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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-KSB
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file No. 0-29414
PRODUCTEXPRESS.COM EBUSINESS SERVICES, INC
Formerly: PREMIUM CIGARS INTERNATIONAL, LTD.
(Name of small business issuer 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, AZ 85260
(Address of principal office) (Zip code)
Issuer's telephone number, including area code: (480) 922-8887
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
No par value Common Stock OTC BB
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 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $4,021,859, from both
continuing and discontinued operations.
The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $2,338,916 as of March 31, 2000.
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The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date of March 31, 2000 was 5,554,290.
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PREMIUM CIGARS INTERNATIONAL, LTD.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PAGE
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PART I.......................................................................................4
Item 1 - Description of Business....................................................5
Item 2 - Description of Property...................................................22
Item 3 - Legal Proceedings.........................................................22
Item 4 - Submission of Matters to a Vote of Security Holders.......................23
PART II.....................................................................................24
Item 5 - Market for Common Equity and Related Stockholder Matters..................24
Item 6 - Management's Discussion and Analysis or Plan of Operation.................27
Item 7 - Financial Statements and Supplementary Data...............................27
Item 8 - Changes in and Disagreements with Accountants on Accounting
Financial Disclosure.............................................32
PART III....................................................................................33
Item 9 - Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act..............................................33
Item 10 - Executive Compensation...................................................36
Item 11 - Security Ownership of Certain Beneficial Owners and Management...........42
Item 12 - Certain Relationships and Related Transactions...........................43
Item 13 - Exhibits and Reports on Form 8-K.........................................45
SIGNATURES..................................................................................46
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................................47
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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 ProductExpress.com to obtain and maintain ongoing
fulfillment contracts sufficient enough to keep the operations
ongoing;
- failure of ProductExpress.com's independent authorized
representatives(20+) to sell website design, orders online
processing, web site hosting, and online/offline generated
fulfillment services sufficient to keep the operations
ongoing;
- any decision by major fulfillment service accounts to
discontinue our fulfillment services for them and/or their
manufacturers;
- failure of others products that we intend to sell in our
distribution channels, particularly new products such as
Renditions(TM) Fragrances, Americas Acid Free Coffee, and ATM
Scrip machines, and the PAID CARD debit card 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 replace old products and add retail
stores and new products;
- our ability to raise additional capital to enable us to
maintain sufficient working capital for operating activities;
- our ability to obtain funding to enable us to payoff prior
debts;
- any decision by major retail chains to not sell our future
products or to place our future products or countertop units
in a disadvantageous location within their stores;
- a decline in the popularity of the Products we intend to sell
in the future and/or possible adverse public opinion against
the future products;
- interruptions in the availability of our Products that we
place into our distribution channels;
- changes in government regulations, tax rates, the manner of
tax calculation and collection, including any recalculation of
taxes due from prior operations that are currently under
dispute in the Provinces of Canada, and similar matters
relating to our products, including any trademark infringement
issues from prior operations, in particular the PrimeTime
trademark that was applied for and later assigned to the
manufacturer, as it relates to a cease and desist letter from
Brown & Williamson's Prime(TM) cigarettes trademark, and
including any restriction on the self-service nature of
merchandising displays and marketing promotions particularly
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 get consignment of quality Products at
favorable prices and the effect on Product prices and
availability, of weather and other conditions in the countries
that import Products to the U.S.; and
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- 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.
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
HISTORY. PCI was incorporated in Arizona on December 16, 1996 to be a national
and international distributor of premium cigars from humidors in high traffic
retail outlets. Shortly after incorporation, PCI acquired CAN-AM International
Investments Inc. ("CAN-AM"), a Canadian corporation which owned all cigar
accounts, inventory and humidors formerly owned by Rose Hearts Inc. ("Rose
Hearts") of Seattle, Washington, and J&M Wholesale, Inc. ("J&M") located near
Vancouver, British Columbia. PCI began trading on the NASDAQ Small Cap Market
August 28, 1997 under the stock symbol PCIG.
NAME CHANGE, PCI began doing business as ProductExpress.com eBusiness Services
in June 1999, and received a majority stockholder approval to officially change
its name from Premium Cigars International, Ltd. to ProductExpress.com eBusiness
Services, Inc., and to change its symbol on the NASDAQ OTCBB from PCIG to PREX
or some other available symbol, on April 10, 2000 via proxy vote of the
shareholders. PREX was not available, so the new symbol is PXPS, and the change
takes place on April 24, 2000.
OPERATIONS.
WHAT WE WERE TO ACCOMPLISH DURING 1999. In our 1998 Annual Report on Form 10-KSB
we outlined what changes we believed would occur during 1999 and the rationale
for the changes. The following summarizes those key changes we anticipated:
- To be a marketer of brand name premium cigars was not enough.
PCI must vary the products it distributes to its convenience,
gas and high volume retail outlets, so that the Company was
not reliant on any one product or product line to fulfill the
needs of the consumer and the unique needs of each
distribution channel. Expanding our operations to provide
online sales from our ProductExpress.com website would allow
for a variety of products to be marketed to our distribution
channels and consumers as well.
- Managing PCI's existing and future operations required
different management skills and experience. The Company needed
to drastically reduce its overhead and staff. The unprofitable
Canadian operations needed to be sold. PCI needed to assemble
a new management team, particularly in executive management.
- PCI must never again allow itself to become overburden with
inventory through exclusive purchase order agreements that
could leave the Company with non-saleable inventory.
- Computer systems for order processing was the core competency
that could be utilized to restructure the way PCI does
business and allow the rapid expansion of new impulse products
such as Prime Time cigarillos to enter our distribution
channels quickly and efficiently.
- Utilizing our customer service competencies allowed
ProductExpress.com to offer many other unique services as an
outsource to other customers as an ebusiness fulfillment
service.
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WHAT WE ACCOMPLISHED DURING 1999. PCI implemented most of the changes outlined
in our 1998 10-KSB. Specifically:
- During the first half of 1999, we continued to pursue the premises on
which PCI was founded, with increased focus on the needs of the
consumer and the unique needs of each distribution channel.
- We implemented the roll out of the Prime Time product to our
distribution channels faster than any other product we had
ever launched. In one six week period we opened 9,000 stores
with Prime Time.
- We improved our understanding of the consumer purchases of
impulse items in our customers' retail outlets, and offered a
variety of products that might fit the consumer.
- We renegotiated our Supplier Agreement that had been
negotiated and agreed to by prior PCI management with Single
Cigar, Inc. In order to eliminate the burden of monthly
purchase quotas of Prime Time cigarillos, which totaled in
excess of 74 million dollars over a five year period. In doing
so we relinquished our exclusivity to the distribution of the
product and gave back the rights to the trademark application
for Prime Time. The manufacturer of Prime Time subsequently
gave our wholesale distributor accounts to another entity, and
then took the distribution rights in house. In December 1999,
ProductExpress.com received notice from Brown & Williamson
Tobacco Company demanding that PCI cease using the PrimeTime
trademark on the PrimeTime Cigarillo. Brown & Williamson
alleged that PCI's use of its PrimeTime mark for cigarillo's
infringed on Brown & Williamson's Prime(TM) mark for
cigarettes. Management, although not conceding to this claim
responded to the notice with documentation that PCI no longer
had an interest in the trademark application PrimeTime. Prior
to this PCI had received notice from the manufacturer, Single
Cigar, Inc., that they would not allow PCI to purchase for
distribution, Prime Time, after December 31, 1999. Due to
declining same store sales, price increases from the
manufacturer that eroded margins, the manufacturers minimum
purchase demands, notice from the manufacturer that they would
no longer supply PCI with Prime Time at years end, and finally
trademark issues, the Company ceased selling the product on
December 31, 1999.
- The placement of products on our Internet Web Site
ProductExpress.com was accomplished, but the sales failed to
materialize.
- By June 1999, it was the opinion of the new management team
that the Company's core competency was in high speed
fulfillment. Therefore, it was decided that the Company's new
business focus should include Fulfillment, High Speed Internet
Order Processing, and eBusiness Services for other businesses.
As a result, it also affords the Company the opportunity to
become exposed to Products that might successfully fit in the
Convenience Store Channels without having to bear the
financial risk of Purchasing the Inventory. This has become
the Company's core business model as it moves into the future.
This allows ProductExpress.com to store products for a fee,
and purchase them for distribution into our channels only at
the time of an order, thus eliminating the burden of owning
inventory that might not sell.
- During 1999, PCI assembled a new management team, particularly
in Executive Management, and in the process, drastically
reduced its overhead.
- John Greenwell resigned as CEO in May 1999. He was replaced by
Scott Lambrecht who resigned to pursue another venture on
November 10, 1999. In December Steven A.
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Lambrecht resumed the CEO position he had at the time the
Company was taken public, in addition to his positions of
Director of Corporate Development and a Member of the Board
since the Company's inception. The changes section in the 3rd
Qtr. 10QSB misstated that Steven Lambrecht was the Interim CFO
which differed from the Signature page which stated the CEO
and Corp. Secretary titles correctly.
- Brendan McGuinness resigned as Vice President of Sales and COO
in December 1999. He was replaced by Corey Lambrecht who has
been with the company since its inception. He has been
promoted from National Sales Director to Vice President of
Sales and Marketing.
- Stan Hall resigned as the Controller on January 30, 2000. He
has been replaced by Karl Zeidler, who has been an assistant
Controller since April 1998. Karl brings strong controller
skills and the experience necessary to get the Company through
the transition to a Fulfillment Services company and beyond.
Gary Sherman became Chairman of the Board in September 1999
and President in November, 1999. The changes section in the
3rd Qtr. 10QSB misstated that Gary Sherman was the Interim CEO
which differed from the Signature page which stated the
Chairman and President titles correctly.
- - We utilized the integrated computer systems.
- PCI invested time and money in refining our systems that deal
with order solicitation, processing and shipping small
packages to thousands of locations.
- We substantially reduced our fulfillment time, shipping time,
lowered labor costs per shipment, improved our ability to
track shipments, reduced our shipping costs, and improved our
ability to prove store receipt of the shipment.
- The result was that we used these systems to quickly launch
new products such as Prime Time and convert our existing
business to High Speed Fulfillment and eBusiness Services.
- Utilization of these systems improved our ability to manage
inventory associated with merchandise that turns at retail for
our fulfillment service customers.
- - We expanded customer service.
- We expanded and further developed our in-house Customer
Service Department, that regularly called every store location
to solicit orders, by adding a (1-800 Customer) Service and
Order Taking Service, and an in house Telemarketing Service to
aid our Customers in procuring orders for their Consumers. In
addition, we added a Data Processing Division, to aid our
Customers in Processing initial application forms, processing
Credit Card Transactions, and producing introductory
collateral information that we pick, pack, and ship to the
initial application Clients in addition to the products.
- The Customer Service Department has been expanded from the
original Convenience store solicitation of orders to include a
number of new revenue producing sources. These include
in-bound and out-bound toll free Customer Service Calls, Order
Taking, and other TeleMarketing Services. In addition, the
Company has added a Data Processing Division which can
accommodate the Processing of Applications, Membership Forms,
Databases and Credit Cards. A final new revenue source is the
Assembly and Packing of Products for Clients in anticipation
of shipping or Presentation.
- - We eliminated the risk associated with relying on one product, and
owning our own products.
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- During 1999, PCI liquidated the premium name brand cigars that
were not selling. In addition we traded out the cigar program
for the Prime Time (cigarillo) program. This proved to be a
very costly proposition, with the net effect that we
discontinued selling Prime Time at the end of 1999, due to
declining sales, mounting obligations to purchase more Prime
Time product on an escalating monthly basis as per a supplier
agreement negotiated and signed by former executive
management, and the notification by Brown and Williamson that
they were disputing the trademark for PrimeTime, as it relates
to their cigarette called Prime(TM).
- Current Executive Management set a policy that the Company
would only sell inventory that had been placed in our facility
on consignment to our distribution channels. The Company
eliminated the risk of inventory ownership. By taking the
liability for ownership of products sold into our chains of
distribution only at the time the product is shipped, we have
eliminated the overstock of inventory liability and marketing
and sales projections that plagued prior executive management.
Customers products that are brought in on consignment are
charged monthly pallet storage with our standard margins after
30 days. We are no longer confined to one or two products for
distribution as there is no risk of failed marketing and sales
projections.
WHAT WE LEARNED DURING 1999. Our U.S. store count expanded dramatically in 1999,
but the results of operations were disappointing in several aspects. See Item 6
- - "Management's Discussion and Analysis of Financial Condition" later in this
report. The insights that were gained in 1998 failed to achieve results in 1999.
The following summarizes that activity:
- The New Pime Time business alone would not support PCI;
distributing/marketing premium cigars in humidors and Prime
Time was limiting in terms of revenue generation and expensive
to implement. - During 1999, we continued to aggressively
pursue the premise on which PCI was founded, with an increased
focus in finding the right product for the consumer and
servicing the unique needs of each distribution channel.
However, revenues generated were disappointing, even with the
new product Prime Time. At the same time, our efforts to
convert the programs with a partial load of free product on
the initial units of Prime Time increased our overhead
marketing burden, and negatively impacted profitability.
- In general, even cigars with well-known brand names proved to
be difficult to sell, creating an inventory problem. - PCI
started 1999 with a heavy inventory of premium well known
brand named cigars that were purchased in anticipation of a
trade out program for existing and anticipated new humidor
placements. We initiated a cigar trade-out program beginning
in the Second Quarter of 1998, replacing the lesser known
cigars with more established brands in order to improve retail
inventory movement. While this strategy worked in certain
locations, it was not universally successfully. The return of
these cigars added to our already heavy inventory. Efforts to
sell this inventory was met with difficulty as the entire
cigar industry was suffering from oversupply. The remaining
cigars were liquidated in the first and second quarter of 1999
as the Company shifted it focus to the Prime Time flavored
cigarillo.
- Fully integrated systems proved to be a valuable investment. -
The development and implementation of an integrated order
solicitation, order processing, inventory
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management, and shipping system continued to be instrumental
in improving our gross margins and provided the basis for the
Company's transition to Fulfillment Services.
- Account relationships continue to be strong. - Our strong
customer relations continued with the trade out of the cigar
program with the Prime Time flavored cigarillo program. Our
customers have expressed appreciation for our efforts, our
increasing knowledge of the convenience store retail channel
and consumer package goods marketing. As a result, our
customers continued to view PCI favorably. We have favorable
relationships to present new products through our distribution
channel in the future.
- Canada continued to be a difficult operating environment. -
Can-Am revenues increased during 1998 as we added new
accounts. Adjustment in products, along with the installation
of an integrated accounting platform, resulted in improved
gross margins. However, increasingly aggressive tobacco taxes
in Canada continued to restrict our margin improvement. It was
decided that since the Prime Time product could not be sold in
Canada in its US configuration, and that this was clearly the
direction and focus of the Company in beginning of 1999, that
Can-Am should be sold. After long protracted negotiations,
Can-Am was sold in June, 1999 for cash and a stock swap of
100,000 common shares (restricted for one year) of the
Ultimate Cigar Company for 100,000 common shares (restricted
for one year) of PCI stock, and a discount of the Web Access
card developed by Ultimate subject to its viability, which
based on beta tests conducted by the Company, later proved to
be not viable.
- Our performance made traditional financing difficult to
obtain. - Our difficulties in generating increased revenues
via our in-store humidor program, combined with our
significant investment in systems and continuing
administrative and sales overhead, resulted in continuing
operating losses throughout 1999. To maintain adequate
available funds for operations, we attempted to obtain a
revolving credit line that would be secured by our accounts
receivable and inventories. In March 1999, we obtained a
$1,000,000 Accounts Receivable Financing package through
Alliance Financial Capital. We utilized the Accounts
Receivable Financing extensively in 1999 for accounts
receivable relating to Prime Time. At the end of 1999, we
reduced the amount to $500,000 to lower the monthly cost to
have this financing option available to the Company for future
use.
WHAT WE CHANGED DURING 1999. We recognized the need to expand beyond the
limitations of the Prime Time cigarillo, and began to pursue fulfillment and
ebusiness services and new products to distribute utilizing our core competency
of high speed fulfillment and distribution.
