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
- --------------------- ----------------------
March 31, 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
incorporation or organization) Identification Number)
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 March 31, 1999, there were 3,839,092 shares of Premium Cigars
International, Ltd. common stock, no par value outstanding.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements........................................... 3
Condensed Consolidated Balance Sheet (Unaudited)
as of March 31, 1999.............................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the three months ended March 31, 1999 and 1998................ 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1999 and 1998................ 5
Notes to Condensed Consolidated Financial Statements................ 6
Special Note Regarding Forward-Looking Statements................... 8
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.............................................. 12
Item 2 - Changes in Securities and Use of Proceeds...................... 12
Item 3 - Defaults Upon Senior Securities................................ 12
Item 4 - Submission of Matters to a Vote of Security Holders............ 13
Item 5 - Other Information.............................................. 13
Item 6 - Exhibits and Reports on Form 8-K............................... 13
SIGNATURES................................................................... 14
2
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
March 31,
1999
------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 140,774
Accounts receivable - trade, net 420,515
Inventory, net (Note 3) 1,381,152
Other current assets (Note 5) 180,144
-----------
Total Current Assets 2,122,585
-----------
Property and Equipment, net 596,526
-----------
Other Assets:
Humidors, net 739,284
Other assets 62,934
-----------
802,218
-----------
$ 3,521,329
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses 1,397,700
-----------
Total current liabilities 1,397,700
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Common stock - no par value, 10,000,000 shares
authorized, 3,839,092 shares issued and outstanding
(Note 6) 8,943,049
Foreign currency translation adjustment (52,137)
Accumulated deficit (6,767,283)
-----------
Total Stockholders' Equity 2,123,629
-----------
$ 3,521,329
===========
The accompanying notes are an integral part of the
condensed consolidated financial statements
3
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
(Unaudited) (Unaudited)
Net Sales $ 1,317,687 $ 1,255,904
Cost of Sales 963,110 1,081,461
----------- -----------
Gross Profit 354,577 174,443
Selling, General and Administrative 976,871 1,232,554
Severance Packages (Note 4) 395,173
----------- -----------
Loss from Operations (622,294) (1,453,284)
Other Income (Expense) (3,640) 65,671
----------- -----------
Net Loss $ (625,934) $(1,387,613)
=========== ===========
Basic Loss per Share $ (0.17) $ (0.40)
=========== ===========
Weighted Average Number of Shares Outstanding 3,678,425 3,469,092
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements
4
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-------------------------
1999 1998
--------- -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(625,934) $(1,387,613)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 251,660 131,491
(Increase) decrease in accounts receivable 111,253
(Increase) decrease in inventories (55,870)
Increase (decrease) in accounts payable and
accrued expenses 253,687
Deposits on equipment and office furniture (125,125)
Accrual of severance packages 244,111
Net change in other assets and liabilities (47,838) (40,504)
--------- -----------
Net cash provided by (used for) operating
activities (113,042) (1,177,640)
--------- -----------
Cash flows from investing activities:
Purchase of humidors (64,283) (207,776)
Purchase of equipment (7,053) (49,674)
Proceeds from sale of available for sale
securities 456,566
--------- -----------
Net cash provided by (used for) investing
activities (71,336) 199,116
--------- -----------
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 20,936 (4,284)
--------- -----------
Net increase (decrease) in cash and cash equivalents (27,442) (982,808)
Cash and cash equivalents, beginning of period 168,216 1,264,365
--------- -----------
Cash and cash equivalents, end of period $ 140,774 $ 281,557
========= ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements
5
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Premium Cigars International and Subsidiary
(the "Company" or "PCI"), the accompanying condensed consolidated financial
statements include all normal adjustments considered necessary to present fairly
the financial position as of March 31, 1999, and the results of operations for
the three months ended March 31, 1999 and 1998, and cash flows for the three
months ended March 31, 1999 and 1998. Interim results are not necessarily
indicative of results for a full year.
The condensed consolidated 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 consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
3. INVENTORIES
As of March 31, 1999, inventory consists of the following:
Cigars and cigar accessories $1,770,332
Reserve for obsolescence (389,180)
----------
$1,381,152
==========
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
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
6
<PAGE>
was increased from 6% to 10% during the extension period. Accrued interest as of
March 31, 1999 is $15,520. The total of the notes receivable plus accrued
interest is included in other current assets in the Company's condensed
consolidated 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.
7. SUBSEQUENT EVENT
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 immediately eligible to trade on the OTC Bulletin
Board. The Company's management is currently evaluating all of its available
options relating to this action.
7
<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.
8
<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 ("PCI" or the "Company") in
conjunction with PCI's condensed consolidated 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.
PCI is building a marketing and merchandising platform for the placement of
niche products in convenience stores and other specialty outlets throughout
North America. PCI operates in one business segment and has a December 31 fiscal
year.
RESULTS OF OPERATIONS
The following table sets forth, for the three months ended March 31, 1999 and
1998, certain items from PCI's Condensed Consolidated Statements of Income
expressed as a percentage of net sales.
Three Months Ended
March 31,
-------------------
1999 1998
---- ----
Net Sales 100.0% 100.0%
Cost of Sales 73.1% 86.1%
----- ------
Gross Profit 26.9% 13.9%
SG&A and Other Operating Expenses 74.1% 129.6%
----- ------
Loss from Operations (47.2%) (115.7%)
Other Income (Expense) (.3%) 5.2%
----- ------
Net Loss (47.5%) (110.5%)
===== ======
9
<PAGE>
COMPARISON OF THE FIRST QUARTER OF 1999 WITH THE FIRST QUARTER OF 1998
Net sales for the quarter ended March 31, 1999 increased by $62,000 versus the
same period last year, a 5% increase. Sales in the United States were down
slightly versus one year ago; however, revenue steadily increased during the
quarter as the company began rolling out its new flavored cigar Prime Time. This
was offset by a decline in sales via the Company's in store humidor program.
