reported EPS for any periods
presented.
Note 2. Discontinued Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. The Company anticipates that the division will be disposed
of by August 1998, however, there can be no assurance that any sale can be
successfully completed. Accordingly, the retail division has been accounted
for as discontinued operations for the three months ended June 30, 1998 and
1997. The net assets of the discontinued operations consist primarily of
inventories and property and equipment.
Summarized results of the retail division are as follows:
1998 1997
----------- -----------
Sales $ 372,254 $ 744,117
Income (loss) from discontinued operations (101,612) 16,212
Income (loss) per common share (0.01) --
Net assets of the retail division, which are classified as held for sale in
the accompanying balance sheets, are summarized as follows:
1998 1997
----------- -----------
Inventories $ 1,504,077 $ 2,143,604
Property and equipment 342,608 813,216
Other assets 41,211 41,631
Current liabilities (5,387) (9,790)
----------- -----------
Net assets of retail division $ 1,882,509 $ 2,988,661
=========== ===========
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Note 3. Debt
Finova Credit Facility - On August 28, 1997, the Company entered into a
credit facility with Finova Capital Corporation ("Finova Credit Facility").
Under the terms of the Finova Credit Facility, the Company can borrow up to
a maximum of $3,000,000 subject to limitations based upon eligible accounts
receivable and inventory. The Finova Credit Facility expires in two years
and bears interest at prime plus 2.5% per annum. As of June 30, 1998, the
Company had borrowed approximately $1,385,000 under the facility. At June
30, 1998, the Company is not in compliance with certain of the covenants
under the facility. The Finova Credit Facility is secured by a first lien
on all assets of the Company now owned or hereafter acquired. The Company
is required to maintain a $1,000,000 life insurance policy of the life of
Mr. Kevin Doyle payable to Finova Capital Corporation in the event of Mr.
Doyle's death.
In June 1998, the Company received notice from Finova of its intent to
declare a default under the Finova line of credit. The Company and Finova
entered into a forbearance agreement on July 10, 1998 (the "Forbearance
Agreement"). Under the terms of the Forbearance Agreement, Finova has
agreed to advance the Company up to $1.5 million. In exchange for such
forbearance, the Company has agreed to pay Finova in full by September 8,
1998. In the event that the Company fails to pay the line of credit in full
by such date, Finova has indicated its intent to exercise available
remedies under the line of credit including foreclosure of its security
interests in the Company. Because of the Company's continuing cash flow
deficit and the declaration of default under the line of credit, the
Company must obtain a new line of credit facility or substitute debt or
equity in order to repay the line of credit and meet its anticipated
working capital requirements. Furthermore, Finova holds a security interest
in the Company's receivables and inventories, and could claim the Company's
accounts receivable and its inventories for the purpose of liquidating such
assets and apply the proceeds thereof toward repayment of the Company's
obligations under the line of credit. In such event, the Company would not
be able to continue its operations, and would be forced to seek protection
from its creditors or let Finova proceed to claim and liquidate the assets
of the Company. In such event, creditors other than Finova, and the
Company's shareholders, would receive no value for their rights and claims
against the Company, and would realize a total loss on their investments in
the Company. On August 18, 1998, the Company entered into an agreement with
Finova (see Note 7).
Subordinated Notes - The Company has borrowed a total of $785,000 under a
series of 9% subordinated promissory notes due 60 days from the date of
funding. In connection the borrowing, the Company agreed to issue shares of
the Company's common stock in an amount based upon the length of time the
loans remain outstanding. For the three months ended June 30, 1998, an
additional 325,850 shares of common stock have been issued in connection
with these notes, which resulted in interest expense of approximately
$190,000 being recorded. Approximately $410,000 remains outstanding as of
June 30, 1998, which the Company is in default.
Other - In June 1998, the Company borrowed an additional $150,000 which is
convertible into 375,000 shares of common stock of the Company.