- PCI began the roll out of the Prime Time cigarillo program as
an exchange program for the cigar humidor program. Through the
end of March, 1999, PCI shipped approximately 4,000 countertop
PrimeTime displays. Based on interest expressed from new and
existing accounts, we believed that this new product would
provide significant revenue to PCI while we re-engineered for
fulfillment and ebusiness contracts.
- The Humidibox program failed to generate enough interest to
continue the marketing effort.
- PrimeTime was a major part of the re-engineering efforts to
replace our in-store humidor program while leveraging PCI's
knowledge and experience in fulfillment and ebusiness
services.
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- - During the Second Quarter, we began work on developing fulfillment
services and e-commerce solutions that leverages PCI's core
competencies - integrated systems and convenience store experience .
The site - ProductExpress.com - was activated in late March, 1999.
- We leveraged our integrated order solicitation, order
processing, inventory management, and shipping system via a
March, 1999 launch of ProductExpress.com - a unique internet
site that offered retail consumers a variety of cigar gift
packs and multi-brand humidor assortments. We added other
products to the site. ProductExpress.com also has a wholesale
side that offered store managers PCI's traditional products
along with other products designed and packaged for the needs
of convenience stores. The site featured online wholesale
purchases and 72-hour direct store delivery. PCI intended to
expand the site to inform retailers about sales order history,
selling techniques, merchandising suggestions, consumer
demographics, price point comparisons and provide them with
the ability to share their experiences with other retailers.
The online retail and wholesale interest did not generate
enough sales to warrant further expansion of our products for
either retail or wholesale.
- By the Third Quarter ProductExpress.com was expanded to
include Fulfillment and eBusiness Services that would allow
the Company to act as a fulfillment center for other company's
products and provide ebusiness solutions for companies who
wanted to sell their products on the internet, with
ProductExpress.com processing the orders through their
strategic alliance partners. ProductExpress.com provides all
facilities reasonably necessary to effectively place inventory
orders, accept, receive, UPC label (if required), real time
inventory, warehouse, solicit and accept sales orders via
telephone and internet, place orders, custom pick (if
required), shrink wrap (if required), custom pack, shipping
rate, ship label, create packing slip and invoice, remove from
real time inventory, bill, track in real time, collect (EDI),
and provide customer service along with telemerchandising for
orders and meaningful data for the Customers Products.
- By the Fourth Quarter ProductExpress.com added data entry and
payment processing for initial membership orders for Network
Marketing and Multi Level Marketing Company's initial
memberships and product
- - During the Second Quarter of 1999, PCI liquidated its remaining cigar
inventory.
- Despite PCI's efforts through the first half of 1999 to sell
our lesser-known and name brand cigar inventory purchased in
late 1998, including the inventory that was returned during
the 1998 cigar trade-out program, we were unsuccessful in our
efforts to sell this product at prices at or above our cost
basis. Compounding our problems were heavy retail inventories
in the industry generally and a decline in imports of premium
cigars, suggesting a market slowdown.
- We were able to sell some of this inventory during the First
Quarter, 1999 at lower prices.
- PCI liquidated the remaining inventory during the Second
Quarter, 1999.
- - PCI reduced staff during the First Quarter, and throughout 1999. - Our
new products, integrated systems, and declining importance of our
in-store humidor program lead us to reassess our staffing needs. We
reduced staff in the U.S. by 50% in the First Quarter, 1999
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and continued to reduce staff throughout the year as we replaced our
salaried sales and marketing staff with outsource and commissioned
independent contractors to sell fulfillment services. PCI benefited
from reduced operating costs during 1999 and will continue to do so in
2000 as more independent authorized sales representatives are added to
the 20+ existing commissioned sales representatives..
OUR CUSTOMERS.
PrimeTime, our new product introduced late in 1998, enabled us to increase our
potential customer base beyond just the large convenience stores.
OUR LARGEST CUSTOMER. Corporate and franchise stores affiliated with Southland
USA and Southland Canada (7-Eleven) accounted for approximately 34% of our U.S.
sales and 44% of our Canadian sales during 1999. We dramatically expanded our
customer base throughout 1999 and these percentages steadily declined throughout
the year. However, the reduction and final elimination of our Prime Time
business resulted in diminished revenues for the third and fourth quarters of
1999 and the first and second quarters of 2000 or more as we replace that
business with fulfillment contracts, ebusiness services, and new products into
our distribution channels.
CANADIAN SALES. CAN-AM net sales for the period ending with the sale date of
CAN-AM were approximately US$805,100.
U.S. SALES. As of December 31, 1999 our United States operations distributed to
stores throughout the United States. PCI U.S. net sales for the twelve-month
period ended December 31, 1998 were approximately $3,216,700 million. Our U.S.
accounts included nationally-recognized accounts such as 7-Eleven(TM); Circle
K(TM); Mobil(TM); AM/PM(TM) and stores supplied by the McLane Company. Other
than 7-Eleven, which represents approximately 33% of our total U.S. sales, no
other individual customer represents more than 10% of our U.S. sales.
DIRECT AND THIRD-PARTY DISTRIBUTION. To effectively market and distribute Prime
Time, we primarily distributed directly to national convenience store chains,
and to a smaller degree through independent national, regional and local
distributors. Direct sales accounted for approximately 90% of our total sales
and third-party distribution accounted for 10% of our total sales for the
twelve-month period ended December 31, 1999.
CUSTOMER SERVICE. The ongoing success of our "full-service" Fulfillment Services
depends, in part, upon a strong customer service department. Our goal is to be a
working partner with each of our customers.
WHERE WE ARE GOING IN THE NEW MILLENNIUM.
THE FUTURE OF PRODUCTEXPRESS.COM
FULFILLMENT FOCUS
It has become clear that the new focus of becoming a high speed Internet
Fulfillment company is very attainable in a short period or time, due to the
systems and facilities that have been operational for three years. This has
given the new Management team of Gary Sherman and Steve Lambrecht, along with
the Director of Fulfillment, Pam Johnson, who has over 20 years of fulfillment
experience (14 with Revlon), and V.P. of Sales, Corey Lambrecht (with the
company
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since it's inception), in addition to the Strategic Alliance Partnership with
Meridian One Technologies' orders-online to provide Web Site Design, Hosting,
and Internet Order Processing, for our Customers, the ability to enter the new
millennium with a sophisticated high speed fulfillment center that services all
of our Customers needs. Management intends to build on the core fulfillment
contracts and expand with profits from the contracts and commitments that have
been received and are in the process of implementation. The Management team's
primary, number one goal, is to quickly become profitable through fulfillment
contracts that have been signed and are in the process of implementation and
contracts that the Company is in the process of bidding.
INTERNET FULFILLMENT CONTRACTS
Product Express.com e-business services has developed one of the most powerful
high speed Internet fulfillment facilities available anywhere. Once a
Manufacturer/Distributor is properly setup in the system, Product Express.com
can process an Internet Fulfillment Order in as little as 20 minutes from the
time it is received.
The system is based on an SBT Platform Accounting System that required a link
with a software program developed in conjunction with Meridian One Technologies
"Orders-online" system. This allows the initial Internet order to download the
correct information into SBT to create an invoice for products to be shipped.
The products can then be picked from individually controlled inventories, bar
coded, custom assembled, and packed in appropriate shipping boxes supplied by
the shippers. Each shipment is priced by computer software for the best rates by
weight, size, destination, and timing of delivery. Product Express has account
relationships with most of the major shippers. As a customer's products are
removed from inventory, they are also billed electronically, accounted for
electronically, and funds all collected electronically when possible. Only one
paper invoice is created in-house, and it contains all information, including
that of shipment tracking. This system has been acknowledged buy a major shipper
as one of the most efficient in the country. Finally, a customer service
department is available to deal one on one with any problems relating to the
delivery or warranty of the customer's products, on a fee basis.
The current accounting software and hardware can handle hundreds of millions of
dollars of online/offline order processing and shipping per year. There are some
minor software links that are being implemented to make a seamless transition of
data processing from multiple customer web sites directly into Product
Express.com's system. The warehouse has been reconfigured to one that
accommodates a fulfillment center. In addition, alternate storage sites have
been identified for the storage of customer products that would be in excess of
those required for immediate fulfillment. Therefore, as the company grows it
should have the capacity to accommodate both new and existing Customers needs
for storage.
It should be noted, that every area of service described adds another source of
revenue for the Company with profit margins added to the Company's cost of each
service.
Product Express.com has formed a Strategic Alliance Partnership with Meridian
One Technologies, an automated Web Site and business to business/consumer
e-commerce builder whereby web sites can be constructed for Product Express
clients. These sites will interface with the Product Express systems.
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The Company is also working with a public relations firm to launch a campaign
geared to highlight all of the services available. It is believed that a small
advertising program combined with a solid public relations campaign should
direct strong attention.
In an effort to control costs, there has been an implementation of an authorized
agent program in which individuals from other businesses that have clients with
fulfillment needs can direct them to Product Express when appropriate and be
compensated.
To date, Product Express. Com has entered into contracts with a number of
companies requiring fulfillment. These contracts have resulted in a variety of
service requirements. The Company is pleased with it's early results, and
believes that the decision to move into fulfillment as a method of providing
eBusiness solutions to other businesses is one that is sound. It also believes
that fulfillment will provide the foundation for the Company as it moves into
the future. Historically, the growth and needs of the internet have been
underestimated. The indications for the future appear to be even more
optimistic. It is the Company's belief that the future requirements for
fulfillment services will grow at this same rapid pace.
SUPPORT OF NEW PRODUCTS ROLL OUT TO OUR 15,000+ STORES
Product Express maintains an active database of more than fifteen thousand
convenience stores that it has serviced since inception. It is the Company's
belief that this information can be a valuable asset in the future. It is
believed that as a customer engages Product Express for fulfillment services,
there will be some whose products will be suitable for sale in convenience
stores as impulse or novelty items. The contacts that were established by
Premium Cigars International are maintained in the database. Consequently, it is
an easier process for the Company to develop test programs for these products
than it would be for a purveyor who has never had a product line in that market.
If the test marketing were to be successful on a specific product test, it is
believed that existing database would provide a known distribution channel. At
the same, the Company's financial risk would be a significantly reduced by
avoiding the initial inventory risk.
DEVELOPMENT OF WEB SITES FOR ORDER PROCESSING ONLINE SALES
GROCERY ASSOCIATION/PRODUCTEXPRESS/ORDERGROCERIESONLINE WWW.GROCERSONWEB.COM, OR
WWW.GROCERSEXPRESS.COM, OR WWW.EXPRESSGROCERS.COM WWW.ORDERGROCERIESONLINE.NET
OR WWW.ORDERGROCERIESONLINE.ORG
In the immediate post WWII era it was common to have delivery of dairy
products, meats, and some grocery items for the families that were mostly
limited to one car. Shopping for groceries, other than at the store, has in the
past been generated with a telephone call and more recently with fax, from the
home or office for a home delivery or pickup at the store.
As the Internet Age and the new millennium have come to bear it is increasingly
apparent that due to time constraints, more and more people are turning to the
web to order products, in this case groceries, to save precious time and the
mundane task of driving to crowded understaffed grocery stores, malls and other
stores to buy the necessities of life.
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ProductExpress.com believes that there are strong forces within the grocery
market place, that have raised billions of dollars, to become the future grocery
stores on the web. Obviously this would be at the demise of the existing
neighborhood grocery stores whether they be a national/regional chain or an
independent grocery store. As other Internet related online grocery stores,
increase their branding through national TV and print media, it will become
increasingly difficult to bring these customers back to the idea of ordering
groceries online from the stores they were familiar with in their neighborhoods,
let alone shopping for groceries at the store itself. Perhaps the major chains
could continue to merge with the online grocers, but not without dilution to
chain's shareholders. These combined powerful entities could be even more
devastating to the other chains and especially the independent grocery stores.
ProductExpress.com believes that to insure the future growth of all the grocery
stores, an all encompassing web site for ordering groceries online should be
built, under the umbrella of an association or buying group. ProductExpress.com
and its Strategic Partners have the ability to build and administer this web
site and process the orders and transactions. This would allow all the chains
and stores that belong to the buying group to have their icon or trademark that
bests identifies their store(s) on the web site to allow the millions of dollars
of branding that has been spent over the years to identify the various stores to
be recognized easily by the consumer.
The online shopping experience would be developed as follows:
1. A National TV, Radio, and Print Media Blitz to let the consumer know
that they can now shop at home, office, or from a laptop anywhere
online at their favorite neighborhood grocery stores for every item
each store has, with the knowledge that they are supporting their local
store, of which they know and trust, and can easily get to if there is
a delivery or product problem. There is also the convenience factor for
some who need to pick the groceries up due to a schedule change, or
because its easier to stop by on the way home from work, rather than
waiting at home for delivery. It should also be noted that deliveries
can be made more often, quicker, fresher, and cheaper than deliveries
from online warehouse stores that have to come all the way from a
central warehouse, and in many cases, not even the same day the order
was placed, and with no possibility of a second delivery that day for
missed items or corrections.
2. The consumer, with national, regional, and local branding, will quickly
become aware, that by going to grocersexpress.com that they will be
able to shop all their favorite local stores from one web site. This
will allow the consumer to compare the weekly specials and ads that
would also appear in the regional/local newspapers. Coupons could be
printed directly from that store's web site.
3. When the customer goes to the grocersexpress.com web site it will ask
for the zip code the customer wishes to shop within. The stores that
participate in the Grocery Association's Web Site Program will have
their brand recognizable icons/logos and name appear on the front page
relating to that zip code.
4. The customer clicks on the store icon they choose and begins shopping
at the store(s) they are familiar with, knowing that through power
searches, category searches, and specific brand searches they can find
the products they want faster than if they walked through the store.
Most customers tend to buy the same products and brands time and again,
so as each shopping order is saved, the process just gets faster.
5. It is suggested the on sale items and coupons items be listed as a
separate category in addition to their normal category listing to allow
customers who compare the ads, the ability to do so.
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6. All items are paid in advance by debit card, credit card, PAIDCARD, or
online check. This allows businesses to shop for office holiday and
birthday parties, and other functions without leaving the office and the
ability to pay with online checks. It would also allow siblings, children,
and caretakers of homebound elderly and the disabled to shop for their
loved ones from another state. And for parents of college bound and other
young adults to shop for appropriate healthy items for them from afar. All
this can be done from the comfort of the home, office, or in route to your
favorite vacation cabin, condo, or second home, with groceries delivered or
picked up at your local store nearest to your destination.
7. A fixed, standard, uniform, processing and delivery charge can be charged
for orders under a uniformly fixed amount. Undeliverable products are
brought back to the store for pickup, and if no pickup is made, a uniform
restock charge is deducted prior to a credit issuance.
8. ProductExpress.com and the grocery association would be paid a portion of
the processing charge from the customer if the order was less than the
fixed amount, and from the stores if the order was over a fixed amount,
from the stores margin on the larger amount of goods sold.
9. Many of stores already have delivery programs for the elderly and the
handicapped. Usually a box boy can be pulled off the line during slow hours
to make the deliveries in a leased small van with the stores logos and the
web site advertising for home deliveries displayed all over the van. Thus
furthering the branding for the stores/chains and the web site in
neighborhoods where the advertising would be most effective in attracting
more local customers.
10. By offering this opportunity to an entire association of chains and
independent stores, the costs of creating and maintaining the web site, and
the cost of national and international branding of the site, possibly by
using a celebrity to bring instant recognition to the site, is spread out
over the entire organization, so that the existing branding of the chains
is left intact for the consumer to decide when they give the zip code as to
where they want to shop. The smallest independent store has at least the
benefit of national exposure to go along with whatever loyal customer base
they have built. It is essential that each chain's and independent store
web site within the associations web site retain their own branding and
every item and private label they carry be available to the customer.
11. ProductExpress.com believes that if an association can get all or most of
its members to unite and embrace the concept of having one nationally, and
internationally in the case of some chains, branded web site with icons
that send the customer to the participating stores of their choice, then
these chains and independent stores will be able to outperform in service,
familiarity, loyalty, recognition, and most importantly price, the well
funded online grocery stores that are currently building momentum with the
consumers.
