UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
June 30, 1999 0-29414
PREMIUM CIGARS INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
Arizona 86-0846405
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
15849 North 77th Street
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Registrant's telephone number, including area code: (480) 922-8887
Securities registered pursuant to Section 12(b) of the Act:
No par value common stock
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods 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 June 30, 1999, there were 3,939,092 shares of Premium Cigars
International, Ltd. common stock, no par value outstanding.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements.............................................3
Condensed Balance Sheet (Unaudited) as of
June 30, 1999........................................................3
Condensed Statement of Operations (Unaudited) for
the three and six months ended June 30, 1999 and 1998................4
Condensed Statement of Cash Flows (Unaudited) for
the three and six months ended June 30, 1999 and 1998................5
Notes to Condensed Financial Statements..............................6
Special Note Regarding Forward-Looking Statements.........................9
Item 2 - Management's Discussion and Analysis or Plan of Operation.......10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings...............................................14
Item 2 - Changes in Securities and Use of Proceeds.......................14
Item 3 - Defaults Upon Senior Securities.................................14
Item 4 - Submission of Matters to a Vote of Security Holders.............14
Item 5 - Other Information...............................................14
Item 6 - Exhibits and Reports on Form 8-K................................15
SIGNATURES....................................................................16
2
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
CONDENSED BALANCE SHEET
June 30,
1999
-----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 59,861
Available for sale securities 25,000
Accounts receivable - trade, net 251,334
Inventory, net (Note 3) 175,282
Other current assets (Notes 5 and 8) 236,394
-----------
Total Current Assets 747,871
-----------
Property and Equipment, net 450,682
-----------
Other Assets:
Other assets 63,102
-----------
63,102
-----------
$ 1,261,655
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,259,987
-----------
Total current liabilities 1,259,987
-----------
Commitments and Contingencies (Note 10) --
-----------
Stockholders' Equity:
Common stock - no par value, 10,000,000 shares
authorized, 3,939,092 shares issued and outstanding 8,974,299
Accumulated deficit (8,972,631)
-----------
Total Stockholders' Equity 1,668
-----------
$ 1,261,655
===========
The accompanying notes are an integral part of the
condensed financial statements
3
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 1,248,600 $ 2,018,651 $ 2,566,286 $ 3,263,604
Cost of Sales 930,163 1,475,885 1,893,272 2,544,770
----------- ----------- ----------- -----------
Gross Profit 318,437 542,766 673,014 718,834
Selling, General and Administrative 1,150,032 1,274,923 2,126,903 2,510,163
Loss on sale of subsidiary (Note 8) 1,200,638 -- 1,200,638 --
Writedown of cigar humidor program (Note 9) 1,017,524 -- 1,017,524 --
Severance Packages (Note 4) -- -- -- 395,173
----------- ----------- ----------- -----------
Loss from Operations (3,049,757) (732,157) (3,672,051) (2,186,502)
Other Income (Expense) (13,040) 28,181 (16,679) 94,913
----------- ----------- ----------- -----------
Net Loss $(3,062,797) $ (703,976) $(3,688,730) $(2,091,589)
=========== =========== =========== ===========
Basic Loss per Share $ (0.79) $ (0.20) $ (0.98) $ (0.60)
=========== =========== =========== ===========
Weighted Average Number of Shares Outstanding 3,876,455 3,469,092 3,777,987 3,469,092
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the
condensed financial statements
4
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
CONDENSED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
-------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(3,688,730) $(2,091,589)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 470,053 324,116
Loss on sale of subsidiary 1,200,638
Writedown of cigar humidor program 1,017,524
Accrual of severance packages 139,133
Net change in other assets and liabilities 577,496 (474,956)
----------- -----------
Net cash provided by (used for) operating
activities (423,019) (2,103,296)
----------- -----------
Cash flows from investing activities:
Purchase of humidors (64,283) (425,437)
Purchase of equipment (7,053) (448,710)
Proceeds from sale of subsidiary 250,000
Proceeds from sale of available for sale
securities 2,024,323
----------- -----------
Net cash provided by (used for) investing
activities 178,664 1,150,176
----------- -----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 136,000
----------- -----------
Net cash provided by financing activities 136,000 --
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents -- 421
----------- -----------
Net increase (decrease) in cash and cash equivalents (108,355) (952,699)
Cash and cash equivalents, beginning of period 168,216 1,264,365
----------- -----------
Cash and cash equivalents, end of period $ 59,861 $ 311,666
=========== ===========
The accompanying notes are an integral part of the
condensed financial statements
5
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Premium Cigars International, LTD. (the
"Company"), the accompanying condensed financial statements include all normal
adjustments considered necessary to present fairly the financial position as of
June 30, 1999, and the results of operations for the three months and six months
ended June 30, 1999 and 1998, and cash flows for the six months ended June 30,
1999 and 1998. Interim results are not necessarily indicative of results for a
full year.