Note 4. Litigation
The Company is involved in various legal proceedings, including pending
litigation. From November 1997 to January 1998, eight class action lawsuits
were filed in federal court against the Company, its then chief executive
officer and its former chief financial officer alleging violations of the
federal securities laws between August 14, 1997 and November 14, 1997. In
March 1998 the court dismissed seven of the complaints and required the
plaintiffs of the dismissed complaints to file by amending the remaining
complaint. Once the amended complaint (Roger Garrity, William Brotski,
Gregory C. Zaremba, James G. Smith, CIV - Louis Allard, Lynda M. Bradley,
Kathleen E. Dalton and Allen Cohen v. Caribbean Cigar Company, Kevin Doyle,
and Thomas R. Dilk) was filed, the Company had 30 days to answer. The
Company has answered the complaint. Due to the preliminary stage of these
matters, the Company has not determined whether it has any liability
exposure, although it has recorded a $200,000 reserve for defense costs.
The Company believes that it has valid defenses to all litigation pending
against it, and all cases against the Company are, and will be vigorously
defended. Management is unable to make a meaningful estimate of the amount
or range of loss that could result from an unfavorable outcome of all
pending litigation. The ultimate outcome of any or all pending litigation
could have a material adverse effect on the Company's operating results,
cash flows or financial position.
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Note 5. Income Taxes
There is no provision or benefit for income taxes in either period, as any
deferred tax assets generated by the losses are offset in their entirety by
valuation allowances. There are no significant deferred tax liabilities.
Note 6. New Accounting Standards
Effective April 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." These new standards
will not have an effect on the Company, as (i) the Company currently has no
items of other comprehensive income, therefore the Statement of
Comprehensive Income will not be presented, and (ii) since the Company's
continuing operations are in a single reportable segment, the provisions of
SFAS No. 131 are not applicable to its continuing business. See Note 2 for
the disclosures related to discontinued operations.
Note 7. Subsequent Events
On July 28, 1998, the Company entered into an agreement with Mr. Ron
Jenkins (the "Jenkins Agreement"). Under the terms of the Jenkins
Agreement, Mr. Jenkins, president of SJI Wholesale, Inc. ("SJI"), (i) will
facilitate the consummation of an agreement between the Company and SJI
whereby the Company would grant SJI the exclusive right to market the
Company's products in the United States; (ii) will attempt to arrange for
the purchase of cigars manufactured for SJI by the Company; (iii) will
arrange for SJI to purchase certain of the inventory of the Company for
$500,000; (iv) will transfer $25,000 to the Company to cover expenses; and
(v) will assist the Company in either restructuring or repaying its debt
obligations with Finova.
In consideration for the services to be performed by Mr. Jenkins, pursuant
to the Jenkins Agreement, the Company agreed to issue Mr. Jenkins 1,000,000
shares of preferred stock of the Company (the "Preferred Stock"). In
connection with the Jenkins Agreement, the Company's Board of Directors
authorized the issuance of a new class of preferred securities with certain
designations and preferences. Such designations and preferences include;
(i) each share of preferred stock shall have super voting rights of four
votes per share subject to Nasdaq SmallCap approval, (ii) each share of the
Preferred Stock is convertible into four shares of common stock of the
Company at a conversion price of $.80 per share of the Preferred Stock, and
(iii) the Preferred Stock must be converted within 48 months from the date
of issuance or Mr. Jenkins must immediately return the unconverted portion
of the Preferred Stock to the Company. The Company also appointed Mr.
Jenkins Chief Operating Officer, Executive Vice President and a Director of
the Company. In addition, J.D. Jenkins was appointed Chief Executive
Officer, President and a Director of the Company. In connection with the
Jenkins Agreement, Mr. Kevin Doyle resigned as Executive Vice President and
a Director of the Company.
