Last one, if you want more send me a PM
Baa-a-a-a (not)
Here's a final item on Barron Chase of Boca (not sure which one). A tale of two cigar companies that say's judge the underwriter as much as you judge the companies pitch. Note carribian cigar, mentioned below has a current market cap of 211 thousand bucks
Copyright 1997 American Lawyer Media, L.P.
BROWARD DAILY BUSINESS REVIEW
December 10, 1997 Wednesday
SECTION: CIGAR; Pg. A1
LENGTH: 1658 words
HEADLINE: No longer smoking;
There's still smoke, a lot less fire as shakeout hits local cigar makers;
The cigar industry's undergoing a shakeout, which is mixed news for local publicly traded cigar makers
BYLINE: BY MICHAEL MARCONI BRAGA, REVIEW STAFF
BODY:
After four years of heady growth, the cigar industry is undergoing a shakeout.
Too many entrepreneurs jumped into the market in the past few years hoping to cash in on escalating demand for premium smokes. They rolled all the tobacco they could lay their hands on and flooded the market with cigars to such a degree that a glut has developed.
"There is still a shortage of established brands," says Gordon Mott, editor of Cigar Aficionado, a New York-based magazine. "But there is now an oversupply of cigars that nobody wants."
South Florida's three publicly traded cigar manufacturers have been affected by the shakeout in different ways.
Not surprisingly, Fort Lauderdale-based Consolidated Cigar Corp., the grand-daddy of U.S. cigar makers with 23 percent of the domestic market, has made out best. Its third-quarter sales increased 36.3 percent over the same period last year, while profits are up 75.3 percent.
Miami's Tamboril Cigar Co., which only started rolling cigars in September 1996, has also reported a healthy third quarter, with sales up 25.8 percent in the first nine months of the year and a 8.8 percent increase in profits.
But Caribbean Cigar Co., also based in Miami, has not been so fortunate. The company reports a third-quarter loss of $ 2.05 million on sales of $ 1.99 million.
Worse, Caribbean Cigar officials admit that they incorrectly reported a $ 131,265 profit in the second quarter of 1997 instead of a $ 600,000 loss -- and that has prompted a shareholder class action suit.
Now Caribbean is scrambling to restore its tarnished image, while shoring up its battered financials. The company is selling off its seven Florida retail stores and is hunting for an infusion of capital.
The experience of those companies reflect general trends in the industry: Larger, more established companies like Consolidated are thriving because they have increased supply of well-known brands in the face of rapidly increasing demand. Smaller startups, which initially benefited from the shortage of high-end cigars, have not fared as well.
Back in time
Starting in 1992, the cigar industry went on a roll.
Thousands of trendy cigar shops and smoke rooms opened across the country, as sales of premium cigars soared 176 percent from 99.3 million in 1992 to 274.3 million in 1996. Entrepreneurs bankrolled hundreds of new cigar rolling operations in countries like the Dominican Republic, Honduras, Nicaragua and the Philippines.
At first, most manufacturers were able to sell all their cigars because rising demand far outstripped supply.
"Cigar shop owners just wanted to fill their empty shelves," says Norman Sharp, executive director of the Cigar Association of America in Washington. But this year, market conditions have changed.
Established manufacturers like Consolidated, which distributes well-known brands like H. Upmann, Montecristo and Don Diego, and New York-based General Cigar, which markets Macanudos and Partagas, have finally been able to increase supply. That means tobacconists no longer need to stock less established brands, and their sales have fallen.
About 500 million cigars are expected to be imported into the U.S. in 1997, says Consolidated chief executive Richard DiMeola. That's way up from the 275 million in 1996. But DiMeola says only about 350 million to 400 million will be purchased. The rest will just hang over the market until their prices have been sufficiently discounted.
Most of the unwanted cigars will come from manufacturers that have started producing in the last two or three years. Some have already been forced to shut down factories in the Dominican Republic and elsewhere. But so far there have been no big bankruptcies, says Mott of Cigar Aficionado.
Balls in the air
Caribbean Cigar already has been affected by the sales shift away from less established brands. In its third quarter report, the company states that sales have not been as strong as expected and it has had to write down $ 744,000 worth of inventory. Caribbean spokeswoman Amy Townsend attributes the problems to growing pains.
CEO Kevin Doyle, a former air traffic controller, had little experience in the business world before opening his first cigar shop in Key Largo in 1994. His company began producing cigars a year later, and with the help of Michael Risley, a stock broker who has been disciplined and fined by the NASD, Doyle was to able to convince Boca Raton-based Barron Chase Securities to take the company public. Caribbean raised $ 9 million from its initial public offering in August 1996 and used the proceeds to open five retail stores in Florida and establish a factory in Miami.