The condensed financial statements and notes are presented as permitted by the
instructions to Form 10-QSB, and therefore do not contain certain information
included in the Company's audited consolidated financial statements and notes
for the year ended December 31, 1998.
2. FINANCIAL STATEMENTS
The condensed statements of operations and cash flows include the accounts of
the Company and its wholly-owned subsidiary through the date of sale of the
subsidiary (see Note 8). All significant intercompany accounts and transactions
have been eliminated. Subsequent to the date of sale, the condensed financial
statements include the accounts of the Company only.
3. INVENTORIES
As of June 30, 1999, inventory consists of the following:
PrimeTime and cigars $ 521,787
Reserve for obsolescence (346,505)
---------
$ 175,282
=========
4. SEVERANCE PACKAGES
During the first quarter of 1998 the company terminated employment agreements
with certain former officers and employees of the Company. Under the terms of
the various employment agreements, severance pay ranged from six to nine months
of salary, payable over the same six or nine month period. Additionally, three
of the former officers received lump-sum payments of $40,000 each as settlement
for potential claims against the company.
5. RELATED PARTY TRANSACTIONS
The company has notes receivable from two director/shareholders of the Company
in the aggregate amount of $86,225. The notes, which bear interest at 6%, were
6
<PAGE>
originally due on March 31,1999. The independent members of the Company's board
of directors approved a one-time extension for the repayment of these notes to
September 30, 1999. As consideration for this extension, the interest rate has
been increased from 6% to 10% during the extension period. Accrued interest as
of June 30, 1999 is $17,676. The total of the notes receivable plus accrued
interest is included in other current assets in the Company's condensed balance
sheet.
6. ISSUANCE OF STOCK
During the first quarter of 1999, the Company issued 370,000 restricted shares
of its common stock for a total of $136,000. As more fully discussed in the
notes to the Company's 1998 audited financial statements included in its 1998
Form 10-KSB, the proceeds include the sale of 100,000 shares of stock for an
initial price per share of $.01 to its financial public relations provider. The
sale is subject to certain performance criteria being met; if the criteria are
met the provider has the option to pay between $.99 and $1.49 per share as
additional consideration in exchange for the removal of a restrictive legend. If
the performance criteria are not met, the Company may repurchase the shares at
their original issue price.
The Company issued an additional 100,000 restricted shares in connection with
the sale of its wholly-owned subsidiary (see Note 8).
7. NASDAQ DELISTING
On May 11, 1999 the Company was notified by the NASDAQ Listing Qualifications
Panel that its shares would be delisted as of the close of trading that day. The
securities of the Company are now trading on the OTC Bulletin Board.
8. SALE OF CAN-AM
On or about June 2, 1999, the Company finalized the sale of all of its shares in
its wholly owned subsidiary, Can-Am International Investments, Corp. ("Can-Am"),
to Ultimate Cigars, Corp. ("ULTC"), a publicly traded company, for $375,000. In
connection with the sale of Can-Am, the Company and ULTC exchanged 100,000
shares of each other's common stock. ULTC has already paid the Company the first
required installment of $250,000. The second and third installments of $100,000
and $25,000 are due on or before July 6, 1999 and July 21, 1999, respectively.
The total of $125,000 is included in other current assets in the Company's
condensed balance sheet. Additionally, the Company has entered into an option
agreement with ULTC (the "Option") pursuant to which ULTC has the option to
acquire additional shares for a total of up to 50% of the Company's issued and
outstanding stock for a payment of $2,500,000 and all outstanding shares of
ULTC's common stock not owned by the Company. The Option is subject to the
approval of the shareholders for both the Company and ULTC.
In connection with the sale, the Company has also been granted a purchase
discount of up to $125,000 on a product currently in development by ULTC, which
would be sold by the Company.
7
<PAGE>
9. WRITEDOWN OF CIGAR HUMIDOR PROGRAM
Due to declining demand for its humidified cigar program, the Company has
discontinued the program in most of the stores in which it had placed humidors.
The cost to write-off the abandoned humidors and discontinued or unsalable
product has been charged against operations for the three months ended June 30,
1999.
10. CONTINGENCIES
One of the conditions of the Purchase Agreement for the sale of Can-Am specified
that the buyer would not be responsible for past provincial tobacco taxes that
were subsequently assessed against Can-Am based on a different method of
calculation than had been historically used by Can-Am. On July 30, 1999 Can-Am
was notified by the Alberta Treasury that it was being assessed back taxes in
the amount of CAN $247,500 (approximately US $165,000) for the period April 1997
through April 1999. At the same time, the Alberta Treasury has submitted a claim
in the amount of CAN $60,000 (approximately US $40,000) against the Tobacco Tax
Bond. The Company is the indemnitor on this bond.