On August 18, 1998, the Company entered into an agreement with Finova (the
"Agreement"). Under the terms of the Agreement, Finova has agreed to accept
the amount of $1,000,000 as satisfaction (the "Satisfaction Amount") of the
Company's obligations to Finova. The Company has agreed to make weekly
installments of $16,000 including interest at one point over prime. In
addition, the Company has agreed to direct one of its customers to send
Finova $105,600 (the "Receivable") which the customer currently owes to the
Company. The Receivable would immediately reduce the Satisfaction Amount to
$894,400 if the Company were successful in arranging for its customer to
send the Receivable to Finova. In the event of default under the Agreement,
the Company shall be obligated to Finova for the balance owed as of the
date of the event of default plus approximately $350,000. Mr. Ron Jenkins,
the Company's executive vice president and chief operating officer has
personally guaranteed the Company's obligations under the Agreement up to
$1,000,000.
On August 5, 1998, the Company received notice from the Nasdaq Stock
Market, Inc. notifying the Company it was subject to delisting from the
Nasdaq SmallCap Market due to insufficient net tangible assets and the
minimum bid price requirements. The Company is contemplating a reverse
stock split that the Company believes will assist in raising the bid price
of the Company's common stock and thereby achieve compliance with the
applicable standard. Notwithstanding Nasdaq's comments regarding the
Company's net tangible assets, the Company believes it in compliance with
such requirement.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 Form 10-QSB 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
depend 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 materials, 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. Words used in this Form
10-QSB, such as "expects," "believes," "estimates" and "anticipates" and
variations of such words and similar expressions are intended to identify such
forward-looking statements.
The following should be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and the Notes thereto included elsewhere in
this Form 10-QSB.
Comparison of Results of Operations
In August 1997, the Company's Board of Directors adopted a plan to sell its
retail division. The Company anticipates that the division will be disposed of
by August 1998, however, there can be no assurance that the division will be
disposed of by that date. Accordingly, the retail division has been accounted
for as discontinued operations for the three months ended June 30, 1998 and
1997.
The following table presents, for the periods indicated, certain items in the
historical consolidated statements of operations as a percentage of sales.
Three Months
Ended June 30,
--------------------
1998 1997
------ ------
Sales 100.0% 100.0%
Cost of sales 67.6 51.9
------ ------
Gross profit (loss) 33.4 48.1
------ ------
Operating expenses:
Selling expenses 31.3 30.4
General and administrative expenses 32.8 45.5
------ ------
64.1 75.9
------ ------
Operating income (loss) (31.7) (27.7)
Interest (income) expense 42.1 (.5)
------ ------
Income (loss) from continuing operations (73.8) (27.2)
Income (loss) from discontinued operations (15.7) .7
------ ------
Net loss (89.4)% (26.5)%
====== ======
Three Months Ended June 30, 1998 and 1997
Sales for the three months ended June 30, 1998 were approximately $649,000, a
decrease of approximately $1,638,000 or 71.6% from sales for the three months
ended June 30, 1997 of approximately $2,288,000. This decrease is primarily
attributed to increased competition, including expanded supply from larger,
well-known cigar manufacturers. In addition, due
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to supply problems, the Company did not record any sales of its flavored cigars
until late June 1998. Production of flavored cigars began in June 1998 at the
Company's Jaibon, Dominican Republic facility.
Cost of sales for the three months ended June 30, 1998 were approximately
$439,000, or approximately 67.6% of sales, as compared to cost of sales for the
three months ended June 30, 1997 of approximately $1,187,000, or approximately
51.9% of sales. The increase as a percentage of sales is primarily attributable
to discounting of some cigar products and the general decline in premium cigar
sales.
Selling expenses includes salaries and wages, marketing and advertising
expenses, shipping costs and other miscellaneous expenses. Selling expenses for
the three months ended June 30, 1998 were approximately $203,000, or
approximately 31.3% of sales, as compared to selling expenses for the three
months ended June 30, 1997 of approximately $695,000, or approximately 30.4% of
sales. The decrease consists primarily of decreases in expenditures for
advertising and promotional expenses, sales and marketing salaries, and shipping
costs.