12. The systems required to seamlessly accomplish the web site design, on the
web backbone hosting with unlimited band width, taking the orders online,
processing the orders to print at the designated store's printer,
processing the credit, debit, checks online in real time, and processing
the fees, along with downloading all 45,000+ SKU's with digital pictures
and descriptions including price per unit measure and nutritional info for
each store with real time inventory back stock checks if required, are
currently being used for other projects by ProductExpress.com and its
Strategic Alliance Partners and Affiliates (malls that have 1.5+ million
SKU's). Our processing accounting software can currently handle up to a
billion a year in small sales transactions such as described herein, and
with some minor software upgrades the servers can process additional
billions.
13. Summation and Conclusion: An opportunity exists within a grocery
association to seize the momentum of the Internet...use the existing
facilities of the store's in the association to stem the wave of online
grocery warehouses that are being built by outside competitors...provide
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new and improved online order and delivery or pickup services to the
customers who have branded loyalty to their neighborhood chains and
store(s)...and create new customers by allowing other customers to shop and
compare online all member stores in the zip code under the umbrella of a
grocery association's uniformly priced order processing and delivery
service...all at a much lower barrier to entry for national branding,
taking and delivering orders online cost to the chains and independent
stores, while offering the customer a better and lower cost online service
than the competing online grocery services could ever offer.
14. ProductExpress.com in conjunction with its Strategic Alliance Partners, is
currently under consideration by major Grocery Associations and Chains to
develop the order groceries online Web site and process the orders taken.
Funding for the project will come from the association(s), store chains, or
possibly by ProductExpress.com and its Strategic Partners, in which case
the systems and order processing would remain proprietary to them. This is
one of the primary focuses for the expansion of ProductExpress.com in the
immediate future. To date, the master web site is in development stage, and
no contracts with Grocery Associations or Grocery Chains have been
finalized.
EXPANSION OF PRODUCT EXPRESS.COM INTRANET PRODUCT SALES
As a future project, ProductExpress.com intends to expand and market Product
Express.com Intranet related sales. A link has been developed by
ProductExpress.com to take and process orders directly from other Internet Web
Sites. This can be adapted and implemented to allow seamless transactions to
flow from an Intranet Appliance based software to the Company's order processing
and SBT accounting software. Product Express.com would be a viable Intranet
ordering system for the 60,000+ independent stores who do not have delivery from
distributors and are forced to rely on small jobbers and driving to wholesale
warehouses, to get there products for resale. This will require that the
independent store owners that are not already on the Internet sign up for a
Personal Internet Appliance, which is actually a touch screen Internet and
Intranet Phone. It is installed by simply plugging in the phone jack and signing
up for a 36 month Internet Service Program at approximately $30.00 per month,
with the monthly fee waived if the store orders a certain amount of product per
month. This will give the store immediate touch screen ordering capability with
Product Express.com and any other vendor Product Express.com contracts with to
make their products available through Product Express.com's touch screen
ordering system. In addition, each independent storeowner will receive the
different convenience store association's news and challenged merchandise
specials of the day. The storeowners will pay for products at time of order via
their own pre-registered credit card or through a pre-approved commercial credit
card with a limit of up to $50,000.00 per independent owner.
It is anticipated that Product Express can retain additional profits and cost
savings from several areas of the Intranet ordering system which will be
proprietary to Product Express.com. The cost of an order received over the
Internet is approximately $.18 versus $7.86 to take an order by a customer
service representative over the phone. Additional fees can be derived from the
credit card processing and additional savings through the virtual elimination of
accounts receivable functions because of the customer credit card debit prior to
or the same day as shipping occurs. Advertising banner fees could also be
derived as well as different organization news fees charged to get onto our
service.
The marketing effort to place the units would be through small jobbers and
convenience store associations and their respective trade shows. This will
require additional staff, software programming, brochures, trade show fees, and
other to be determined expenses. The anticipated
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result would be to launch a marketing effort to obtain 12,000 stores after
successful beta testing, on a time schedule based on the response of the beta
test, that would sign up stores on Product Express.com's exclusive Intranet
Ordering System. This is a long term goal and does not require immediate funding
and focus. While the Company has located the touch screen hardware device, the
software is in development stage, and no contracts have been signed to date by
the independent stores to implement the Intranet Ordering System.
FULFILLMENT SERVICES - GENERALLY ASKED QUESTIONS AND ANSWERS.
WHAT HAVE YOU BEEN DOING THAT WE NEED TO CHANGE THE NAME?
We have been operating under d/b/a (doing business as) ProductExpress.com
eBusiness Services for nine months, and have made the transition from a cigar
distribution company to a high speed fulfillment ebusiness services back office
for the both online and offline companies.
HOW DOES THIS RELATE TO THE ORIGINAL PLAN?
As stated in the IPO, part of the plan was to build a high speed distribution
system to deliver humidified cigars to the approx. 15,000 convenience stores
currently in our data base. Now, we are expanding on the distribution aspect of
the plan, but it is our belief that it can be best utilized by delivering other
peoples products to any type of location.
WHAT CORE COMPETENCIES DID YOU DEVELOP THAT RELATE TO FULFILLMENT?
Due to different pricing in various stores, different tobacco taxes in the 42
states, and the various brands and sizes of cigars, our systems had to be
developed to handle in excess of 50,000 SKU's. After a mapping process was
completed to automate the order processing, the entire processing time to
complete an order, including taking the order, relieving it from inventory,
billing, processing, picking, packing, and scanning for shipping was reduced to
as little as 20 minutes electronically from the original paper processing system
of 42 hours. According to FedEx, this was the fastest shipping system that they
had ever seen.
WHY ARE YOU OUT OF THE CIGAR BUSINESS?
Unfortunately, the cigar and cigarillo business failed to generate enough
profitable reorders to continue operations in that product mix. In addition, the
ongoing problems related to tobacco products has become cause for us to take a
second look at those items.
HOW WILL YOU ADAPT THE CORE COMPETENCIES TO FULFILLMENT?
We took the core competency of being able to ship tens of thousands of small
packages a month to as many different locations, and reengineered the company to
do high speed fulfillment services. These services focus on taking orders
directly from our clients web sites and electronically process those orders with
a minimum of time, paper, or labor.
HOW WILL YOU ACCOMPLISH INTERNET ORDER PROCESSING AND ECOMMERCE FULFILLMENT?
The Company has already developed the systems to take and process orders
seamlessly from our Customers Web Sites. Fulfilling orders (over 50,000 SKU's)
to our Convenience Store Customers (over 15,000 stores) has given the Company
the necessary experience and created an advantage over fulfillment companies
that are just starting to do small package, pick, packing, and shipping to
thousands of different locations. The capital equipment and software required
for the cigar business is virtually the same as that needed for any type of
fulfillment.
WHAT IS FULFILLMENT AND WHAT CAN YOU DO AS AN EBUSINESS SERVICES PROVIDER?
Fulfillment is the physical processing and delivery of orders for businesses who
don't want to incur the in house expense themselves. As an "eBusiness Service
provider" we take fulfillment a bit further and offer an array of services for a
fee. Some of these services include taking orders from a client's web site,
inventory control, real time processing of credit cards and checks, invoicing,
light assembly, picking, packing, shipping, tracking, customer service, and
telemarketing.
IS THIS JUST AN IDEA OR ARE YOU ACTUALLY DOING ANY FULFILLMENT BUSINESS?
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ProductExpress.com has come to a point where the concept is reality, and the
fulfillment center is currently doing ongoing fulfillment for its Customers.
INTELLECTUAL PROPERTY RIGHTS. PCI has registered the name and mark
ProductExpress.com eBusiness Services, Inc. with the state of Arizona. This
provides a level of protection.
We have filed service mark registration application in the United States Patent
and Trademark Office for the mark ProductExpress.com. We are already using this
mark in interstate commerce. ProductExpress.com, however, does not currently own
any United States federal trademark registrations. We filed a federal trademark
application with the United States Patent and Trademark Office to register the
trademark application for PRIMETIME, but we gave up the right to this trademark
registration to Single Cigar, Inc. PCI currently owns no patents. We have filed
and obtained a domain name registration for our e-commerce site,
ProductExpress.com.
NASDAQ LISTING. NASDAQ advised PCI by letter on October 23, 1998 that it had 90
calendar days in which to regain compliance with the minimum $1.00 closing bid
price requirement, and that if it did not do so, PCI's securities would be
subject to delisting. PCI satisfied the minimum bid price requirements in late
November and early December, 1998. Nevertheless, on January 12, 1999 NASDAQ
advised PCI that despite the staff's awareness that PCI complied with technical
requirements, the staff was exercising its broad discretion to recommend
delisting of PCI shares as of January 23, 1999. PCI disagreed with the proposed
action, and requested an oral hearing on this matter. On February 12, 1999
NASDAQ advised PCI that it has granted an oral hearing on April 8, 1999.
Subsequent to that oral argument NASDAQ lowered the listing of the Company to
the NASDAQ OTC BB on May 11, 1999.
BOARD OF DIRECTORS. During January, 1999 Mr. Mark Jazwin, President, W.B. McKee
Securities, Inc. was added to the PCI Board of Directors as an additional
independent director. In April 1999 he resigned. During March, 1999 Mr. Bill
Anthony and Mr. Robert Manschot resigned as independent directors due to the
time requirements of their primary business commitments. During March, 1999 Mr.
Gary Sherman, of Heritage West Securities, Inc., was appointed as an independent
director. In September 1999 Colin Jones and in November 1999 Greg Lambrecht
resigned due the time requirements of their primary business commitments. In
January 2000 George T. Simon Esq. agreed to serve on the Board of Directors as
an independent director, pending shareholder approval.
GOVERNMENT REGULATION
GENERAL. The tobacco industry in general has been subject to regulation by
federal, state and local governments, and recent trends have been toward
increased regulation. Federal law requires states, in order to receive full
funding for federal substance abuse block grants, to establish a minimum age of
18 years for the purchase of tobacco products, together with an appropriate
enforcement program. The recent trend is toward increasing regulation of the
tobacco industry, and the recent increase in popularity and visibility of cigars
could lead to an increase in the regulation of cigars. A variety of bills
relating to tobacco issues have been introduced in recent sessions of the U.S.
Congress and various state legislatures, including bills that would have: (1)
prohibited or restricted the advertising and promotion of all tobacco products
or restricted or eliminated the deductibility of such advertising expenses, (2)
increased labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins, (3) banned self
service displays of all tobacco products, (4)
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shifted regulatory control of tobacco products and advertisements, (5)
substantially increased tobacco excise taxes and (6) required tobacco companies
to pay for health care costs incurred by the federal government in connection
with tobacco related diseases.
Respected members of the public health community and others have called for
Federal Food and Drug Administration ("FDA") jurisdiction over all tobacco
products which contain nicotine. While no reliable standard testing procedure
has been established for cigars because of their many types, sizes and shapes,
and manner of use, it is undisputed that cigars contain nicotine and some will
call for FDA regulation of cigars for that reason.
Cigarette manufacturers mounted a court challenge to the FDA's existing
statutory authority to regulate tobacco and, after a U.S. District Court found
that the FDA was not precluded from such regulatory authority in general, but
was prohibited from restricting advertising or promotion of tobacco products,
appealed the matter to the United States Court of Appeals for the Fourth
Circuit. In 1998, the Court of Appeals reversed the District Court decision and
held that the FDA has no jurisdiction to regulate tobacco. The FDA has
petitioned the United States Supreme Court to review that decision and their
most recent ruling upheld the Court of Appeals reversal.
In 1997, the five largest tobacco companies announced a proposed settlement of a
number of cases brought by the Attorneys General of several states to recoup
Medicare expenses. Congress introduced legislation to implement the settlement
by increasing the price of cigarettes, regulating all tobacco products
including, in certain versions of the legislation, those manufactured by cigar
companies (which were not a party to the suits being settled), imposing full FDA
regulation and adopting new and highly restrictive marketing requirements.
Although Congress failed to adopt the legislation, the five tobacco companies
engaged in the 1997 proposed settlement entered into separate settlement
agreements in 1998 with the Attorneys General pursuant to which they agreed to
pay significant amounts annually and to certain marketing restrictions. The
Master Settlement Agreement ("MSA") was signed on November 23, 1998 and since
then additional tobacco product manufacturers have joined as subsequent
participating parties to the MSA. Prime Time cigarillos are not a part of the
MSA.
The FDA considered asserting jurisdiction over little cigars in 1995. It
declined to do so in the final rule issued in 1996 principally because the FDA
concluded that little cigars were not used significantly by teenagers. In May
1997, the Center for Disease Control (CDC") issued a widely publicized report
that has come most often to be cited for the claim that "more than a quarter of
the nation's teenagers have smoked a cigar in the past year." While the Company
believes the incidence of youth usage of cigars has been exaggerated, the CDC
report is being cited as justification for extending legislation to all cigars,
and for FDA jurisdiction of all cigars.
In addition, the majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies also have increasingly moved to curtail
smoking by prohibiting smoking in certain building or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on the sales or operations of PCI. Numerous proposals also
have been considered at the state and local level restricting smoking in certain
public areas, regulating point of sale placement, and promotions and requiring
warning labels. In California, the exemption from no-smoking regulations
accorded taverns, bars and cigar bars expired January 1, 1998. On June 16, 1997,
Texas passed a law which prohibits offering cigarettes or tobacco products
(including cigars) in a manner that permits a customer direct access to the
products, but the law specifically
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does not apply to "that part of a business that is a humidor or other enclosure
designed to store cigars in a climate-controlled environment."
California requires "clear and reasonable" warnings to consumers who are exposed
to chemicals determined by the state to cause cancer or reproductive toxicity,
including tobacco smoke and several of its constituent chemicals. As a result,
PCI has gone to significant lengths to ensure the following warning label is
attached to its humidors in California: "WARNING: This product contains/produces
chemicals known to the State of California to cause cancer, and birth defects or
other reproductive harm." In Massachusetts, regulations mandating warning labels
on machine made cigars were recently issued by the outgoing Attorney General.
Unless revised, these regulations will become effective August 1, 1999. In
addition, Texas and Minnesota have recently passed ingredient, additive and/or
nicotine disclosure laws applicable to cigars. We cannot assure that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation.
Although federal law has required health warnings on cigarettes since 1965 and
on smokeless tobacco since 1986, there is no federal law requiring that cigars
carry such warnings. In February 1998, the Federal Trade Commission ("FTC")
issued orders to five of the largest cigar companies requiring them to file
"special reports" on their sales and advertising expenditures. This could lead
to regulations and/or legislation respecting cigar advertising and promotion,
including health warning labels. The FTC is expected to send a report to
Congress in 1999 which could include, among other things, a recommendation for a
federal warning label on cigars. A petition for such a label ("WARNING: This
product is not a safe alternative to cigarettes") was submitted by Action on
Smoking or Health last year and remains pending before the FDA. In addition, the
"Cigars Are No Safe Alternative Act", introduced in Congress in 1998, contains a
provision which would require the FDA to develop a warning label for cigars.
Consideration at both the federal and state level also has been given to
consequences of tobacco smoke on non-smokers (so called "second-hand" smoke).
The expressed concern of the California legislators who supported the above
referred to expiration of the no-smoking exemption for taverns, bars and cigar
bars was the effect of second-hand smoke on the employees of such
establishments. In 1998, plaintiffs representing the cities of Los Angeles and
San Francisco filed suit against several cigar manufacturers with respect to the
adequacy of the presently required warning as it relates to non-smokers exposed
to second hand smoke. We cannot assure that regulations relating to second-hand
smoke will not be adopted.
The U.S. Environmental Protection Agency (EPA") published a report in 1993 with
respect to the respiratory health effects of second-hand smoke, which concluded
that widespread exposure to environmental tobacco smoke presents a serious and
substantial public health concern. In 1998, the EPA report was invalidated by a
Federal District Court.
In 1998, the National Cancer Institute issued a report describing statistical
and other research into cigars and health. The report was widely publicized and
could affect pending and future tobacco regulation and litigation.
ProductExpress.com has a strategic alliance business opportunity with Mayan
Cigar Company and Blunt Wrap USA to provide Fulfillment Services.
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation.
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Although there could be continuing liability for prior sales, as of December 31,
1999, PCI no longer directly sells tobacco products to wholesalers, retailers or
consumers. ProductExpress.com provides Fulfillment Services for Mayan Cigar
Company and Blunt Wrap USA, in addition to its other none tobacco related
fulfillment Customers.