The company does not agree with the assessment and intends to vigorously contest
it in cooperation with the buyer. Furthermore, it disputes the claim against the
bond, as it believes the bond had been effectively canceled at the time of the
claim. Management is unable to determine at this time what amount, if any, will
ultimately be paid to settle this claim and therefore has made no provision for
it in the accompanying financial statements.
8
<PAGE>
Special Note Regarding Forward-looking Statements
Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Important factors that may cause actual
results to differ from forward-looking statements and projections include, for
example:
* failure of our products, particularly new products such as PrimeTime(TM)
and Humidibox(TM), to be accepted and have a lasting presence in the
marketplace;
* our ability to maintain an adequate capital position and a sufficient cash
flow as we add retail stores and new products;
* our ability to obtain funding to enable us to maintain sufficient working
capital for operating activities;
* any decision by major retail chains to discontinue selling all tobacco
products or to place our humidors or countertop control units in a
disadvantageous location within their stores;
* a decline in the popularity of cigar smoking and/or possible adverse public
opinion against cigars and cigar smoking;
* interruptions in the availability of PrimeTime(TM);
* changes in government regulations, tax rates, the manner of tax calculation
and collection and similar matters relating to our products, including any
restriction on the self-service nature of merchandising displays and
marketing promotions particularly or any retroactive application of such
changes;
* our ability to negotiate and maintain favorable distribution arrangements
with our customers;
* the effect of changing economic conditions;
* the risk of any significant uninsured loss from settlement dealing with
Proposition 65;
* our ability to buy quality premium cigars at favorable prices and the
effect on cigar prices and availability, of weather and other conditions in
the countries that import cigars to the U.S. and Canada; and
* other risks which may be described in our future filings with the SEC. We
do not promise to update forward-looking information to reflect actual
results or changes in assumptions or other factors that could affect those
statements.
9
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You must read the following discussion on the financial condition and results of
operations of Premium Cigars International, LTD. ("PCI") in conjunction with
PCI's condensed financial statements, including the notes elsewhere in this Form
10-QSB filing. Historical results are not necessarily an indicator of trends in
operating results for any future period.
As a direct distributor of cigar products, PCI has built an infrastructure that
provides high speed fulfillment of products to retailers. The Company's business
plan is to provide these same business solutions to other companies. PCI
operates in one business segment and has a December 31 fiscal year.
RESULTS OF OPERATIONS
COMPARISON OF THE SECOND QUARTER OF 1999 WITH THE SECOND QUARTER OF 1998
Net sales for the quarter ended June 30, 1999 decreased by $770,000 versus the
same period last year, a 38% decrease. Most of the decrease ($600M) is
attributable to declining sales at its former Canadian subsidiary; also, year
ago results included three months of Canadian operations versus only two months
for the current quarter. Canadian sales were negatively impacted due to
increasing legislative pressure affecting cigar packaging and humidor placement
within retail outlets. Sales in the United States were down 16% versus one year
ago; however, revenue steadily increased during the quarter as the company
continued rolling out its new flavored cigar PrimeTime. This was offset by a
steep decline in sales via the company's now mostly discontinued in-store
humidor program.
Gross profit margin was 26% for the quarter ended June 30, 1999 versus 27% for
the quarter ended June 30, 1998. Margins were negatively impacted in Canada due
to a higher than normal volume of returns of product that could not be resold.
Margins in the United States held steady despite the heavy introductory efforts
in launching PrimeTime.
Selling, general and administrative expenses for the quarter ended June 30, 1999
decreased $125,000 or 10% from the same period one year ago. Excluding the cost
of the introductory PrimeTime marketing spending that was charged off as account
acquisition costs, SG&A decreased $326,000, or 26% from the comparable period
one year ago. SG&A has declined due to staff cuts that were implemented during
the first quarter of 1999 (in recognition of the declining importance of the
Company's in-store humidor program), as well as an overall decrease in
infrastructure spending that was ongoing during 1998. The favorable trend in
SG&A is expected to continue, as the now disposed of Canadian operations were
incurring higher average monthly SG&A during the current quarter versus one year
ago.
Other income for the quarter ended June 30, 1999 declined from the previous year
because the prior year amount consisted mainly of interest income from
short-term investments which were purchased with a portion of the net proceeds
10
<PAGE>
from the Company's initial public offering. The current year expense also
reflects interest expense from the factoring of the Company's accounts
receivable.