General and administrative expenses include administrative salaries,
professional fees, travel and entertainment, insurance and other expenses.
General and administrative expenses for the three months ended June 30, 1998
were approximately $213,000, or approximately 32.8% of sales, as compared to
general and administrative expenses for the three months ended June 30, 1997 of
approximately $1,041,000, or approximately 45.5% of sales. This decrease is
primarily attributable to decreased expenditures for professional fees,
administrative salaries, and travel. In addition, for the three months ended
June 30, 1997, the Company recorded a loss on abandonment of its Miami factory.
Interest expense for the three months ended June 30, 1998 was approximately
$273,000, or approximately 42.1% of sales, as compared to interest income for
the three months ended June 30, 1997 of approximately ($11,000), or
approximately (.5%) of sales. The interest expense for the three months ended
June 30, 1998 is due to the Company's credit facility and subordinated notes
payable. The interest income for the three months ended June 30, 1997 was due to
the investment of funds from the Company's initial public offering in August
1996.
Income (loss) from discontinued operations includes the results of the Company's
retail division.
As a result of the forgoing factors, the Company sustained a loss of
approximately $580,000, or $.09 per share for the three months ended June 30,
1998, as compared to a loss of approximately $607,000 or $0.12 per share for the
three months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of approximately $1,394,000.
Since its inception, the Company has sustained losses of approximately
$9,000,000. The Company's operations and growth has been funded by loans from
investors, the sale of common stock (including an initial public offering of its
common stock in August 1996) and a credit facility from a lending institution.
These funds have been used for working capital, capital expenditures,
information systems development and other corporate purposes.
The Company has an ample supply of tobacco for the production of cigars as well
as the maintenance of a sufficient supply of non-tobacco retail products for its
stores. The Company has no commitments for purchases.
In June 1998, the Company received notice from Finova Capital Corporation
("Finova") of its intent to declare a default under the Finova line of credit.
The Company and Finova entered into a forbearance agreement on July 10, 1998
(the "Forbearance Agreement"). Under the terms of the Forbearance Agreement,
Finova has agreed to advance the Company up to $1.5 million. In exchange for
such forbearance, the Company has agreed to pay Finova in full by September 8,
1998. In the event that the Company fails to pay the line of credit in full by
such date, Finova has indicated its intent to exercise available remedies under
the line of credit including foreclosure of its security interests in the
Company. Because of the Company's continuing cash flow deficit and the
declaration of default under the line of credit, the Company must obtain a new
line of credit facility or substitute debt or equity in order to repay the line
of credit and meet its anticipated working capital requirements. Furthermore,
Finova holds a security interest in the Company's receivables and inventories,
and could claim the Company's accounts receivable and its inventories for the
purpose of liquidating such assets and applying the proceeds toward repayment of
the Company's obligations under the line of credit. In such event, the Company
would not be able to continue its operations, and would be forced to seek
protection from its creditors or permit Finova to proceed to claim and
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liquidate the assets of the Company. If this were to occur, none of the
Company's shareholders and no creditor other than Finova would receive any value
for their rights and claims against the Company, and would realize a total loss
on their investments in the Company.
RISK FACTORS
Recently Organized Business; History of Losses
The Company was organized in October 1994 and has incurred a loss of $580,000,
or $.09 per share, on revenues of $649,000 for the three months ended June 30,
1998; a loss of $7.7 million, or $1.46 per share, on revenues of $5.8 million
for the fiscal year ended March 31, 1998; a loss of $116,000, or $.03 per share,
on revenues of $7.3 million for the fiscal year ended March 31, 1997; a loss of
$522,000, or $.16 per share, on revenues of $277,000 for the fiscal year ended
March 31, 1996; and a loss of $12,000, or $.00 per share, on revenues of $88,000
for the period from October 3, 1994 (inception) to March 31, 1995. The ability
of the Company to operate profitably is dependent upon its ability to increase
its manufacturing and distribution channels and a continuation of an increase in
the market for premium cigars (as to which no assurance can be made). In
addition, its costs may be increased as a result of government regulations,
which may affect the ability of the Company to operate profitably. The Company
is also subject to business risks associated with a developing business
enterprises. No assurance can be given as to the ability of the Company to
operate profitably.