TAXES. Cigars long have been subject to federal, state and local excise taxes,
and such taxes frequently have been increased or proposed to be increased, in
some cases significantly, to fund various legislative initiatives.
Although there could be continuing liability for prior sales, as of December 31,
1999, PCI no longer directly sells tobacco products to wholesalers, retailers or
consumers. ProductExpress.com provides Fulfillment Services for Mayan Cigar
Company and Blunt Wrap USA, in addition to its other none tobacco related
fulfillment Customers.
TAX FILING COMPLIANCE ISSUES. In December, 1999 the State of New York performed
an audit at the offices of PCI. The results of the audit have not been disclosed
to PCI as of March 31, 2000. PCI believes there will be proposed adjustments,
which will be immaterial to results of operations, we cannot guarantee the
results of the audit at this time.
PCI has registered with the appropriate taxing authorities in the Canadian
provinces and in most of the states in which it currently does business.
Currently, PCI is in arrears in the payment of tobacco taxes in several states
in which it does business. Although we have posted payment bonds in several of
the states, failure to remit taxes could have a material adverse effect on our
operations if one or more of the states initiate enforcement actions. In
addition, four of the Canadian Provinces have sent letters to Reliance Surety
requesting payment from the bonds. While PCI has protested the formula for
calculation for payment of tobacco taxes that the provinces are using is not the
formula that the other tobacco distributors are using in Canada. Reliance has
released payment for the Province of Alberta in the amount of US$40,926.30 and
is seeking reimbursement from PCI. PCI has reserved in its financial statements
for the entire amount of all the bonds in Canada (approximately US$218,000.)
as a potential liability if efforts of protest are not successful.
Although there could be continuing liability for prior sales, as of December 31,
1999, PCI no longer directly sells tobacco products to wholesalers, retailers or
consumers. ProductExpress.com provides Fulfillment Services for Mayan Cigar
Company and Blunt Wrap USA, in addition to its other none tobacco related
fulfillment Customers.
CANADIAN REGULATIONS. The Canadian Tobacco Act of 1997 was enacted to protect
the health of Canadians, especially young people. The new tobacco legislation
affects all persons who promote or sell tobacco products. The Act prohibits the
sale to persons under 18 years of age, restricts access to tobacco products
through self-service displays and vending machines, direct mail and regulates
advertising and promotions. Although there could be continuing liability for
prior sales, as of June 1999, PCI no longer sold tobacco products to
wholesalers, retailers or consumers in Canada.
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TOBACCO INDUSTRY LITIGATION. Historically, the cigar industry has experienced
less health-related litigation than the cigarette and smokeless tobacco
industries have experienced. We carry general commercial liability insurance
with an aggregate limit of $10,000,000. However, we cannot assure you that we
will not be subject to liability which is not covered beyond the limits of our
general liability insurance coverage, and which may have a material adverse
effect upon our business. Although there could be continuing liability for prior
sales, as of December 31, 1999, PCI no longer directly sells tobacco products to
wholesalers, retailers or consumers. ProductExpress.com provides Fulfillment
Services for Mayan Cigar Company and Blunt Wrap USA, in addition to its other
none tobacco related fulfillment Customers.
RESEARCH AND DEVELOPMENT; ENVIRONMENTAL COMPLIANCE. We have not incurred
research and development costs associated with our products. Historically, PCI
has acquired cigars and accessory product lines from its suppliers and contract
manufacturers and has typically allowed the suppliers and manufacturers to incur
the costs of product research and development. Our policy is to not warehouse or
handle in our facilities any products that require Material Safety Data Sheet
("MSDS") reporting and compliance. Currently, the costs and effects of
environmental compliance do not have a material effect on our financial
condition or operations. As of March 31, 2000 PCI has not had any compliance
issues.
EMPLOYEES. As of December 31, 1999, we had 13 employees in the U.S. Currently we
have approximately 11 employees. None of our employees are represented by a
labor union and we believe that employee relations are good.
ITEM 2 - DESCRIPTION OF PROPERTY
Because we outgrew our original facilities, we entered into a new building lease
on February 25, 1998 for approximately 20,434 square feet of office and
warehouse space at 15849 North 77th Street, Scottsdale, Arizona 85260, and moved
our operations to the new facilities in late April of 1998. The lease expires on
April 30, 2003. The monthly rent for the first three years (May 1998 through
April 2001) is $18,000 and the monthly rent for years four and five (May 2001
through April 2003) is $19,000. PCI is also responsible for common area
maintenance, taxes and certain other incidental costs. We sublet portions of our
office facilities to strategic partners who bring us fulfillment business on a
short term basis in 1999, and continue to do so in 2000, until we can utilize
the space for our own needs.
PCI also leased, from an independent third party, approximately 3,064 square
feet of office and warehouse space in Burnaby, British Columbia (a suburb of
Vancouver) for CAN-AM's Canadian operations. The lease expires July 14, 2000 and
the rent is approximately U.S. $1,190, $1,373 and $1,556 per month for the
first, second and third years of the lease, respectively. The liability for the
lease transferred to Ultimate Cigar Company as part of sale of the assets of
CAN-AM in June 1999.
ITEM 3 - LEGAL PROCEEDINGS
AUTOMOBILE ACCIDENT. On September 16, 1997, a PCI employee Pete Charleston, was
involved in an automobile accident in which he was the driver and four
passengers were injured. Attorneys for the first three passengers have indicated
that their clients will pursue personal injury claims against PCI, but no
lawsuit has been filed. A fourth passenger has made a demand
22
<PAGE> 23
against the employee-driver and his insurer only. PCI tendered defense of the
claims to, and requested indemnification from, our commercial general liability
carrier, but the carrier has initially declined coverage on grounds that the
endorsement covering Hired and Non-Owned Auto Liability was not yet effective.
We have disputed the carrier's denial of coverage and we have asserted that PCI
obtained an oral binder of such coverage prior to the accident. We have
negotiated and executed a settlement with the potential claimants pursuant to
which Mr. Charleston's own insurer will pay its policy limits, $300,000 to the
claimants. The claimants have provided to PCI a covenant not to execute against
PCI or Mr. Charleston, and PCI has assigned to the claimants any claims which
PCI might have against its insurer for denying coverage. Their claim against
PCI's insurance company is ongoing as of March 31, 2000.
PROP 65. During 1998 PCI, among many other companies and individuals including
PCI customers, Southland and Mobil, received Notices of alleged Violations of
Proposition 65, a California law which requires warning labels on or at the
place of sale or use of certain cancer causing products including cigars. These
notices were delivered by a California lawyer named Morse Mehrban on behalf of
his clients, purported public interest organizat5ion named Consumer Cause, Inc.
and Consumer Advocacy Group, Inc. ,m and an individual named Reuben Yeroushalmi.
They have been followed by lawsuits in the Superior Court of Los Angeles County,
California. Under Proposition 65 such lawsuits may be brought by a "private
attorney general". The lawsuits demand compliance with Proposition 65 and seek
penalties of $2,500 per day per location of each alleged violation which could
total man millions of dollars plus attorneys fees and costs of suit. PCI has
taken the position it did not violate the law and is not subject to penalties.
Nonetheless, after receipt of the notice, PCI took steps to insure compliance.
Then PCI ceased distribution of cigars. Southland and Mobil demanded that PCI
defend and indemnify them from these claims. PCI has refused. PCI joined with
other defendants in a successful challenge to the original lawsuits. That result
is on appeal. In 1999, Plaintiffs served new notices and filed new lawsuits,
which have been stayed pending the outcome of the appeal. Regardless of the
outcome of the appeal, PCI continues to be subject to potential exposure to
plaintiffs' claims. Pursuant to the agreement between Southland and PCI,
Southland has requested that it be indemnified for these claims. PCI has
countered that Southland has claims against it for products other than PCI's in
violation of Proposition 65, and Southland is defending those claims. Mobil has
not made a similar indemnification request, and based on the agreement between
Mobil and PCI, Mobil probably cannot claim any indemnification rights. PCI is
not currently exploring the possibility of settling with Mr. Mehrban any of the
claims against PCI and its former customers, including Mobil and Southland. In
the meantime, PCI has and continues to retained California counsel to defend the
cases brought against it. The claim is ongoing as of March 31, 2000.
JUDGMENT. On March 1, 2000 a judgment was entered against PCI in favor of Stadia
Colorado Corp. in the amount of $6,555.56 regarding an indebtedness for a
labeling machine that PCI claimed did not work properly and tried to return to
the manufacturer. To date the judgment has not been paid.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
<PAGE> 24
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market for Common Equity.
The Company's common stock under the registered name of
ProductExpress.com eBusiness Services, Inc. currently is traded on the NASDAQ
"Over The Counter Bulletin Board" (OTCBB) Market as "PXPS". The former
registered name was Premium Cigars International, Ltd., which traded on the
NASDAQ Small Cap Market or The Boston Stock Exchange and the NASDAQ OTCBB as
"PCIG"
Set forth below are the high and low closing prices for PCI's common
stock as reported on either the NASDAQ SmallCap Market or The Boston Stock
Exchange for the first seven quarters, and on the NASDAQ OTCBB for the last four
quarters:
<TABLE>
<CAPTION>
Quarter High Low
- ------- ---- ---
<S> <C> <C>
September 30, 1997 $ 5.8125 $ 4.3750
December 31, 1997 $ 5.5625 $ 2.0000
March 31, 1998 $ 2.563 $ 1.313
June 30, 1998 $ 2.438 $ 1.313
September 30, 1998 $ 1.750 $ 0.750
December 31, 1998 $ 1.250 $ 0.500
March 31, 1999 $ 3.125 $ 0.375
June 30, 1999 $ 0.750 $ 0.187
September 30, 1999 $ 0.625 $ 0.150
December 31, 1999 $ 0.400 $ 0.200
March 31, 2000 $ 0.650 $ 0.200
</TABLE>
As of March 12, 2000 there were approximately 60 holders of record of
PCI's common shares, plus 561 consenting owners held in brokerage accounts and
an unknown number of non consenting shareholders held in brokerage accounts.
PCI has never declared or paid a cash dividend on its shares. PCI's
Board of Directors will determine whether to pay cash dividends based upon
results of operations, cash flows, financial condition and liquidity. However,
at present, PCI intends to retain any earnings to fund
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<PAGE> 25
the development and growth of its business and does not anticipate paying any
cash dividends in the foreseeable future.
1999 SALE OF RESTRICTED UNREGISTERED SECURITIES, WARRANT GRANTS, AND SETTLEMENT
OF DEBT FOR EQUITY
During 1999, PCI sold a total of 1,010,000, of unregistered, (restricted as to
Rule 144 for a minimum of one year) securities in private transactions with
accredited investors, granted 2,020,000 warrants (restricted as to Rule 144 for
a minimum of one year), and settled debt for a total 12,000 unregistered
(restricted as to Rule 144 for a minimum of one year) securities in private
transactions with account payable holders under Sections 4(2) and 4(6) of the
Securities Act, as amended, as follows:
(a) On January 27, 1999, John Greenwell purchased 70,000
restricted shares at a purchase price of $0.50 per share.
(b) On January 31, 1999 RCG Capital paid for 100,000 restricted
shares from PCI at a price of $0.01per share. If and when RCG
requested removal of the restrictive legends on the shares,
RCG was to pay from $0.99 to $1.49 per share. These shares
were acquired in connection with PCI's consulting agreement
dated December 14, 1999 with RCG as a public relations
consultant. PCI may have repurchased the shares over the
3-year term of the agreement, at the original issuance price
($0.01 per share) if certain criteria was not met. On
September 10, 1999, RCG Capital, Inc. settled the balance of
the debt owing to PCI for the 100,000 restricted shares that
RCG Capital, Inc. purchased from PCI at a price of $0.01 per
share. The settlement to RCG is the release of the payment due
from RCG for the shares in exchange for the release of the
$34,996.79 due to RCG Capital, Inc. for any and all investor
relations services performed through September 10, 1999 and a
release of any future contractual relationship for investor
relations services.
(c) On March 1, 1999, Clemons F. Walker, Keith A. Cannon, and
Daniel V. McLeon paid for 100,000, 60,000 and 40,000
restricted shares, respectively, at a purchase price of $0.50
per share.
(d) On June 30, 1999, PCI exchanged 100,000 shares of common stock
(restricted as to Rule 144 for a minimum of one year), for
100,000 shares of Ultimate Cigar Company (OTCBB: ULTC) common
stock (restricted as to Rule 144 for a minimum of one year),
as part of the sale of CAN-AM to Ultimate Cigar Company.
(e) On October 14, 1999 Heddy Renner paid for 100,000 restricted
shares at a purchase price of $0.25 per share, plus one
warrant (call price of $0.25) for every two shares.
(f) On October 28, 1999 Verde Investments Ltd. paid for 100,000
restricted shares at a purchase price of $0.25 per share, plus
one warrant (call price of $0.25) for every two shares, plus
one warrant (call price of $0.25) for every two shares.
(g) On October 29, 1999 Fleming Securities Corp. Ltd. paid for
200,000 restricted shares at a purchase price of $0.25 per
share, plus one warrant (call price of $0.25) for every two
shares.
(h) On November 11, 1999 Bob Oliva accepted 12,000 restricted
shares at a purchase price of $0.25 per share as a part of the
final settlement of the PCI debt owed him.
(i) On November 12, 19, and December 29, 1999 May Family Trust
paid for 40,000, 20,000, and 20,000 restricted shares,
respectively, at a purchase price of $0.25 per share, plus one
warrant (call price of $0.25) for every two shares.
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<PAGE> 26
(j) On December 29, 1999 Western Omni Trust paid for 60,000
restricted shares at a purchase price of $0.25 per share, plus
one warrant (call price of $0.25) for every two shares.
(k) On December 30, 1999 Gary Sherman and Steven A. Lambrecht
received 1,000,000 and 750,000 restricted warrants (call price
of $0.25), respectively, as payment in full for services
rendered in 1999, in lieu of stock options, salary, past due
consulting fees, board fees, and common stock that they would
have been normally entitled to, and in accordance with, the
agreement to raise capital and retain warrants as approved by
the independent Board Members dated September 21, 1999.
SALE OF UNREGISTERED SECURITIES, WARRANT GRANTS, AND SETTLEMENT OF DEBT FOR
EQUITY TO DATE
On January 5, 2000, the Board of Directors of PCI approved the reauthorization
of their authorization to the sale of common shares (restricted as to Rule 144
for a minimum of one year), granting of warrants (restricted as to Rule 144 for
a minimum of one year), in conjunction with those shares, and the settlement of
debt for common shares (restricted as to Rule 144 for a minimum of one year), at
the same per share and strike price for warrants of $.25 with an adjustment of
650,000 authorized shares converted to warrants, leaving a balance of authorized
common shares (restricted as to Rule 144 for a minimum of one year) available to
sell at the beginning of 2000 at 2,488,000 and warrants at 1,370,000. Through
the filing of this annual report sales of restricted shares, grants of
restricted warrants in conjunction of those shares, and the settlement of debt
for restricted shares under Sections 4(2) and 4(6) of the Securities Act, as
amended, as follows:
(a) On January 6, 2000 Darrin J. Fedder paid for 100,000
restricted shares at a purchase price of $0.25 per share, plus
one warrant (call price of $0.25) for every two shares.
(b) On January 6, 2000 George Cattermole paid for 40,000
restricted shares at a purchase price of $0.25 per share, plus
one warrant (call price of $0.25) for every two shares.
(c) On January 17, 2000 Stephen T. Sullivan,P.C. accepted 49,206
restricted shares at a purchase price of $0.25 per share as
partial settlement of the PCI debt owed him.
(d) On January 26, 2000 Shangent Tool accepted 80,200 restricted
shares at a purchase price of $0.25 per share as the final
settlement of the PCI debt owed them.
(e) On January 31, February 14, 18, 25, March 14, and April 11,
2000 George Simon Trust paid for 100,000, 100,000, 200,000,
100,000, 100,000, and 60,000 restricted shares, respectively,
at a purchase price of $0.25 per share, plus one warrant (call
price of $0.25) for every two shares. An additional 140,000
restricted shares has been committed for at a purchase price
of $0.25 per share, plus one warrant (call price of $0.25) for
every two shares. due by May 1, 2000. George T. Simon Esq. is
an independent Member of the Board.