COMPARISON OF THE FIRST SIX MONTHS OF 1999 WITH THE FIRST SIX MONTHS OF 1998
Net sales for the six months ended June 30, 1999 decreased by $700,000 versus
the same period one year ago, a 21% decrease. As discussed above, most of the
decrease is attributable to declining sales at its former Canadian subsidiary;
also, year ago results included six months of Canadian operations versus five
months for the current year. Sales in the United States were down 10% versus one
year ago; however, revenue has steadily increased during the current year as the
company continues rolling out its new flavored cigar PrimeTime. This was offset
by a steep decline in sales via the company's now mostly discontinued in-store
humidor program.
Gross profit margin was 26% for the six months ended June 30, 1999 versus 22%
for the six months ended June 30, 1998. The margin improvement is attributable
to a much lower margin in the United States during the first quarter of 1998 due
to nonrecurring expenditures for consolidating warehouse space and inspecting
inventory for possible damage, as well as the continuing trend towards more
efficient warehousing and shipping operations throughout 1998 and into 1999.
Selling, general and administrative expenses for the six months ended June 30,
1999 decreased $383,000 or 15% from the same period one year ago. Excluding the
cost of the introductory PrimeTime marketing spending that was charged off as
account acquisition costs during the second quarter of 1999, SG&A decreased
$584,000, or 23% from the comparable period one year ago. SG&A has declined due
to staff cuts that were implemented during the first quarter of 1999 (in
recognition of the declining importance of the Company's in-store humidor
program), as well as an overall decrease in infrastructure spending that was
ongoing during 1998. The favorable trend in SG&A is expected to continue, as the
now disposed of Canadian operations incurred higher SG&A for the current year
versus last year.
As discussed in our previous 10-KSB filings, we took a one-time charge in the
first quarter of 1998 to reflect the cost of severance packages for previous
management.
Other income for the six months ended June 30, 1999 declined from the previous
year because the prior year amount consisted mainly of interest income from
short-term investments which were purchased with a portion of the net proceeds
from the Company's initial public offering. The current year expense also
reflects interest expense from the factoring of the Company's accounts
receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $423,000 for operating activities for the first six months of
1999. The net loss of $3,689,000 was reduced by non-cash expenses for
depreciation and amortization of $470,000, $1,200,000 for the loss on the sale
of its Canadian subsidiary and $1,000,000 for the write-down of its humidors and
cigars.
11
<PAGE>
As part of Management's efforts to restructure the Company, unprofitable
investments in our Canadian subsidiary and the in-store cigar humidor program
were either divested or severely curtailed. Canadian operations were hampered by
a difficult operating environment due to increasing legislative pressure that
affected cigar packaging and humidor placement within retail outlets. Combined
with a downward trend in cigar consumption and the likely inability to be able
to place its PrimeTime countertop control units on the front counters,
Management determined that the best course of action was to eliminate any future
cash drain resulting from the Canadian operations. In early June, the Company
finalized the sale of its Canadian subsidiary for $375,000 in cash, plus an
exchange of 100,000 shares of stock with the buyer.
The downward trend in cigar sales plus a surplus of inventory led Management to
conclude that no further investment was justified in the in-store humidor
program. Efforts to dispose of our discontinued inventory met with limited
success; only through substantial markdowns were we able to move some of this
inventory. Although most of the stores have now dropped the in-store humidor
program, we were able to place PrimeTime in the majority of these stores. The
cost to write off the investment in the humidors and write-down the discontinued
cigar inventory and packaging materials is shown as a charge against current
operations for the three months ended June 30, 1999.
As part of the Company's roll out of Prime Time, a countertop control unit
("CCU") is sent to each store as part of the initial order. However, the
Company's supplier of Prime Time provides the CCU's at no cost to the Company.
Therefore, as we continue to add more Prime Time accounts, no additional capital
investment in the CCU's is required on our part.
Management has determined that there is a tremendous opportunity and value in
our core competencies as a high-speed order and fulfillment center. Our unique
distribution system that we have developed for the convenience store industry is
very efficient and valuable. Therefore, we are now pursuing new products to
sell, market and distribute directly through our expanding convenience store
distribution channel. As we begin to provide product fulfillment for others, we
do not anticipate any significant capital expenditures beyond a modest
investment to enhance our existing systems. Should the volume of business exceed
our current capacity, we will need to acquire additional warehouse space and
invest in additional equipment such as forklifts and racking.
We invested nearly $600,000 in capital additions during 1998 as we developed our
infrastructure and moved into our new facility. We do not anticipate any
significant capital expenditures for the foreseeable future beyond those
discussed above.