Existing Default on Line of Credit; Potential Claim and Liquidation of Company's
Assets; Need of Additional Investment Capital
In June 1998, the Company received notice from Finova of its intent to declare a
default under the Finova line of credit. The Company and Finova entered into a
forbearance agreement on July 10, 1998 (the "Forbearance Agreement"). Under the
terms of the Forbearance Agreement, Finova has agreed to advance the Company up
to $1.5million. In exchange for such forbearance, the Company has agreed to pay
Finova in full by September 8, 1998. In the event that the Company fails to pay
the line of credit in full by such date, Finova has indicated its intent to
exercise available remedies under the line of credit including foreclosure of
its security interests in the Company. Because of the Company's continuing cash
flow deficit and the declaration of default under the line of credit, the
Company must obtain a new line of credit facility or substitute debt or equity
in order to repay the line of credit and meet its anticipated working capital
requirements. Furthermore, Finova holds a security interest in the Company's
receivables and inventories, and could claim the Company's accounts receivable
and its inventories for the purpose of liquidating such assets and apply the
proceeds thereof toward repayment of the Company's obligations under the line of
credit. In such event, the Company would not be able to continue its operations,
and would be forced to seek protection from its creditors or let Finova proceed
to claim and liquidate the assets of the Company. In such event, creditors other
than Finova, and the Company's shareholders, would receive no value for their
rights and claims against the Company, and would realize a total loss on their
investments in the Company.
Competition
The tobacco industry in general, including the cigar industry, is dominated by a
small number of companies which are well known to the public. The Company
believes that, as a manufacturer of premium cigars, it competes with a smaller
number of domestic and foreign companies that specialize in premium cigars and
certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Company, General Cigar Holdings, Inc., a division of Culbro
Corporation and Swisher International Group, Inc. 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.
However, the market for premium cigars constitutes a small portion of the cigar
market. The Company believes that smokers of premium cigars purchase cigars
based on the perceived quality of the tobacco. The process of producing premium
cigars is not patented, but is based on the know-how and experience of master
craftsmen who can identify and purchase the tobacco and roll the tobacco into
premium cigars. The principal characteristics that differentiate one premium
cigar from another are the quality of the tobacco in the cigar, the quality of
the tobacco used as a cigar wrapper, the blend of tobacco and the quality of the
rolling. No assurance can be given as to the ability of the Company to compete
successfully in any market in which it conducts, or may conduct, operations.
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11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See the discussion of litigation in (a) Note 9 to the Fiscal 1998 Annual
Financial Statements and (b) Note 4 to the Notes to Condensed Consolidated
Financial Statements of the Company for the fiscal quarter ended June 30,
1998, which are included elsewhere in this Quarterly Report on Form 10-QSB.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
See Part I, Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources and
Note 3 to the Notes to Condensed Consolidated Financial Statements of the
Company for the fiscal quarter ended June 30, 1998, which are included
elsewhere in this Quarterly Report on Form 10-QSB for a discussion on the
forbearance agreement entered into with Finova Capital Corporation and a
discussion on certain other subordinated notes which the Company is in
default.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports of Form 8-K.
(a) Exhibits
27.1 - Financial Data Schedule
99.1 - Forbearance Agreement
99.2 - Agreement
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 2, 1998 with respect
to the appointment of Ahearn, Jasco + Company, P.A. as its independent
certified public accountants.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 19, 1997
CARIBBEAN CIGAR COMPANY
/S/ EDWARD C. WILLIAMS
-----------------------
Edward C. Williams
Chief Financial Officer
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