Canadian sales increased 19% from one year ago despite a difficult operating
environment due to increasing legislative pressure affecting cigar packaging and
humidor placement within retail outlets.
Gross profit margin was 27% for the quarter ended March 31, 1999, up from 14%
for the quarter ended March 31, 1998. Gross margin has continued to show
improvement as a result of the Company's investment in its integrated systems,
as well as negotiating more favorable terms with suppliers. However, margins in
Canada continue to lag those in the U.S. due to significantly higher tobacco
taxes.
Selling, general and administrative expenses for the quarter ended March 31,
1999 decreased $651,000 or 40% from the same period one year ago. Excluding a
one-time charge for severance packages in the first quarter of 1998, SG&A
decreased $256,000, or 21%, 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.
Other income for the quarter ended March 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company used $113,000 for operating activities for the first three months of
1999. The net loss of $626,000 was reduced by non-cash expenses for depreciation
and amortization of $252,000 and an increase in accounts payable and accrued
expenses of $254,000.
Accounts receivable at March 31, 1999 decreased $111,000 or 21% from December
31, 1998. The decrease is due in part to improved collection efforts in Canada,
combined with product returns in Canada which reduced the overall accounts
receivable balance. Net sales for the quarter were down from the fourth quarter
of 1998, which also contributed to the overall decrease.
As part of the Company's humidor program, a humidor is sent with each initial
order of cigars as new stores are added. While PCI retains ownership of the
humidor, the store is not charged for the humidor unless it is lost or damaged
by the store. Therefore, as new stores continue to be added, PCI requires
capital to purchase the humidors it sends out as part of the initial order. As
discussed in our 1998 Form 10-KSB, we expect future humidor purchases to be
minimal.
10
<PAGE>
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.
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.
Accounts payable and accrued expenses at March 31, 1999 increased $254,000 or
22% from December 31, 1998. The increase is largely due to our inability to
secure financing until mid-March of 1999.
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
indebtedness. We have raised an additional $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. However, it is likely that the Company will have to raise
additional capital through the sale of some of its assets in order to raise the
necessary capital to repay the trade debt it has incurred over the past several
months. We cannot assure you that we will be able to sell sufficient assets 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 is expected to be completed by the second
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 represented as being
non-compliant. The cost to replace this software is not expected to be material
and we intend to identify suitable alternatives by the second quarter of 1999.
We are in the process of determining the compliance of our other software and
expect to have this completed by the second quarter of 1999.
11
<PAGE>
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 is
expected to be completed by the second 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.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) Sale of Unregistered Securities.
The Company sold a total of 370,000 shares of unregistered common stock
during the first quarter as more fully described in Part II, Item 5 of the
Company's Form 10-KSB filed for the year ended December 31, 1998.
(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
12
<PAGE>
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None. After the quarter's end, on or about April 26, 1999, the Company
filed a proxy statement for its 1999 Annual Meeting originally scheduled to be
held on May 26, 1999. Notice of the 1999 Annual Meeting of Shareholders and
Proxy Statement have not yet been distributed to the shareholders as the Company
is contemplating an extension of the Annual Meeting to a later date.
ITEM 5 - OTHER INFORMATION
Nasdaq Delisting. The Listing Qualifications Panel of the Nasdaq Stock
Market determined to delist the securities of the Company effective with the
close of business on May 11, 1999. The shares of the Company are currently being
traded on the OTC Bulletin Board. The Company's management team, in conjunction
with the Company's Board of Directors, is evaluating all available options
relating to this action. The Nasdaq Listing and Hearing Review Council may, on
its own motion, determine to review any Listing Qualifications Panel decision
within 45 days of the decision. The Company may request that the Review Council
review the decision within 15 days from the date of the Listing Qualifications
Panel's decision. If the Review Council determines to review this decision it
may affirm, modify, reverse, dismiss, or remand the decision of the Panel.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Name Method 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 ****
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.
**** 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 January 15, 1999 disclosing potential
Nasdaq delisting and other matters.
13
<PAGE>
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/ John E. Greenwell Date: May 17, 1999
- ------------------------------------
John E. Greenwell
President & Chief Executive Officer
/s/ Stanley R. Hall Date: May 17, 1999
- ------------------------------------
Stanley R. Hall
Controller and principal accounting officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 140,774
<SECURITIES> 0
<RECEIVABLES> 420,515
<ALLOWANCES> 32,656
<INVENTORY> 1,381,152
<CURRENT-ASSETS> 2,122,585
<PP&E> 596,526
<DEPRECIATION> 203,752
<TOTAL-ASSETS> 3,521,329
<CURRENT-LIABILITIES> 1,397,700
<BONDS> 0
0
0
<COMMON> 8,943,049
<OTHER-SE> (52,137)
<TOTAL-LIABILITY-AND-EQUITY> 3,521,329
<SALES> 1,317,687
<TOTAL-REVENUES> 0
<CGS> 963,110
<TOTAL-COSTS> 1,939,981
<OTHER-EXPENSES> 3,640
<LOSS-PROVISION> 992
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (625,934)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (625,934)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 0
</TABLE>