The Company has incurred substantial operating losses since inception. As of
December 31, 1998 the Net Operating Loss carryforward was approximately
$5,300,000. We expect to incur another substantial operating loss for the
current year. The Net Operating Loss carryforward may be attractive to another
company wishing to offset its own tax liability.
We have secured a $1,000,000 accounts receivable financing package which,
assuming sales forecasts are achieved, we believe will provide the necessary
working capital for our immediate ongoing needs; however, we cannot assure you
that that we can generate sufficient revenues to provide the cash flow necessary
to meet our ongoing working capital needs, nor to repay prior existing trade
12
<PAGE>
indebtedness. We raised $136,000 during the first quarter of 1999 through the
issuance of additional shares of the Company's shares. The Board of Directors
has authorized the issuance of additional shares for up to an additional
$200,000. We raised an additional $375,000 ($250,000 received in the second
quarter with the balance to be received in the third quarter) from the sale of
our Canadian subsidiary. However, the Company will have to raise additional
capital to repay the trade debt it has incurred over the past several months. We
cannot assure you that we will be able to raise sufficient capital to enable us
to repay our outstanding trade debt in a timely manner.
YEAR 2000 READINESS
We purchased most of our computers within the past year and do not anticipate
any significant problems relative to their Year 2000 ("Y2K") capabilities.
Testing of each machine's capability will be completed by the third quarter of
1999. We have not yet implemented a plan to identify the non-IT (Information
Technology) systems (i.e., those systems with an imbedded technology such as
microcontrollers) which may require repair or replacement; however, given the
nature of our operations and the age of our business, we do not believe that we
face any material risk from these types of systems.
Our business relies to a large extent on our integrated accounting, order entry,
and inventory control system (SBT Pro Series 5.0), which is represented by the
vendor as being Y2K compliant. We also rely on standard office productivity
software (Microsoft Office 97) which is also represented as being Y2K compliant.
Our EDI software, which we use to transmit invoices and receive payment
information from our largest U.S. customer is now represented as being
compliant. We are in the process of determining the compliance of our other
software and will have this completed by the third quarter of 1999.
We have begun the process of contacting key customers, vendors, service
providers and other third parties with whom business is conducted to determine
what impact, if any, their Y2K readiness will have on us; this process will be
completed by the third quarter of 1999. Although we do not anticipate any
material adverse effect on our business as a result of such parties failure to
achieve Y2K readiness, we cannot assure you that these parties will have
accurately assessed their Y2K readiness status.
At this time, we do not believe that we will incur any material expenditures to
identify and replace, as necessary, any Y2K non-compliant systems. We do not
anticipate any material effect to our business from any non-compliant PCI-owned
systems; however, we are unable at this time to determine what, if any, effect
on our business will occur from any third parties non-compliant systems. We
expect to be better able to assess this uncertainty as we obtain more Y2K
information from these parties.
We do not currently have a contingency plan in place to handle a "worst case
scenario", as we believe that any non-compliant systems on our part do not pose
a material risk to PCI. If, and to the extent that we identify material risks to
the company from third parties non-compliance, we will formulate a plan at that
time.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
PROP 65. PCI and Southland have received a notice of violations of
Proposition 65, a California regulation which requires warning labels on certain
cancer causing products, from a California attorney, Morse Mehrban. PCI believes
it is currently in compliance with Proposition 65. A new notice was submitted to
PCI following the dismissal of the prior civil suit brought by Mr. Merhban,
which was dismissed without prejudice for improper notice. It is expected that
Mr. Mehrban will re-file a lawsuit against PCI. With respect to the lawsuit
filed against Southland, the complaint indicates that the lawsuit covers a vast
quantity of products other than PCI's products. Accordingly, PCI has determined
not to retain California counsel to defend these claims on behalf of Southland.
If Mr. Mehrban files suit against PCI, PCI will retain California counsel to
defend the claims brought against it.
Item 2 - Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) Sale of Unregistered Securities.
The Company sold a total of 100,000 shares of unregistered common stock
during the first quarter to Ultimate Cigar Corp. as more fully described in Item
5 herein.
(d) Use of Proceeds.
All proceeds from the Company's initial public offering have been expended
as set forth in the Company's Form 10-KSB for the year ended December 31, 1998.
Item 3 - Defaults upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None.
Item 5 - Other Information
Sale of Can-Am International Investments, Corp. On or about June 2, 1999,
Premium Cigars International, Ltd. (the "Company") finalized the sale of all of
its shares in its wholly owned subsidiary, Can-Am International Investments,
Corp. ("Can-Am"), to Ultimate Cigars, Corp. ("ULTC"), a publicly traded company.