(f) On February 22, 2000 Dan Goldman accepted 5,000 restricted
shares as a final settlement of the PCI debt owed him for the
sale of CAN-AM and the release of our Web Site from his
hosting service. Dan Goldman was a founder of PCI.
(g) On March 14, 2000 Stringfellow Attorneys accepted 60,008
restricted shares at a purchase price of $0.25 per share as a
settlement to date of the PCI debt owed him.
(h) On March 17, 2000 Topper Cigar Company Inc.accepted 36,804
restricted shares at a purchase price of $0.25 per share as
the final settlement of the PCI debt owed him.
(i) On March 28, and April 7, 2000 Jim McCanlies Family Trust/IRA
paid for 40,000 and 40,000 restricted shares at a purchase
price of $0.25 per share, plus one warrant (call price of
$0.25) for every two shares.
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<PAGE> 27
(j) On April 8, 2000 Michael Hatch accepted 18,179 restricted
shares at a purchase price of $0.25 per share as the final
settlement of the PCI debt owed him.
(k) On April 10, 2000 Robert King paid for 40,000 restricted
shares at a purchase price of $0.25 per share, plus one
warrant (call price of $0.25) for every two shares.
(l) On April 12, 2000 L. G. Zangani accepted 14,220 restricted
shares at a purchase price of $0.25 per share as the final
settlement of the PCI debt owed him.
(b) Use of Proceeds.
As of December 31, 1998 all proceeds of the Initial Public Offering had
been used.
Proceeds from the sale of Unregistered Securities in private
transactions with accredited investors have been used for ongoing
operations of the Company during the transition period, and the
settlement of past debt.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
You must read the following discussion of the results of the operations and
financial condition of PCI in conjunction with PCI's consolidated financial
statements, including the notes included elsewhere in this 10-KSB filing.
Historical results are not necessarily an indication of trends in operating
results for any future period. The consolidated financial statements present the
accounts of PCI through December 31,1999 and its wholly-owned subsidiary, CAN-AM
through June 1999. All significant intercompany balances and transactions were
eliminated in consolidation.
RESULTS OF OPERATION. The following table sets forth a summary of PCI's
consolidated statements of operations for the twelve months ending December 31,
1999, and the twelve month period ended December 31, 1998.
<TABLE>
<CAPTION>
Year ended Year Ended
December 31, 1999 December 31, 1998
($000) ($000)
<S> <C> <C>
Net Sales $4021.8 $6,900.9
Gross Profit 1150.8 1,319.1
S,G & A and other 3560.7 5,435.7
operating expenses
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
<S> <C> <C>
Loss From Operations (2,409.9) (4,116.5)
Other Income (1360.2) 86.7
------- ----
Net Loss ($3,770.1) ($4,029.8)
========= =========
Loss Per Share ($0.95) ($1.16)
====== ======
Weighted Average Number of
Shares Outstanding 3,958,681 3,469,092
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
Sales. Sales of cigars, Prime Time and related items for the twelve month period
ending December 31, 1999 were $4,021,859 an decrease of 42% versus fiscal 1998.
The following table summarizes unaudited quarterly results.
Net Sales ($000) (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
1998 $1,255.9 $2,018.6 $2,000.6 $1,625.8 $6,900.9
1999 $1,317.7 $1,248.6 $1,029.5 $ 426.0 $4,021.8
</TABLE>
As 1999 started, sales associated with the base humidor program continued to
decline. The U.S. Customer Service Department continued to improve the number of
completed calls; however, the humidor productivity (as measured by average
reorder rates) and the close ratio did not improve. The program was not
"working", the average dollars/reorder and the close ratio decreased. The launch
of the Humidibox at the beginning of the year as a replacement for the humidor
program did not materialize due to the poor sales of cigars in general. By June
the balance of the cigars were liquidated. The early and mid-year roll out of
the Prime Time program briefly accelerated the close ratios and the average
reorder amount, but once the program was completed, even these key numbers began
to decline. While it was a total reengineering of our business model, the
ProductExpress.com fulfillment services division, held out to be the most
promising use of our core competencies. By the end of the year, the transition
was complete, and ProductExpress.com eBusiness Services was operational, and
ready to take on fulfillment and ebusiness contracts. It is the core business
and foundation from which Company started the new millennium.
Gross Margins. Gross profit margin for the year ended December 31, 1999 was
28.6% (does not include discontinued inventory write down) versus 19.1% for
fiscal 1998 (included cost of inventory write down). Gross margin steadily
improved as a result of PCI's integrated systems
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<PAGE> 29
and more favorable purchasing arrangements with key suppliers and lowered fixed
overhead; however, Can-Am continued to lag the U.S. during the first half of the
year until it was sold. A major problem with Canadian margins is the
significantly higher tobacco taxes. During the first half of 1999, U.S. tobacco
taxes were 5.2% of Net Sales, while in Canada, they were 31.2% of Net Sales. The
lower margins during the First and Second Quarter was due mainly to a higher
percentage of lower margin cigars that were sold in Canada.
1999 Gross Margins (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Total Year
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
U.S. 37.8% 30.1%* 32.8% 32.7% 33.0%*
Canada 18% 10% N/A N/A 14.9%
Total Company 26.9% 25.5%* 32.8% 32.7% 28.6%*
</TABLE>
*Before adjustment to write down inventory to the lower of cost or liquidation.
Selling, General and Administrative. Selling, general and administrative
expenses (SG&A) were $3,560,747 for the year ended December 31, 1999 compared to
$5,435,680 for fiscal 1998. As a percentage of sales, SG&A was 88.5% for the
year ended December 31, 1999 versus 78.7% for fiscal 1998. Excluding the effect
of payment of severance compensation during 1998, SG&A as a percentage of sales
in 1998 was 73%.
SG&A is disproportionately high relative to net sales due to the continuation of
an infrastructure (warehouse, offices, equipment, etc.) that was built by former
management to generate future revenue and manage operations on a five year plan;
however, issues discussed previously have negatively impacted revenue growth
(see Part I - Item 1 - Description of Business). New management has taken
drastic steps to reduce its SG&A in 1999, including staff reductions that were
announced previously. PCI has converted its sales force to commission with over
20 authorized representatives that bring fulfillment and ebusiness projects to
ProductExpress.com. In addition, we have sublet parts of our facility to
strategic alliance partners, that not only pay for a portion of our facility,
but also bring fulfillment business to ProductExpress.com.
Other Income/Expenses. Other income for the year ended December 31, 1999 totaled
a loss of $1,360,230 compared to $86,700 in fiscal 1998. The 1999 loss consists
of the loss on the sale of our Canadian Subsidiary, CAN-AM, the write down of
our humidor/cigar program, net of interest expense of $35,669 and foreign
currency transaction loss of $69,658, versus interest income for 1998 from the
investment of the proceeds from the initial public offering in August of 1997,
offset by interest expense.
SEASONALITY.
Our operational history in 1999 suggests some variation in convenience store
impulse cigar purchases may be tied to outdoor weather conditions. In the
northern U.S. and Canada, sales appear to improve in the warmer months and in
the southern U.S. sales appear to improve in the cooler months. Because we are
no longer distributing only one product, and the new products we are
anticipating launching are varied, we do not believe we will incur seasonal
variances that may have hampered sales in the past, and since we no longer
purchase inventories in advance of
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<PAGE> 30
sales, there is a reduced risk of seasonality in placing new products into our
distribution channels.
LIQUIDITY AND CAPITAL RESOURCES.
We require capital to market our ProductExpress.com eBusiness Services program,
market new products to put in our distribution channels, and continue to develop
our systems to do totally seamless internet transactions and fulfillment
services necessary to support our expanding business. Prior to our initial
public offering, we raised capital through the issuance of stock and notes
payable, as well as obtaining a line of credit from a bank. On September 29,
1997 we completed an initial public offering that resulted in net proceeds to
PCI of $8,131, 664. PCI used $3,032,774 million for operating activities for the
year ended December 31, 1999, which was largely attributable to the net loss
incurred during the period. Non-cash expenses (depreciation and amortization)
totaled $599,441.
As of December 31, 1999 the combined balance of cash and available for sale
securities totaled $15,069, a decrease of $153,147 or 91% from December 31,
1998. The decline is due to the net loss incurred for the year ended December
31, 1999 as well as PCI's continued additional investments in a restructuring of
the business that occurred during the later half of 1999.
Accounts receivable at December 31, 1999 decreased $512,581 or 91.4% from
December 31, 1998. The decrease was partially due to a continued improvement in
collection efforts in the U.S. during 1999. A general overall decrease in the
receivables balance was due to decreased sales in 1999 due to the sale of the
CAN-AM and the restructuring of the business in the later half of 1999.
Net inventories at December 31, 1999 decreased $1,321,564 or 99.7% from December
31, 1998. The change is attributable to: 1) the liquidation of the cigar
inventory that was not sellable in the second quarter of 1999; 2) the
renegotiations of the Prime Time supplier agreement that eliminated increasing
monthly purchase quotas that totaled more than 74 million dollars over a five
year period. 3) the elimination of our wholesale accounts by the Prime Time
manufacturer in the third quarter as a result of the renegotiations of the
supplier agreement. 4) the elimination of our direct delivered accounts by the
Prime Time manufacturers cancellation of our distributor agreement as of
December 31, 1999, that allowed us to purchase product for those accounts. an
overall increase in the number of cigars on hand to support a higher volume of
sales. 5) New Management's decision to never again burden the Company with
impulse item inventory that may not sell, based on sales projections that may
not be achieved.
As part of the conversion of the cigar humidor program to the Prime Time
program, the existing humidors in the stores were written off, and the remaining
inventory of humidors in the warehouse was liquidated throughout 1999 and early
2000. The value of the humidors was minimal, given the poor demand for the
cigars that could be sold from the humidors.
Capital expenditures (excluding humidors) totaled $2,925 for the year ended
December 31, 1999. This included the cost of computer software and minor
leasehold improvements for our new facility. We do not anticipate any
significant capital spending needs for the foreseeable future.
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<PAGE> 31
Accounts payable and accrued expenses at December 31, 1999 increased $15,017, or
1.3% from December 31, 1998. Decreases in the amount of tobacco taxes payable
were largely offset by increases in trade payables due to our inability to
secure financing until 1999.
The use of proceeds described in the Prospectus dated August 21, 1997 were
exhausted by December 31, 1998. We secured a $1,000,000 accounts receivable
financing package which, provided the necessary working capital for our ongoing
needs in launching the Prime Time program in March, 1999, and currently have
lowered the accounts receivable limit to $500,000 until new products that are
being developed by others, and stored by us on consignment, are then sold by us
into our distribution channels; however, we have not as yet, cannot assure you
in the future, 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 raised an additional $135,000 during the first quarter of
1999 through the issuance of additional shares of PCI's stock. The Board of
Directors authorized the issuance of additional shares for up to an additional
$200,000 in the first quarter of 1999. PCI raised additional capital through the
liquidation of its cigar and humidor inventory, in addition to the sale of its
Canadian Operations, in order to raise the necessary capital to repay part of
trade debt it incurred from prior management and to launch the Prime Time
cigarillo program in approximately 15,000+ stores by giving an initial half load
of free product with each store. This proved to be an extremely successful
endeavor with the opening of over 9,000 stores in less than six weeks. However
sales reorders did not meet expectations, and the relationship with the
manufacturer quickly deteriorated, with management's decision to not take on the
additional inventory the purchase agreement with the manufacturer required. The
remaining independent Board of Directors authorized the sale of an additional
3.7 million restricted shares and 2.6 million warrants at a target price of
$0.25 to qualified investors and to be utilized to settle accounts payable. In
addition, as per the authorization of the Board, consulting fees and warrants
were to be paid and issued to Board Members that raised the capital and settled
the debt with restricted shares and warrants. As of December 31, 1999 one
payment of $7,500 each had been paid to the two Directors (See Directors
Compensation Table). On December 30, 1999 the remaining Directors Gary Sherman
and Steven Lambrecht authorized 1,000,000 and 750,000 restricted warrants,
respectively, as payment for services rendered throughout 1999 and for accepting
and fulfilling the titles of President, CEO, and Corp. Secretary, upon their
being vacated at the beginning of November 1999 in addition to their titles of
Chairman, and Board Member and Director of Corporate Development, respectively.
We cannot assure you that we will be able to sell sufficient restricted shares
to enable us to fund ongoing operations until we are profitable and repay our
outstanding trade debt in a timely manner.
KNOWN TRENDS, EVENTS OR UNCERTAINTIES THAT MAY IMPACT OUR FINANCIAL CONDITION OR
OPERATIONS.
YEAR 2000 ISSUES. We purchased most of our computers within the past couple of
years and did not anticipate any significant problems relative to their Year
2000 ("Y2K") capabilities. Testing of each machine's capabilities was completed
by the end of the Second Quarter, 1999. We did not implement a plan to identify
the non-IT (Information Technology) systems (i.e., those systems with an
imbedded technology such as microcontrollers) which may have required repair or
replacement; however, given the nature of our operations and the age of our
business, we did not believe that we faced any material risk from these types of
systems. To date, April 8, 2000, we have not had any significant problems
relating to Y2K.
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<PAGE> 32
Our business relies to a large extent on our integrated accounting, order entry,
and inventory control systems (SBT Pro Series 5.0), which was represented by the
vendor as being Y2K compliant. We also rely on standard office productivity
software (Microsoft Office 97) which was also represented as being Y2K
compliant. Our EDI software, which we used to transmit invoices and receive
payment information from our largest U.S. customer was represented to be
non-compliant. The cost to replace this software is not expected to be material
and we identified suitable alternatives by the end of the Second Quarter, 1999.
We completed the process of determining the compliance of our other software by
the end of the Second Quarter, and have not experienced any significant problems
relating to Y2K.
We began 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 would have on us; this process was completed by the end
of the Second Quarter, 1999. we did not anticipate any material adverse effect
on our business as a result of such parties failure to achieve Y2K readiness,
and to date have not experienced any significant problems relating to Y2K.
At this time, we do not believe that we will incur any additional material
expenditures to identify and replace 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.
To date, 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 PCI from third parties non-compliance, we will formulate a plan at that
time. We believe the "worst case scenario" is behind us, but we cannot guarantee
that outside systems that are non compliant, and certain dates in the future may
still trigger Y2K problems.
ITEM 7 - FINANCIAL STATEMENTS
PCI's audited financial statements for the year ended December 31, 1999, and the
twelve month period ended December 31, 1998 are set forth commencing on page
F-1, following the Index to Financial Statements on Page xx.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
32
<PAGE> 33
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gary Sherman...........................51 Chairman and President
Steven A. Lambrecht....................49 Director, CEO, Director of Corporate Development, and Corporate
Secretary
Corey A. Lambrecht.....................30 Vice President of Sales/Marketing and Assistant Secretary
George T. Simon, Esq...................48 Independent Director
</TABLE>
Gary J. Sherman has been the interim Chairman of ProductExpress.com since June
1999, and the permanent Chairman since September, 1999, and acting President
since November, 1999. Mr. Sherman has been an director since March 1999. He was
Executive Vice President of Heritage West Securities, a regional broker/dealer
in Scottsdale. Mr. Sherman has 25 years of management and sales experience.
Since 1990, he has been President of both W.B. McKee Securities, Inc. and
Owen-Joseph Asset Management. From 1976 to 1990, he served as a General Partner
with Boettcher & Company, a NYSE Member headquartered in Denver, Colorado; as
well as Senior Vice President and Regional Director of Kemper Securities after
their purchase of Boettcher in 1986. Mr. Sherman majored in Finance at the
University of Denver and attended the Securities Industry Institute at the
Wharton School of Finance.