Since then, Caribbean has purchased the assets of Cincinnati-based American Western Cigar Co., which gave it an exclusive supply agreement with an Indonesian factory. It has leased a 32,000-square-foot distribution facility in Miami, closed its Miami plant, opened one in the Dominican Republic and spent $ 2.5 million to finance a tobacco growing program there to assure supplies.
Caribbean executives say the moves will save the company money and make it more competitive in the long run. But for now, the spending has left it financially weakened.
Meanwhile, Caribbean's decision to market 14 different brands has also cost it a lot of money. The company spent $ 750,000 on advertising and marketing in the third quarter alone. That's about $ 250,000 more than Tamboril spent during the same period to achieve roughly the same level of sales -- $ 1.8 million in the third quarter, compared with Caribbean's $ 1.9 million.
Caribbean chief financial officer Edward Williams acknowledges that the company's initial marketing strategy was flawed because it tried to reach the consumer directly through pricey ads in magazines like Playboy and GQ instead of through specialty publications like Cigar Aficionado and Smoke. Williams says Caribbean has changed its advertising strategy. He adds that the company has also reduced the number of brands it sells from 14 to 11, and will offer only four of the most popular sizes in each.
"Streamlining our brands will make the entire manufacturing process more efficient," Williams says.
Caribbean made a much bigger mistake than the one it made in advertising, however, by not reporting its second and third quarter earnings accurately. On Nov. 26, a shareholder class action suit was filed in Miami by the New York law firm Abbey Gardy & Squitieri. The suit alleges that Caribbean CEO Doyle purposely falsified SEC reports to keep Caribbean's stock from falling and from losing control of the company.
Williams says the company cannot comment on the suit. But it intends to defend itself vigorously in court.
Meanwhile, two of Caribbean's directors, Erik Kamisher and Luciano Nicasio, and its chief financial officer, Thomas Dilk, have left since the company admitted to its accounting mistake.
With its reputation bruised and its income statement in the red, Caribbean is searching for capital to remake itself. Finova Capital Corp. recently provided a $ 3 million credit line at prime plus 2.5 percent. But Finova has stated it won't lend any more than that.
But the company, in its SEC filings, says it needs still more capital "to help cover costs of completing some of its projects and to provide additional working capital."
Focusing on one brand
Tamboril Cigar Co. has avoided many of Caribbean's problems, according to chief executive Anthony Markofsky, because it focused on a single brand. Tamboril rolled out its first cigars in September 1996. Only recently has it expanded its product line to reach different market segments, Markofsky says. Cordova was introduced in April as a mild starter cigar in the $ 4 price range, while Fore was introduced in October to attract golfers who like to puff as they play.
Producing in the Dominican Republic has also saved Tamboril money, Markofsky says. (Caribbean estimates that its wage expenses there will be 30 percent less than the $ 300,000 a week it pays its Miami workers.)
Too, Markofsky says his company has benefited from concentrating solely on the production end of the business; it has expanded vertically to assure itself a supply of tobacco, cellophane wrappers, bands and boxes. In August, it got out of distribution altogether, turning over the responsibility to Hubbard Imports.
The result of Tamboril's focus is increasing production and profits. It earned $ 972,000 in the third quarter on sales of $ 1.8 million. Next year, Markofsky says, the company's new Dominican factory will almost triple Tamboril's output from 300,000 to 800,000 a month.
Having been in the cigar business for 80 years, Consolidated Cigar has not had to suffer along the same learning curve as its newer competitors. Its main challenge has been to increase production. It has, and sales rose from $ 60.6 million in the third quarter of 1996 to $ 82.6 million in the same period this year. But Consolidated still isn't selling all it could.
The problem is that it takes two to four years for farmers to increase production and cure the tobacco before a company like Consolidated can bring more cigars to market. Training cigar rollers takes roughly the same amount of time. Consolidated is just now beginning to get production up to where it can chip away at its backlogs of orders.
But it still must deal with the industrywide shortage of wrapper leaves.
The ravages of blue mold on the Connecticut shade tobacco crop last summer and heavy rains in Ecuador are expected to reduce the supply of wrappers coming to market, Mott says. That's bad news for Consolidated, which will have to pay more for supply. But it is not necessarily bad news for Tamboril and Caribbean.
If companies like Consolidated can't completely satisfy the cigar market, newer companies like Tamboril and Caribbean will continue to have an opportunity to build the market for their brands.
GRAPHIC: Photo, YOUNG AND PROFITABLE: Tamboril Cigar Co. chief financial officer Pedro J. Mirones, left, and chief executive Anthony Markofsky. Though the company has only been making cigars since September 1996, it earned $ 972,000 on sales of $ 1.8 million in the third quarter.; AIXA MONTERO-GREEN
LANGUAGE: ENGLISH
LOAD-DATE: December 10, 1997
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