The original sales price for Can-Am was $500,000. In connection with the sale of
Can-Am, the Company and ULTC also exchanged 100,000 shares of each other's
common stock. The purchase price was restructured in July, and ULTC has a paid a
14
<PAGE>
total of $375,000 in cash for the purchase of Can-Am. The remaining $125,000 due
under the sales contract was restructured as an incentive to PCI for future
purchases of Web Access Cards provided by ULTC. Pursuant to the revised
agreement, PCI will obtain a purchase discount for Web Access Cards purchased by
PCI until such time as the total amount of such discounts equals $125,000.
Appointment of New Chief Executive Officer. As previously disclosed in the
Company's Form 8-K dated June 17, 1999, the Company named Scott Lambrecht as the
new President and Chief Executive Officer. Scott Lambrecht was an original
founder of the Company and previously served as Vice President of Operations and
Secretary to the Company. Scott Lambrecht's appointment followed the resignation
of John E. Greenwell as President, Chief Executive Officer and Director of the
Company.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Method
Number Exhibit Name of Filing
- ------ ------------ ---------
3.1 Articles of Incorporation *
3.2 Amended and Restated Bylaws, Adopted May 8, 1998 **
4.1 Specimen Common Stock Certificate ***
4.2 Description of Rights of Security Holders ****
10.1 Terms and Conditions for Sale of Can-Am Exhibit
filed herewith
27.1 Financial Data Schedule Exhibit
filed herewith
99.1 "Underwriting" section of Registration Statement on ****
Form SB-2
- ----------
* Incorporated by reference to Exhibit 3.1 of Registration Statement on Form
SB-2 (file no. 333-29985) declared effective on August 21, 1997.
** Incorporated by reference to Exhibit 3.2 of the Form 10-QSB filed by the
Registrant for the quarter ending June 30, 1998.
*** Incorporated by reference to Exhibit 4.2 of Registration Statement on Form
SB-2 (file no. 333-29985) declared effective on August 21, 1997.
15
<PAGE>
**** Incorporated by reference to pages 56-57 of Registration Statement on Form
SB-2 (file no. 333-29985) declared effective on August 21, 1997.
(b) Reports on Form 8-K
Form 8-K filed by the Company on June 17, 1999 disclosing Nasdaq delisting,
sale of Can-Am, the appointment of a new CEO and other matters.
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.
PREMIUM CIGARS INTERNATIONAL, LTD.
(Registrant)
/s/ Scott Lambrecht Date: August 16, 1999
- -------------------------------------------
Scott Lambrecht
President & Chief Executive Officer
/s/ Stanley R. Hall Date: August 16, 1999
- -------------------------------------------
Stanley R. Hall
Controller and Principal Accounting Officer
16
TERMS AND CONDITIONS FOR ULTC TO PURCHASE OF THE NET ASSETS OF
CAN-AM INTERNATIONAL FROM PCIG AND ULTC'S OPTION TO BE
ACQUIRED BY PCIG
MAY 15, 1999
TERMS AND CONDITIONS FOR ULTC PURCHASE OF THE NET ASSETS OF
CAN-AM INTERNATIONAL FROM PCIG
Ultimate Cigar Co. Inc. (herein after referred to as "ULTC"), a Nevada, U.S.A.
corporation publicly traded as a NASDAQ OTCBB issue, hereby makes a conditional
offer to purchase the net assets of Can-Am International, a subsidiary
corporation of Premium Cigars International Ltd.(herein after referred to as
"PCIG" and renamed Product Express.com) an Arizona corporation publicly traded
as a NASDAQ OTCBB issue and 100,000 common shares, for US$500,000.00 and 400,000
common shares (300,000 of which will be non diluting) of Ultimate Cigar Co.
Inc.'s stock. In order to effect this purchase and sale it may be required that
PCIG and ULTC register the shares. The purchase and sale shall be effective on
May 20, 1999 with all rights, possession, and transference of net assets
including all the issued share capital of Can-Am International and control of
operations on that date. The closing of the stock transfer shall be on the date
of the purchase and sale but may be extended to not later than June 20, 1999 if
additional time is required to effect said transfer (not applicable to shares
held as security described below).
It is generally agreed that the following terms and conditions will be met to
effect a purchase of the net assets of Can Am.
1. Purchase Price of US$500,000.00 is payable as follows:
a. US$250,000.00 cash paid to PCIG on or before May 20, 1999.
b. US$250,000.00 cash paid to PCIG on or before June 20, 1999 secured by
500,000 non diluting (unrestricted after June 20,1999) ULTC common
shares, and/or the assets of ULTC, and/or the repossession of Can-Am,
to whatever extent PCIG deems is necessary to recover said payment if
said payment is not made on June 20, 1999.