Steven A. Lambrecht has been a director since December 31, 1996, CEO and
Corp. Secretary since November 1999, Director of Corporate Development since
September of 1999. He is a founder of PCI, and served as PCI's initial Chief
Executive Officer from December 31, 1996 to March 1, 1998, President from May 3,
1997 to December 15, 1997 and as initial Chairman of the Board from December 31,
1996 to June 20, 1997. He has 26 years of marketing and sales experience and 20
years of management experience; most of his business experience has been in real
estate development and construction. He has held positions on the Board of
Directors of Summit Environmental Corporation (OTC BB: SEVC) and Lectralite
Corp. He was the co-owner of Intrimex Trading Company, L.L.C., owner of Forum
Import/Export Company, a sole proprietorship, and was co-owner of Forum
Development and Construction Company, Inc., a Washington corporation. He also
owns SDCC, Inc., an Arizona development and construction corporation that he
founded in 1992. He has developed and sold over 20 million dollars worth of real
estate since 1974. He attended the University of Washington in 1977-78, pursuing
a degree
33
<PAGE> 34
in International Business, before leaving for a Real Estate management position.
Steven A. Lambrecht is the father of Corey A. Lambrecht.
Corey A. Lambrecht has been the Vice President of Sales and Marketing since
December 7, 1999. He previously served as ProductExpress.com's National Sales
Director from July 1999 to December 1999. He served as PCI's Sales Director;
Food, Drug, Mass, Club from June 1998 to July 1999 and National Account Manager
from April 1997 to June 1998. He was a sales representative for Unique Wine Co.
in Seattle, Washington. from February 1993 to October 1993. From November 1993
to March 1997 he served as Vice President of Operations of SDCC, Inc., a
Scottsdale, Arizona general contracting firm owned by Steve Lambrecht. He
attended the University of Washington from September 1987 to December 1992 while
pursuing a Bachelor of Arts in Political Science. Corey A. Lambrecht is the son
of Steven A. Lambrecht.
George T. Simon, esq. agreed to become an independent Director for
ProductExpress.com aka PCI in January 1999 in conjunction with a commitment to
purchase $200,000.00 of restricted stock under the George Simon Trust. Mr. Simon
is a licensed attorney in the State of Ohio, and a partner in Grundell & Simon
Co., L.P.A. Mr. Simon is also a license Real Estate Broker in Ohio and has
Developed, Owned and Built over a one half million sq. ft. of Office,
Commercial, and Retail Space, in addition to seven Restaurant and Entertainment
Establishments. He has Developed, Owned and Managed over Fifteen Hundred
Apartment Units. Recently, he Developed, Financed and Completed a 48,000 sq. ft.
Restaurant and Entertainment Center as a Licensee of The World Wrestling
Federation at Times Square in New York City. Prior to that, Mr. Simon Developed,
Owned, and Joint Ventured the Debbie Reynolds Hotel and Casino in Las Vegas,
Nevada with the World Wrestling Federation. He was Advisor to Former U.S.
Congressman, Ohio 19th District Hon. Edward F. Feighan. Mr. Simon authored
'Health Care in the Work Place' (Small Business News) and has had Restaurant
Authority Interviews with New York Times, Las Vegas Review, Las Vegas Sun, and
the Cleveland Plain Dealer. Mr. Simon received his law degree from Case Western
Reserve University, School of Law - JD, in addition to a MBA from Case Western
Reserve University, Weatherhead School of Management and a B.S. degree from
Myers College (Summa Cum Laude).
Other Executives and Key Employees
Karl Zeidler has been the Controller since February 1st, 2000, and worked
previously as the Assistant Controller prior to that promotion, while employed
at PCI. From January, 1996 to December, 1997, Mr. Zeidler served as Business
Manager for Wadsworth Golf Construction Co. a domestic and international golf
course construction co. From March 1994 to November 1995 he served as regional
controller, for Anthony Crane Rental Co., the 2nd largest crane co in the world.
From February 1986 to 1994 he served as Chief Financial Officer for Reliance
Group, Inc. a holding company for five wholly owned subsidiaries that
specialized in transportation services, crane rental, heavy rigging and
equipment maintenance. From 1980-1986 served as Chief Financial Officer for
Halmar Construction Co., that specialized in heavy and highway construction in
New Jersey, New York , Connecticut, and Pennsylvania. Mr Zeidler received a
Bachelor of Science Degree in accounting from Farleigh Dickinson University.
Pamela Johnson-Fulks has been Director of Fulfillment since November 1999. From
1996 to 1999 Ms. Fulks served as Plant Manager for Global Cassettes, an audio
mass replication and distribution company. Fulfilling over 3,000,000 multiple
units per month. From 1993 to 1996 she served as an independent consultant. In
her capacity as private consultant she took start-up
34
<PAGE> 35
fulfillment centers from conception to full capacity profit centers. From 1979
to 1993, Ms. Fulks was a Worldwide Senior Manager with the ophthalmic division
of Revlon Inc., specializing in inventory control, fulfillment and distribution.
Revlon was the world's largest manufacturer and distributor of ophthalmic
devices from 1982 through 1990. Ms. Fulks brings with her over 20-years
experience in warehouse management, layout and design, job costing, shipping,
inventory control and logistics. Ms. Fulks majored in business at PCC. Served as
Secretary for WERC (Warehouse Education Research Council) from 1983 to 1989. Sat
on the board of the Postal Committee in San Diego, Ca. from 1983 to 1994.
Compliance with Section 16(a) of the Exchange Act
The following persons were, during the last fiscal year, either directors,
officers, or beneficial owners of more than ten percent (10%) of a class of
equity securities registered pursuant to Section 12 of the Exchange Act of 1934
and failed to file the following reports required by Section 16(a) during the
most recent fiscal year or prior years which have not previously been disclosed:
The following persons did not file any Forms 4 during the fiscal year
ended December 31, 1999 and have not provided PCI with a written representation
that no such forms were required: William Anthony and Robert Manschot.
35
<PAGE> 36
Item 10 - Executive Compensation
Summary Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Awards SARs (#) Payouts sation
- -------- ---- ------ ----- ------- ------ -------- ------- -------
($) ($) ($) ($) ($)
--- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John 1999 $11,538(2) -- -- -- -- -- --
Greenwell/ 1998 $144,231
CEO(1)
Brendan 1999 $97,115(4) -- -- -- -- --
McGinnis/COO/
V.P.Sales(3)
Scott 1999 $61,350(6) -- -- -- -- --
Lambrecht/
CEO(5)
Jim Stanley/ 1999 $29,470(8) -- -- -- -- --
V.P. (7)
Purchasing
Secretary
Gary Sherman/ 1999 -0- -- -- -- -- -- 7,500(10)
President(9)
Steve Lambrecht/ 1999 -0- -- -- -- -- -- 7,500(12)
CEO/Sec. (11) 1998 $80,546 42,850
Corey Lambrecht/ 1999 $65,968(14) -- -- -- 2,665(15) --
V.P. Sales/
Mrktng(13) Asst.
Sec.
</TABLE>
(1) Left office May 17, 1999.
36
<PAGE> 37
(2) No salary or bonus after January 18, 1999.
(3) Left office December 3, 1999.
(4) Reduced Salary January 18 thru March 28.
(5) Left office November 10, 1999.
(6) Reduced Salary January 18 thru March 28.
(7) Left office July 1, 1999.
(8) Reduced Salary January 18 thru March 28.
(9) Took office November 10, 1999.
(10) Consulting fees as Director of Corp. Finance.
(11) Took office November 10, 1999.
(12) Consulting fees as Director of Corp. Development.
(13) Took office December 3, 1999.
(14) Reduced Salary January 18 thru March 28.
(15) Several Executives and some Key Employees agreed to a temporary
reduction in salary.
The Board of Directors agreed to give options at $1.50 in lieu of the
reduced salary with a vesting period of one year. Only one Executive or
Key Employee, Corey Lambrecht, is still employed with the Company and
qualified for the vesting period ending March 28, 2000, for a total of
2,665 vested options at $1.50 per share.
EMPLOYEE STOCK OPTION PLAN FOR 2000
On January 5, 2000, the Board of Directors approved the following Stock Option
Plan at an exercise of US$0.25 per share vested quarterly under performance
criteria determined by Management and approved by the Board of Directors for
certain key executives and employees:
Pamela Johnson-Fulks - 10,000 options earned each Quarter per
Employment Agreement.
Henry Schubel - 10,000 options earned each Quarter per Employment
Agreement.
Karl Zeidler - 10,000 options earned each Quarter as determined by
performance criteria.
Corey Lambrecht- 10,000 options earned per Quarter determined by
performance criteria.
Jean Mills- 5,000 options earned per Quarter as determined by
performance criterial.
All options are restricted as to Rule 144 (minumum one year) from date of
vesting.
INDEPENDENT AUTHORIZED REPRESENTATIVE STOCK OPTION PLAN FOR 2000
In addition, it was approved by the Board of Directors that an all encompassing
Stock Option Plan would be made available for the Independent Authorized
Representative Broker Agents for ProductExpress.com that would be a percentage
of the stock options as it relates to a percentage of the gross collectable
billings for fulfillment and other services that each Authorized
Representative's Clients business represented to ProductExpress.com. The total
amount of Stock Options Available for this plan is authorized by the Board of
Directors as follows: A total sum of 400,000 options for the year, granted at
the end of the year, with the exercise prices set by taking 100,000 options each
quarter at an exercise price that is the average market price for the open
market trading of the Company's common shares for the first month of the
quarter, starting with the first quarter of 2000. All options are restricted as
to Rule 144 (minumum one year) from date of vesting.
37
<PAGE> 38
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees in Bsse Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
---- ----------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Corey Lambrecht/ ___ $1.50 April 1, 2003
V.P. Sales/ Mrkt. 2,665(1)
Asst. Corp. Secr.
Pamela Johnson/ ___ $0.25 December 29, 2002
Director of 15,000(2) (5,000) options
Fulfillment Services February 1, 2003
(10,000)
</TABLE>
(1) Options earned in lieu of salary from January 18 to March 28, 1999.
(2) Options earned for securing first fulfillment contract (5,000) and 1st
Quarter (10,000) as per employment contract (40,000 total potential) dated
November 3, 1999.
38
<PAGE> 39
(3) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at FY-End In-the-Money Options/SARs
Shares (#) at FY-End ($)
Acquired on Value Exercisable / Exercisable /
Name Exercise Realized ($) Unexercisable Unexercisable
---- -------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
John Greenwell / CEO -- -- 10,000 Not in-the-Money and
Exercisable Exercisable June 30, 1999
</TABLE>
39
<PAGE> 40
Director Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Annual Consulting
Retainer Meeting Fees/Other Options/$
Name Fees ($) Fees ($) Fees ($) Shares (#)
- ---- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
William L. Anthony -- 0 -- 1,875
John E. Greenwell -- 0 -- 0
Robert H. Manschot -- 0 -- 1,250
Steve Lambrecht -- 0 -- 0
Greg Lambrecht -- 0 -- 3,750
Colin Jones -- 0 -- 3,750
Gary J. Sherman -- 0 -- 0
Mark Jazwin -- 0 -- 1,250
</TABLE>
Employment Agreements
JOHN E. GREENWELL had an at-will Employment Agreement with PCI as President,
Chief Executive Officer and Chief Operating Officer. The initial salary was
$120,000, but increased, pursuant to the agreement's terms, to $150,000 a year
upon his becoming Chief Executive Officer on March 1, 1998. Mr. Greenwell is
eligible for any bonus plan or stock option plan offered to other comparable
executives and was granted a bonus of $50,000 for the fiscal year ending
December 31, 1998. As of March 31, 1999 Mr. Greenwell had agreed to defer
payment of the $50,000 bonus for the fiscal year ending December 31, 1998.
Additionally, as of January 18, 1999 to the date of his resignation, Mr.
Greenwell had declined to accept any payment for his services rendered to PCI.
Given the performance and financial condition of the Company, the Board of
Directors voted to not pay the bonus, and accepted the declination of his
payment for services.
COREY A. LAMBRECHT has an at-will Employment Agreement with PCI as National
Sales Account representative and has been promoted to V.P. of Sales/Marketing
and Assistant Corp. Secretary. The initial salary in 1997 was $60,000 with a
severance provision. Currently it is $70,000 per year. Stock Options have been
made available at 10,000 per quarter for a total of 40,000 for the year 2000,
based on performance criteria approved by the board.
PAMELA JOHNSON has an at-will Employment Agreement with PCI as Director of
Fulfillment Services. The initial salary was $50,000 in November,1999. Currently
it is $25.00 per hour not to exceed $50,000 year. Stock Options have been made
available at 10,000 per quarter for a total
40
<PAGE> 41
of 40,000 for the year 2000, based on performance criteria approved by the
board, with an additional 5,000 options granted for obtaining the first
fulfillment contract.
Consulting Agreements. During 1999, we also had arrangements with the following
consultants:
RCG CAPITAL, INC. On or about December 14, 1998, RCG Capital, Inc. (Mr. Max
Ramras, President/CEO) entered into a Consulting Agreement with PCI to represent
PCI as its financial public relations consultant for $5,500 per month, plus
expenses, and the ability to purchase 100,000 restricted shares of PCI's common
stock at a price of $.01 per share. The shares are subject to repurchase by PCI
in the event certain incentive goals are not achieved. RCG Capital, Inc. has
agreed to pay PCI an amount ranging from $0.99 to $1.49 per share upon the
removal of any and all restrictive legends.
GARY SHERMAN AND STEVEN LAMBRECHT On September 23,1999 as part of a Board of
Directors resolution and approval by the Independent Directors, Gary Sherman and
Steven Lambrecht were to receive $7,500.00 each on a monthly basis for six
months minimum and the remaining warrants of the 2.5 million authorized by the
Independent Directors, for their efforts as Directors of Corporate Development
and Finance in arranging fulfillment contracts, and the ongoing financing needs
of the Company. By November 9, 1999 their positions were expanded to include
President and CEO. They accepted one $7,500 payment each for October, 1999 and
January ,2000 and have retained 1 million and 750,000 warrants, respectively,
for services rendered throughout 1999 and the first Qtr. 2000, in lieu of
salary, options, and stock.
STANDING ARRANGEMENTS FOR OUTSIDE DIRECTOR COMPENSATION. PCI has standing
arrangements to grant each outside director options to purchase 5,000 shares of
common stock and the Chairman additional options to purchase 2,500 shares of
common stock on February 1 of each year at the market price on the date of the
grant, but not less than $5.25 per share, to vest in quarterly increments of
1,250 (1,875 for the Chairman) and which shall be exercisable 1 to 5 years from
the date each quarterly increment vests. The options are non-qualified. To date,
PCI has not formally granted any such options to the outside directors. PCI also
pays all outside directors, including non-employee directors, for all meetings
attended (whether regular or additional meetings) at the rate of $350 per
meeting for meetings of up to four (4) hours and $750 per meeting for meetings
over four (4) hours. Due to severe financial constraints in 1999 the Board of
Directors Agreed that no monetary considerations could be paid to the Board
Members.
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following tables set forth certain information regarding shares of common
stock beneficially owned as of March 31, 2000 by (i) each person or group known
to PCI, which beneficially owns more than 5% of the common stock; (ii) each of
PCI's officers and directors; and (iii) all officers and directors as a group.
The percentage of beneficial ownership is based on 3,939,092 shares outstanding
on March 31, 2000 plus, for each person or group, any securities that person or
group has the right to acquire within 60 days pursuant to options, warrants,
conversion privileges or other rights. Unless otherwise indicated, the following
persons have sole voting and investment power with respect to the number of
shares set forth opposite their names:
41
<PAGE> 42
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
<S> <C> <C> <C>
Common George Simon Trust 1,200,000(2) 14.53%
737 Bolivar Road 4th Floor
Cleveland, Ohio 44115
Common Steven A. Lambrecht 1,015,006(1)(2) 12.29%
12072 North 118th Street
Scottsdale, Arizona 85259
Common Gary J. Sherman 1,007,400(2) 12.20%
6063 E. Cortez Dr.
Scottsdale, Arizona 85254
Common John E. Greenwell 486,600(1) 5.89%
16216 N. 63rd Place
Scottsdale, Arizona 85254
</TABLE>
(1) Includes shares which may be acquired by the exercise of options within
60 days as follows: Steven A. Lambrecht, 21,250 shares, John E.
Greenwell, 50,000 shares.
(2) Includes shares which may be acquired by the exercise of warrants
within 60 days as follows: George Simon Trust, 400,000, Steven A.