2. Stock transference of 400,000 common shares of ULTC's stock to PCIG as
follows:
a. The following shares and restrictions shall become null and void if
ULTC completes the merger with PCIG as outlined in the option phase of
this agreement: 300,000 ULTC (non diluting) common shares to be held
in a third party trust account for the benefit PCIG to be released to
PCIG if the option to merger with PCIG is not completed by September
20,1999 with the following restrictions:
1
<PAGE>
i. 100,000 restricted trading shares until September 20, 1999.
ii. 100,000 restricted trading shares until December 20, 1999.
iii. 100,000 restricted trading shares until March 20, 2000.
b. 100,000 ULTC (dilutable) common shares to PCIG restricted as to
trading until June 20, 2000.
3. Stock transference of 100,000 common shares of PCIG's stock to ULTC as
follows:
a. 100,000 ULTC (dilutable) common shares to ULTC restricted as to
trading until June 20, 2000.
4. ULTC will have the first right of refusal to form an alliance to
participate in the Product Express.com program as a shipping facility in
Canada to serve the convenience, drug, and small grocery outlets in Canada
to whatever extent the program can be developed in Canada by ULTC utilizing
PCIG's products and systems for E-commerce.
5. ULTC will pursue an alliance with PCIG in the development of a similar
product to PCIG's Prime Time(TM) flavored cigarillo and/or other non
tobacco flavored smokes in individually sealed units, and make that product
available to PCIG exclusively in its U.S. markets as an alternate to PCIG's
Prime Time(TM) should PCIG elect to use an alternate cigarillo and/or other
non tobacco flavored smoke.
6. Management and employees will be interviewed by ULTC's Management as to
their future employment. The following Employee, Jim Stanley, has a
severance of six months wages if he is unjustly fired or laid off. This
creates a liability to this individual and as a condition of this offer to
purchase and sale, it is required that the severance clauses in this
contract be made null and void with no payment of severance or bonuses,
past, present, or future or that ULTC assumes the liability for his
contract. All wages, both now or in the future are to remain at the current
level until a review of Management and each employee is completed by ULTC's
Management.
The CEO/President of PCIG (with no compensation, bonus or severance, past,
present, or future) will tender his resignation at the time of acceptance
and approval of the Board of Directors of PCIG of this Terms and Conditions
for ULTC Purchase of the net assets of Can-Am International from PCIG with
an effective date of May 19, 1999.
7. General components to the Terms and Conditions for ULTC Purchase of the net
assets of Can-Am International from PCIG with an effective date of May 15,
1999 and as defined and further outlined in Exhibit "A", and guaranteed
through a offset in the second payment of US$250,000.00 not to be
materially different in Exhibit "B" of which both Exhibits shall become
part and parcel to this agreement are as follows:
a. The ULTC will purchase the assets and assume the liabilities of
Can-Am, excluding the inter company (PCIG) receivable and
stockholder's equity. This will be accomplished by PCIG signing all of
Can-Am's stock and 100,000 shares of PCIG's common stock (restricted
as outlined herein) over to ULTC and delivering to a trust account of
which ULTC will deposit for dispersal to PCIG the first installment
amount of US$250,000.00 and deliver 100,000 shares of ULTC
stock(restricted as outlined herein) signed over to PCIG.
2
<PAGE>
b. ULTC will assume responsibility for any returns after the closing
date.
c. ULTC will establish and escrow account at the closing date to be used
to pay current liabilities. Federal and provincial taxes at the time
of the closing would be determined using the methodology Can-Am has
used historically. Any further tobacco tax liabilities that may arise
associated with the time period prior to the closing would not be the
responsibility of UTLC.
d. ULTC would assume Can- Am's lease commitments.
8. Steven A. Lambrecht has constructed this tender offer to sell Can-Am to
ULTC on behalf of and at PCIG's request delineating the acceptable terms
and conditions outlined herein and at PCIG's direction.
9. Conditions Precedent: Vote by a majority of each respective Board of
Directors approving this agreement in its entirety.
OPTIONAL ACQUISITION OF ULTC BY PCIG
Ultimate Cigar Co. Inc. (herein after referred to as "ULTC"), a Nevada, U.S.A.
corporation publicly traded as a NASDAQ OTCBB issue, hereby reserves an option
under conditional terms to be acquired by Premium Cigars International
Ltd.(herein after referred to as "PCIG" and renamed Product Express.com) an
Arizona corporation publicly traded as a NASDAQ OTCBB issue for up to 50% of
PCIG's equity in common shares in exchange for all of ULTC's equity (including
Can-Am's) to be delivered in the form of common shares and a US dollar amount
that would be 20% per share less than the then current 20 day prior trading
average per share of PCIG's common trading shares, but in no event shall the
total amount paid to PCIG be less than US$2,500,000.00 described as follows:
1. All of ULTC's equity (including Can-Am's) in the form of common shares
shall be delivered to PCIG plus a US dollar amount that would be 20%
per share less than the then current 20 day prior trading average per
share of PCIG's common trading shares, but in no event shall the total
amount paid to PCIG be less than US$2,500,000.00 shall be paid to PCIG
on or before September 20, 1999 for a total of 50% of PCIG's equity in
the form of common shares (includes the 100,000 shares of PCIG stock
exchanged in the purchase of Can-Am).