Lambrecht 750,000, Gary J. Sherman 1,000,000
Security Ownership of Management
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
<S> <C> <C> <C>
Common George Simon (Trust) 1,200,000(1) 14.53%
737 Bolivar Road 4th Floor
Cleveland, Ohio 44115
Common Steven A. Lambrecht 1,015,006(1)(2) 12.29%
12072 North 118th Street
Scottsdale, Arizona 85259
Common Gary Sherman 1,007,400(1) 12.20%
6063 E. Cortez Drive
Scottsdale, Arizona 85254
Common Corey A. Lambrecht 87,865(1)(2) 1.06%
8275 E. Bell Road
Apt. 3139
Scottsdale, Arizona 85260
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Common All Officers and Directors 3,310,271(1)(2) 38.96%
as a group (4 persons)
</TABLE>
(1) Includes shares which may be acquired by the exercise of options or
warrants within 60 days as follows: George Simon (Trust), 400,000
shares, Gary J. Sherman, 1,000,000 shares, Steven A. Lambrecht, 776,250
shares, Corey A. Lambrecht, 12665.
(2) Steven A. Lambrecht is the father of Corey A. Lambrecht. Each of the
Lambrechts disclaims any beneficial interest in the shares held by the
others.
(3) Less than 1%.
Item 12 - Certain Relationships and Related Transactions
RESOLVING CONFLICTS OF INTEREST.
A number of the transactions described in this section involve inherent
conflicts of interest because an officer, director, significant shareholder,
promoter or other person with a material business or professional relationship
with PCI is a party to the transaction. Our current policy adopted by our board
of directors regarding transactions involving conflicts of interest, is:
(i) we will not enter into any material transaction or loan with a related or
affiliated party unless the transaction or loan is on terms that are no less
favorable to us than we could obtain from an unrelated or unaffiliated third
party; and
(ii) a majority of the independent directors (those who do not have a
material business or professional relationship with PCI other than being a
director) who have no interest in the transactions must review and approve
transactions involving related parties or conflicts of interest after having
been given access, at our expense, to our counsel or to their own independent
legal counsel; and
(iii) when there are only two independent directors, both directors must
approve the transaction; and
(iv) the independent director approval applies to all related-party
transactions and loans, whether or not to a related-party.
We currently have one independent director, George T. Simon. Our independent
directors have had access, at our expense, to our counsel or to independent
counsel, and a majority of the independent directors have ratified all
related-party transactions that are ongoing.
JONES/LAMBRECHT NOTES RECEIVABLE. Colin A. Jones and Greg P. Lambrecht each
delivered to PCI long term promissory notes for $43,112.50. The notes are dated
December 31, 1996,
43
<PAGE> 44
accrue interest at six percent, and all interest and principal are due on March
31, 1999. The notes relate to CAN-AM receivables which accrued prior to PCI's
acquisition of all of CAN-AM's outstanding stock on December 31, 1996. The
independent directors have approved a one-time extension for the repayment of
these notes to September 30, 1999. In exchange, Messrs. Jones and Lambrecht have
agreed to increase the interest rate for the notes from six to ten percent. The
notes have been adjusted as per the signed agreement of the Board of Directors
dated September 21, 1999 Section 2.h which reads as follows: At the time of
replacement of current board members, Greg Lambrecht and Colin Jones, all past
due Board of Directors fees due them will be credited against: (i.) all the
interest and the principal of the their notes due to PCIG to that date will be
adjusted to reflect a credit against all Board of Directors meetings to that
date that have not been paid and, (ii.) a continuance of the due date for the
balance of their notes after credits and future interest thereafter, for one
year from the date of their replacement as board members. Collin Jones resigned
as a Member of the Board on September 23, 1999 and Greg Lambrecht resigned as a
Member of the Board on November 9, 1999.
SINGLE CIGAR, INC. As discussed in PCI's Form 10QSB filed for the quarter
ended September 30, 1998, PCI entered into a Supplier Agreement with Single
Cigars, Inc., a wholly owned subsidiary of Single Stick, Inc., dated October 5,
1998, under which Single Cigars, Inc. will supply little cigars known as Prime
Time(TM) and countertop control units exclusively to PCI for distribution by
PCI. Greg Lambrecht, a director of PCI, has entered into a consulting
arrangement with Single Stick, Inc. Pursuant to his relationship with Single
Stick, Inc., Greg Lambrecht will receive consideration including two percent
(2%) of the net collected sales price received by Single Stick, Inc. from sales
of Prime Time(TM) to PCI, as well as shares of Single Stick, Inc. if certain
sales criteria are met for the Prime Time(TM) product. Additionally, Greg
Lambrecht received a retainer and shares of Single Stick, Inc. under his
consulting agreement with Single Stick, Inc. PCI's Board of Directors including
all of PCI's independent directors, have approved the transaction with Single
Stick, Inc. and have found the terms to be fair to PCI. On November 9, 1999 Greg
Lambrecht resigned from the Board of Directors, and as of December 31, 1999 PCI
was no longer allowed to buy Prime Time from Single Stick.
Item 13 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------
<S> <C> <C>
3.1 Articles of Incorporation **
3.2 By-Laws, as amended ***
4.1 Specimen Common Stock Certificate ****
4.2 Description of Rights of Security Holders *****
10.1 Accounts Receivable Line of Credit with Alliance Financial Exhibit filed herewith*
Capital dated March 12, 1999.
</TABLE>
44
<PAGE> 45
<TABLE>
<CAPTION>
<S> <C> <C>
27.1 Financial Data Schedule Exhibit filed herewith
99.1 "Underwriting" section of Registration Statement on Form ******
SB-2
</TABLE>
* Portions of the exhibit omitted and filed separately with the Commission
pursuant to the Confidential Treatment provisions of Regulation ss. 230.406.
** 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 Registration Statement on Form
SB-2 (file no. 333-29985) declared effective on August 21, 1997.
**** 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 Exhibit 4.1 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
<TABLE>
<CAPTION>
Date of Date
Report Filed Description
------ ----- -----------
<S> <C> <C>
January 15, 1999 January 15, 1999 Disclosure of Proposition 65 Litigation
Potential Nasdaq Delisting and Status
of Financing
June 17, 1999 June 17, 1999 Disposition of Assets-Sale of Can-Am
Nasdaq Delisting Appointment new Chief
Executive Officer
September 27, 1999 September 27, 1999 Boston Stock Exchange Delisting
Appointment Board of Directors
Distributorship Agreement -
Prime-Time
November 9, 1999 November 9, 1999 Resignation of CEO
</TABLE>
45
<PAGE> 46
In accordance with Section 13 or 15(d) 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.
By: /s/ Steven A. Lambrecht
-----------------------
Steven A. Lambrecht, Chief Executive
Officer and Corp. Secretary
By: /s/ Gary J. Sherman
-------------------
Gary J. Sherman, President
Date: May 8, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ Steven A. Lambrecht Director, Chief Executive 05/08/00
----------------------- Officer, and Secretary
Steven A. Lambrecht
By: /s/ Gary Sherman Director, President 05/08/00
----------------
Gary Sherman
By: /s/ Karl R. Zeidler Controller and principal accounting 05/08/00
------------------- officer
Karl R. Zeidler
By: /s/ George T. Simon Director 05/08/00
-------------------
George T. Simon
By: /s/ Corey A. Lambrecht Vice President of Sales/Marketing 05/08/00
---------------------- and Assistant Secretary
Corey A. Lambrecht
</TABLE>
46
<PAGE> 47
PREMIUM CIGARS INTERNATIONAL, LTD.
FINANCIAL STATEMENTS
For The Years Ended
December 31, 1999 and 1998
<PAGE> 48
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Premium Cigars International, Ltd.
We have audited the accompanying balance sheet of Premium Cigars International,
Ltd. as of December 31, 1999, and the related statements of operations,
comprehensive operations, changes in stockholders' equity (deficit), and cash
flows for the years ended December 31, 1999 and 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Premium Cigars International,
Ltd. as of December 31, 1999, and the results of its operations, statements of
comprehensive operations, changes in stockholders' equity (deficit), and its
cash flows for the years ended December 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 16 to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Semple & Cooper, LLP
Phoenix, Arizona
April 14, 2000
<PAGE> 49
PREMIUM CIGARS INTERNATIONAL, LTD.
BALANCE SHEET
December 31, 1999
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash $ 4,096
Accounts receivable - trade, net (Note 1) 48,278
Available for sale securities (Notes 1 and 2) 11,000
Inventory, net (Notes 1 and 5) 3,718
Other current assets 7,369
----------
Total Current Assets 74,461
Property and Equipment, net (Notes 1 and 6) 289,224
Deposits 18,622
----------
Total Assets $ 382,307
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable - trade $ 796,115
Accrued expenses
- tobacco taxes 274,153
- other 118,254
----------
Total Current Liabilities 1,188,522
----------
Commitments and Contingencies: (Note 8) -
----------
Stockholders' Deficit: (Note 9)
Common stock - no par value, 10,000,000 shares authorized,
4,491,092 shares issued and outstanding 8,995,586
Additional paid-in capital 150,000
Common stock warrants 1,710
Accumulated deficit (9,911,511)
----------
(764,215)
Net Unrealized Loss on Available for Sale Securities (Note 2) (42,000)
----------
Total Stockholders' Deficit (806,215)
----------
Total Liabilities and Stockholders' Deficit $ 382,307
==========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-2
<PAGE> 50
PREMIUM CIGARS INTERNATIONAL, LTD.
STATEMENTS OF OPERATIONS
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Sales $ 4,021,859 $ 6,900,927
Cost of Sales 2,871,043 5,153,947
Charge for Inventory Adjustment (Note 8) - 427,830
----------- -----------
Gross Profit 1,150,816 1,319,150
Selling, General and Administrative 3,560,747 5,040,507
Officers' Severance Pay - 395,173
----------- -----------
Loss from Operations (2,409,931) (4,116,530)
----------- -----------
Other Income (Expenses):
Interest income 11,938 96,520
Interest expense (47,607) (46)
Loss on disposal of cigars, humidors,
fixed assets and subsidiary (1,254,903) (15,492)
Other (69,658) 9,567
Foreign currency transaction loss - (3,844)
----------- -----------
(1,360,230) 86,705
----------- -----------
Net Loss $(3,770,161) $(4,029,825)
=========== ===========
Basic Net Loss per Share (Note 1) $ (.95) $ (1.16)
=========== ===========
Weighted Average Number of Shares Outstanding 3,958,681 3,469,042
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-3
<PAGE> 51
PREMIUM CIGARS INTERNATIONAL, LTD.
STATEMENTS OF COMPREHENSIVE OPERATIONS
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net Loss $(3,770,161) $(4,029,825)
Other Comprehensive Income (Loss):
Foreign currency translation adjustment 73,072 (76,443)
Unrealized loss on available for sale securities (42,000) -
----------- -----------
Comprehensive Loss $(3,739,089) $(4,106,268)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-4
<PAGE> 52
PREMIUM CIGARS INTERNATIONAL, LTD.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Unrealized
Loss
Additional on Available
Common Stock Paid-in Common Stock for Sale
Shares Amount Capital Warrants Securities
------ ------ ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1997....................... 3,469,092 $ 8,655,339 $ 150,000 $ 1,710 $ --
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars ........ -- -- -- -- --
Net loss for the year ended
December 31, 1998 ........ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31,
1998...................... 3,469,092 8,655,339 150,000 1,710 --
Issuance of common stock ... 1,022,000 340,247 -- -- --
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars ........ -- -- -- -- --
Change in net unrealized
loss on available for
sale securities .......... -- -- -- -- (42,000)
Net loss for the year ended
December 31, 1999 ........ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at December 31,
1999...................... 4,491,092 $ 8,995,586 $ 150,000 $ 1,710 $ (42,000)
=========== =========== =========== =========== ===========
Foreign
Currency Total
Translation Accumulated Stockholders'
Adjustment Deficit Equity (Deficit)
---------- ------- ----------------
<S> <C> <C> <C>
Balance at December 31,
1997...................... $ 3,371 $(2,111,525) $ 6,698,895
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars ........ (76,443) -- (76,443)
Net loss for the year ended
December 31, 1998 ........ -- (4,029,825) (4,029,825)
----------- ----------- -----------
Balance at December 31,
1998...................... (73,072) (6,141,350) 2,592,627
Issuance of common stock ... -- -- 340,247
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars ........ 73,072 -- 73,072
Change in net unrealized
loss on available for
sale securities .......... -- -- (42,000)
Net loss for the year ended
December 31, 1999 ........ -- (3,770,161) (3,770,161)
----------- ----------- -----------
Balance at December 31,
1999...................... $ -- $(9,911,511) $ (806,215)
=========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-5
<PAGE> 53
PREMIUM CIGARS INTERNATIONAL, LTD.
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Increase (Decrease) in Cash:
Cash flows from operating activities:
<S> <C> <C>
Cash received from customers $ 4,346,271 $ 6,783,202
Cash paid to suppliers and employees (5,157,390) (10,015,845)
Interest paid (47,607) (46)
Interest received 11,938 89,622
------------ ------------
Net cash used for operating activities (846,788) (3,143,067)
------------ ------------
Cash flows from investing activities:
Collection of loans receivable 5,809 --
Proceeds from sale of investments -- 3,470,471
Purchase of humidors (17,937) (799,947)
Purchase of fixed assets (2,925) (591,647)
Proceeds from sale of fixed assets 13,724 8,284
Proceeds from sale of subsidiary 375,000 --
------------ ------------
Net cash provided by investing activities 373,671 2,087,161
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock 308,997 --
------------ ------------
Net cash provided by financing activities 308,997 --
------------ ------------
Effect of exchange rate changes on cash -- (40,243)
------------ ------------
Net decrease in cash (164,120) (1,096,149)
Cash at beginning of year 168,216 1,264,365
------------ ------------
Cash at end of year $ 4,096 $ 168,216
============ ============
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-6
<PAGE> 54
PREMIUM CIGARS INTERNATIONAL, LTD.
STATEMENTS OF CASH FLOWS (CONTINUED)
For The Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Reconciliation of Net Loss to Net Cash Used for
Operating Activities:
Net Loss $(3,770,161) $(4,029,825)
----------- -----------
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 599,441 793,649
Loss on disposal of cigars, humidors,
fixed assets and subsidiary 1,254,903 15,492
Accrued interest added to principal of notes
receivable - related parties -- (6,898)
Effect of changes in foreign currency -- 3,844
Write-off of organizational costs 26,536
Changes in Assets and Liabilities:
Accounts receivable - trade 512,981 58,436
Inventory 471,803 (19,542)
Other current assets 31,737 22,278
Deposits 10,955 (19,460)
Accounts payable - trade (53,633) 387,296
Accrued expenses
- tobacco taxes 170,823 (299,507)
- other (102,173) (48,830)
----------- -----------
2,923,373 886,758
----------- -----------
Net cash used for operating activities $ (846,788) $(3,143,067)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Financial Statements
F-7
<PAGE> 55
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates:
Nature of Operations:
Premium Cigars International, Ltd. (the "Company") is a Corporation
organized under the laws of the State of Arizona on December 16, 1996.
CAN-AM International Investments Corp. (CAN-AM), a British Columbia
Canadian corporation, was incorporated on June 20, 1996. The Company
acquired all of the outstanding stock of CAN-AM on December 31, 1996.
The business purpose of the Company was the distribution of premium
cigars using countertop humidors in convenience stores, grocery stores
and other retail outlet markets. The Company conducts business
throughout the United States. The Company's wholly-owned subsidiary,
CAN-AM, operated throughout greater Canada. In May, 1999, the Company
sold its interest in CAN-AM. In addition, effective December 31, 1999,
the Company ceased substantially all of its tobacco product sales. It
is management's intention to change the business focus of the Company
to fulfillment services, wherein the Company will utilize its
experience in order processing, shipping and distribution to deliver
goods or services for various customers. Fulfillment services commenced
in the latter part of December, 1999.
Principles of Consolidation:
The financial statements include the activity of Premium Cigars
International, Ltd., together with its wholly-owned subsidiary, CAN-AM,
until the time of the sale of CAN-AM in May, 1999. All significant
intercompany accounts and transactions have been eliminated.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities, at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates are used when accounting for allowance for
doubtful accounts, inventory reserves, depreciation and amortization,
accruals, taxes, contingencies, tobacco tax, liabilities and sales
returns, which are discussed in the respective notes to the financial
statements.