2. The entire Board of Directors of PCIG will tender their resignations
at the time of acceptance and approval of the Board of Directors of
PCIG of this option of ULTC to be acquired by PCIG and the Private
Placement terms and conditions, subject to the entire amount of funds
being made available with an effective date of the resignations being
the date the entire funds necessary to complete a 50% acquisition of
PCIG's common stock are made available to PCIG.
3. In the event ULTC's shareholders and/or associates cannot raise the
entire amount required to obtain the 50% equity then the percentile of
equity to ULTC's shareholders in the form of common shares of PCIG
3
<PAGE>
shall be adjusted to the amount of US dollars raised times the equity
of PCIG to be delivered (in no event less than US$25,000.00 for every
.5% equity in the form of common stock, less a percentile adjustment
to account for the 100,000 of PCIG's common shares exchanged in the
purchase of Can-Am) to the nearest US$25,000.00 increment up to a
total of not less than US$2,500,000.00 plus all the equity of ULTC in
the form of common stock for up to 50% equity of PCIG in the form of
common stock.
4. The share totals for each public company may be increased or decreased
dependent on the conditions of reinstating the listing of PCIG as a
Small Cap NASDAQ listing, however the equity position percentile in
the form of common shares shall not be altered from the ratios of
equity in the form of common stock delineated herein as part of the
acquisition of ULTC by PCIG for all of ULTC's equity in the form of
common shares and not less than US$2,500,000.00 for up to 50% of PCIG
equity in the form of common stock as defined herein.
5. In order to effect this acquisition it may be required that PCIG and
possibly ULTC register the shares so that all shares become free
trading.
6. Steven A. Lambrecht has constructed this tender offer to sell Can-Am
to ULTC on behalf of and at PCIG's request delineating the acceptable
terms and conditions outlined herein and at PCIG's direction. Gary
Sherman and/or Steven A. Lambrecht and/or their associates will be
compensated by ULTC for their efforts in promoting the private
arrangement of portions of the funding of the not less than
$2,500,000.00 commensurate to their efforts (to be determined by the
parties involved) as a result of privately helping with the raising of
the funds.
7. Conditions Precedent: Vote by a majority of each corporations
respective Board of Directors approving the merger and shareholder
ratification of said approval.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same document.
Agreed to as the principle outline of the Purchase and sale and subsequent
Merger effective as of this 18th day of May, 1999, with the approval of the
undersigned as to whatever authority they have and as to their irrevocable proxy
to vote their shares in favor of this purchase subject to the majority approval
of the respective Board of Directors of the respective Corporations and
ratification of the shareholders with respect to the exercising of the option
for ULTC acquisition by PCIG only.
4
<PAGE>
Ultimate Cigar Co. Inc. Inc. Premium Cigars International, Ltd.
- ----------------------------------- -----------------------------------
Rep. of Shareholders date Steven A. Lambrecht,Board Member-date
- ----------------------------------- -----------------------------------
Phillip Cote, President -date Gary Sherman Board Member-date
-----------------------------------
John Greenwell, President/CEO/BoD-date
-----------------------------------
Gregory P. Lambrecht, Board Member-date
-----------------------------------
Colin A. Jones, Board Member-date
-----------------------------------
Greg Emery, Board Member-date
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 59,861
<SECURITIES> 25,000
<RECEIVABLES> 251,334
<ALLOWANCES> 25,329
<INVENTORY> 175,282
<CURRENT-ASSETS> 747,871
<PP&E> 450,682
<DEPRECIATION> 211,891
<TOTAL-ASSETS> 1,261,655
<CURRENT-LIABILITIES> 1,259,987
<BONDS> 0
0
0
<COMMON> 8,974,299
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,261,655
<SALES> 2,566,286
<TOTAL-REVENUES> 0
<CGS> 1,893,272
<TOTAL-COSTS> 6,238,337
<OTHER-EXPENSES> 16,679
<LOSS-PROVISION> 38,578
<INTEREST-EXPENSE> 10,546
<INCOME-PRETAX> (3,688,730)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,688,730)
<EPS-BASIC> (.98)
<EPS-DILUTED> 0
</TABLE>