Accounts Receivable - Trade:
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense
as a percentage of accounts receivable based on prior collection
history and a review of individual accounts outstanding. At December
31, 1999, an allowance has been provided for potentially uncollectible
accounts receivable in the amount of $143,676.
Inventory:
Inventory is stated at the lower of cost, first-in, first-out method,
or market. Inventory quantities are periodically reviewed by management
for spoilage, and/or obsolescence, and an allowance is established to
provide for same.
Available for Sale Securities:
Securities investments that the Company holds for the purpose of
selling over an undetermined period are classified as
available-for-sale securities. Available-for-sale securities are
reported at fair value with unrealized gains and losses reported as a
separate component of stockholders' equity.
F-8
<PAGE> 56
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates: (Continued)
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method, over the following estimated useful
lives.
Computer equipment 3 years
Equipment 5-7 years
Furniture and fixtures 5-7 years
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred. For
the years ended December 31, 1999 and 1998, depreciation expense was
$174,911 and $138,049, respectively.
Humidors:
Humidors were used to display cigars for sale at retail outlets. The
humidors were being amortized ratably over a two (2) year period. For
the years ended December 31, 1999 and 1998, amortization expense was
$424,530 and $647,435, respectively. Any remaining book value for
humidors was written off in 1999, when the Company changed its
operational focus to fulfillment services.
Advertising Costs:
Advertising costs are charged to operations when incurred. For the
years ended December 31, 1999 and 1998, advertising expense was $5,323
and $120,152, respectively.
Organization Costs:
Organization costs consist of costs incurred in relation to the
formation of the Corporation and its wholly-owned subsidiary. Prior to
January, 1999, these costs were being amortized ratably over five (5)
years. Effective January 1, 1999, the Company elected to adopt the
American Institute of Certified Public Accountants Statement of
Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up
Activities", to account for its organization costs. SOP No. 98-5
requires that start-up costs, including organization costs, be expensed
as incurred and that unamortized start-up costs be expensed in the
period in which the SOP is adopted. During the year ended December 31,
1999, the Company recorded amortization expense of $26,536 to fully
amortize these organization costs.
Income Taxes:
Deferred income taxes are provided on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards. Deferred tax liabilities
are recognized for taxable temporary differences. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
F-9
<PAGE> 57
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates: (Continued)
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Revenue and expenses at average exchange rates for the period
in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of the
Corporation's foreign operations are deferred and included as
a separate component of stockholders' equity.
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of employee stock options equals or
exceeds the market price of the underlying stock on the date of grant,
no compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement
123).
Loss per Share:
Basic loss per share of common stock was computed by dividing net
earnings by the weighted average number of common shares.
Diluted earnings per share are computed based on the weighted average
number of shares of common stock and dilutive securities outstanding
during the period. Dilutive securities are options that are freely
exercisable into common stock at less than market exercise prices.
Dilutive securities are not included in the weighted average number of
shares when inclusion would increase the earnings per share or decrease
the loss per share.
2. Investment Securities:
The amortized cost and fair value (based on quoted market prices) of
equity securities at December 31, 1999 are shown below. below:
<TABLE>
<CAPTION>
Securities Available-for-Sale
Gross
Amortized Unrealized
Cost Fair Value Losses
---- ---------- ------
<S> <C> <C> <C>
Equity Investments $ 53,000 $ 11,000 $ 42,000
========== ========== ==========
</TABLE>
Stockholders' deficit for the year ended December 31, 1999 includes
unrealized holding losses of $42,000.
F-10
<PAGE> 58
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
3. Related Party Transactions:
Notes Receivable - Related Parties:
At December 31, 1999, notes receivable - related parties are comprised
of 6% interest bearing notes from two (2) stockholders in the aggregate
amount of $94,212. The notes and all accrued interest are due on March
31, 2000. Included in the principal balance at December 31, 1998 is
accrued interest in the amount of $7,987. As of December 31, 1999, the
notes have been fully reserved due to the uncertainty of their ultimate
collection.
4. Fair Value of Financial Instruments:
The fair market value of notes receivable - related parties cannot be
determined due to its related party nature. The fair market value of
accounts receivable, accounts payable and accrued expenses approximate
their carrying value due to their short-term nature.
5. Inventory:
As of December 31, 1999, inventory consists of the following:
<TABLE>
<S> <C>
Cigars $ 18,455
Less: reserve for inventory spoilage
and obsolescence (14,737)
----------
$ 3,718
==========
</TABLE>
6. Property and Equipment:
At December 31, 1999, property and equipment consists of the following:
<TABLE>
<S> <C>
Computer equipment $ 246,639
Equipment 58,598
Furniture and fixtures 228,809
Leasehold improvements 43,450
----------
577,496
Less: accumulated depreciation (288,272)
----------
$ 289,224
==========
</TABLE>
7. Income Taxes:
At December 31, 1999, the Company has available approximately $7,900,000
of U.S operating loss carryforwards that may be applied against future
taxable income, expiring as follows:
<TABLE>
<CAPTION>
Expiration During Amount of Unused
Year Ended December 31, Operating Loss Carryforwards
----------------------- ----------------------------
<S> <C>
2004 $ -
2005 -
2012 1,400,000
2013 3,200,000
2014 3,300,000
----------
$7,900,000
==========
</TABLE>
F-11
<PAGE> 59
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
7. Income Taxes: (Continued)
As of December 31, 1999, deferred income tax assets consist of:
<TABLE>
<S> <C>
Net operating loss carryforwards $2,464,000
Other 75,000
----------
2,539,000
Less: valuation allowance (2,539,000)
----------
Total deferred taxes $ -
==========
</TABLE>
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset because of the uncertainty of the
utilization of the asset.
8. Commitments and Contingencies:
Operating Leases:
In February, 1998, the Company entered into a non-cancellable lease
agreement for office and warehouse space in Scottsdale, Arizona,
expiring April 30, 2003. The terms of this lease provide for monthly
payments ranging from $18,000 to $19,000. The lease terms also require
the Company to pay common area maintenance, taxes, and certain other
incidental costs.
In addition to the above, the Company leases office equipment under a
non-cancellable lease agreement expiring in November, 2002. The lease
requires monthly payments of $645.
A schedule of future minimum lease payments due under the above
mentioned non-cancellable operating lease agreements for each of the
next four (4) years, is as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------
<S> <C>
2000 $ 223,740
2001 231,740
2002 235,095
2003 76,000
----------
$ 766,575
==========
</TABLE>
For the years ended December 31, 1999 and 1998, rent expense under the
aforementioned operating lease agreements was $235,347 and $281,750,
respectively.
Purchase Agreement:
In October, 1998, the Company entered into an agreement with a vendor
for future cigar purchases. The agreement was for a period of five (5)
years, with an automatic five (5) year renewal. The agreement provided
for future minimum purchases required by the Company, at a price of $.16
per unit, with a total purchase commitment of approximately $78,000,000.
In 1999, due to an alleged lack of performance and payment on the
contract, the vendor nullified the contract with the Company.
In addition, the Company was notified in 1999 by Brown & Williamson
Tobacco Company (B&W) that there was a potential trademark infringement
by the Company in the use of the name "Prime Time" vs. B&W's trademark
cigarette, "Prime". Management believes this issue was resolved when the
Company ceased distributing the Prime Time product.
F-12
<PAGE> 60
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies: (Continued)
Financial Relations Agreement:
On December 15, 1998, the Company entered into an agreement for the
performance of various financial and public relation duties. The
agreement was for a term of eighteen (18) months, with monthly payments
of $5,500. The agreement also required that the Company sell the
provider 100,000 shares of common stock at a price of $.01 per share.
The stock sale was to be final pending attainment of certain criteria.
The contract was terminated in April, 1999, with a final agreement
transferring full ownership of the 100,000 shares of common stock to the
vendor at an approximate value of $34,997.
9. Stockholders' Equity:
Common Stock Options and Warrants:
During the year ended December 31, 1999, the Company issued 1,750,000
options to officers and directors of the Company. The options are
exercisable at $.25 per share and expire three (3) years from the date
of issuance. An additional 2,665 options were issued to an employee of
the Company. These options are exercisable at $1.50 per share and expire
three (3) years from the date of issuance. As of December 31, 1999, none
of the options have been exercised.
During the year ended December 31, 1999, the Company issued 270,000
warrants to various investors in connection with private placements. The
warrants are exercisable at $.25 per share and expire three (3) years
from the date of issuance. As of December 31, 1999, none of the warrants
have been exercised.
During the year ended December 31, 1998, the Company issued 20,000
options to an officer of the Company. The options are exercisable at
$5.25 per share and expire five (5) years from the date of issuance. As
of December 31, 1999, none of the options have been exercised.
During the nine months ended December 31, 1997, the Company issued
257,500 options to directors and officers of the Company, with 247,500
exercisable at $5.25 per share, and 10,000 exercisable at $2.69 per
share. The options expire five (5) years from the date of issuance, with
vesting periods of zero (0) to three (3) years and are exercisable one
(1) year after the vesting date. As of December 31, 1999, none of the
options have been exercised.
During the nine month period ended December 31, 1997, the Company, in
connection with the bridge financing, issued warrants to purchase
380,226 shares of common stock with 361,215 exercisable at $2.63 per
share, and 19,011 exercisable at $5.25 per share. The warrants expire
five (5) years from the date of issuance. As of December 31, 1999, none
of the warrants have been exercised.
During the nine month period ended December 31, 1997, the Company issued
underwriter warrants to purchase 170,952 shares of common stock,
exercisable at $8.40 per share, expiring five (5) years from the date of
issuance, and exercisable one (1) year after grant date. As of December
31, 1999, none of the warrants have been exercised.
During the nine month period ended December 31, 1997, the Company issued
50,000 options to its public relations firm, exercisable at $8.40 per
share, expiring five (5) years from the date of issuance. The options
vest ratably over a five (5) year period and become exercisable one (1)
year after the vest date. No value was assigned on this transaction. As
of December 31, 1999, none of the options have been exercised.
F-13
<PAGE> 61
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
9. Stockholders' Equity: (Continued)
Common Stock Options and Warrants: (Continued)
The following summarizes stock option and warrant transactions
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Stock Weighted Average
Options Warrants Exercise Price
------- -------- --------------
<S> <C> <C> <C>
Prior Years 327,500 551,178 $ 4.94
Current Year 1,752,665 270,000 $ .25
--------- -------
2,080,165 821,178
========= =======
</TABLE>
Information relating to stock options and warrants at December 31,
1999, summarized by exercise price, are as follows:
<TABLE>
<CAPTION>
Exercise Weighted
Price Average
per Number Life Number
Share Outstanding (Years) Exercisable
----- ----------- ------- -----------
<S> <C> <C> <C> <C>
$2.63 361,215 4 361,215
$2.69 10,000 4 10,000
$5.25 286,511 4 286,511
$8.40 220,952 4 220,952
$ .25 2,020,000 3 2,020,000
$1.50 2,665 2.3 2,665
--------- ---------
2,901,343 2,901,343
========= =========
</TABLE>
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
recorded in the Company's financial statements for the years ended
December 31, 1999 and 1998. Pro forma information regarding net loss
and loss per share are required by SFAS No. 123. Had compensation cost
for stock-based compensation been determined based on the fair value of
the options at the grant dates consistent with the method of SFAS No.
123, the Company's net loss and loss per share for the years ended
December 31, 1999 and 1998, would have been increased to the pro forma
amounts presented below:
<TABLE>
<CAPTION>
1999 1998
---- ----
Net Loss:
<S> <C> <C>
As reported $(3,770,161) $(4,029,825)
Pro forma (4,050,461) (4,105,725)
Loss per Share:
As reported $ (.95) $ (1.16)
Pro forma (1.02) (1.18)
</TABLE>
The fair value of the option grants is estimated as of the date of
grant utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions for grants in 1999; expected
life of options three (3) years, expected volatility of 55%, risk-free
interest rate of 6%, and a 0% dividend yield. The weighted average fair
value at date of grant for options granted during 1999 approximated
$.16.
F-14
<PAGE> 62
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
10. Concentrations:
Economic Dependency:
For the year ended December 31, 1999, the Company had one (1) supplier
which accounted for approximately eighty percent (80%) of the cigar
purchases. As of December 31, 1999, amounts due to this supplier,
included in accounts payable, were approximately $25,000.
For the year ended December 31, 1998, the Company had two (2) suppliers
which accounted for approximately fourteen percent (14%) and thirteen
percent (13%) of the Company's cigar purchases, respectively. As of
December 31, 1998, amounts due to these suppliers, included in accounts
payable, were approximately $49,480 and $50,520, respectively.
For the years ended December 31, 1999 and 1998, the Company's largest
customer accounted for approximately thirty-three percent (33%) and
thirty-eight (38%) of the Company's revenues, respectively. As of
December 31, 1999, there are accounts receivable of approximately
$19,700 due from this customer.
Foreign Operations:
For the years ended December 31, 1999 and 1998, the Company's foreign
subsidiary recorded revenue representing approximately twenty percent
(20%) and forty-six percent (46%) of total revenues, respectively.
11. Statements of Cash Flows:
Non-Cash Financing and Investing Activities:
During the years ended December 31, 1999 and 1998, the Company
recognized investing and financing activities that affected its assets,
liabilities and equity, but did not result in cash receipts or cash
payments. For December 31, 1999, these non-cash activities are as
follows:
Equities in the amount of $53,000 were received, together with
$125,000 of prepaid interest cards, on the sale of Can-Am.
For the year ended December 31, 1998, these non-cash activities are as
follows:
Sales of shares of common stock by the Company's Chief
Executive Officer were valued at $2.50 per share, which
exceeded the cash sales price. Therefore, an additional
$110,000 was reported as compensation.
Accrued interest in the amount of $6,898 was added to the
principal of notes receivable - related parties.
A related party note payable in the amount of $100,000 was
converted into a bridge financing loan.
The Company added accrued interest to the principal balance of
available for sale securities in the amount of $58,574.
The Company offset $53,550 of deferred offering costs from the
prior year against the proceeds of the initial public
offering.
12. Foreign Currency:
Foreign currency transactions resulted in an aggregate exchange loss of
$3,844 for the year ended December 31, 1998.
F-15
<PAGE> 63
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
13. Subsequent Events:
Subsequent to December 31, 1999, the stockholders of the Company
approved a resolution changing the name of the Corporation from Premium
Cigars International, Ltd. to ProductExpress.Com eBusiness Services,
Inc. This is in accordance with management's intention to change the
business focus of the Company to fulfillment services. In conjunction
with this change, the Company's stock symbol was also changed from PCIG
to PXPS.OB.
14. Segment Information:
The Company's products and services are broken down in the following
divisions for financial reporting purposes:
(1) Premium Cigars (U.S. Operations)
(2) Can-Am (Canadian Operations) (Sold in May, 1999)
Following is selected segment information:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
----------------------------
Premium
Cigars Can-Am Total
------ ------ -----
<S> <C> <C> <C>
Sales, Net $ 3,216,860 $ 804,999 $ 4,021,859
Cost of Sales 2,239,621 631,422 2,871,043
----------- ----------- -----------
Gross Profit 977,239 173,577 1,150,816
General and Adminis-
trative Expenses 2,004,632 556,115 3,560,747
----------- ----------- -----------
Operating Loss (2,027,393) (382,538) (2,409,931)
Other Income (Expense) (1,357,046) (3,184) (1,360,230)
----------- ----------- -----------
Net Loss $(3,384,439) $ (385,722) $ (3,770,161)
=========== =========== ===========
Loss per Share $ (.95)
===========
Assets $ 382,307 $ -- $ 382,307
=========== =========== ===========
</TABLE>
F-16
<PAGE> 64
PREMIUM CIGARS INTERNATIONAL, LTD.
NOTES TO FINANCIAL STATEMENTS (Continued)
14. Segment Information: (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
Premium
Cigars Can-Am Total
------ ------ -----
<S> <C> <C> <C>
Sales, Net $ 3,697,338 $3,203,589 $ 6,900,927
Cost of Sales 2,962,740 2,619,037 5,581,777
----------- ---------- -----------
Gross Profit 734,598 584,552 1,319,150
----------- ---------- -----------
General and Adminis-
trative Expenses 4,493,908 941,772 5,435,680
----------- ---------- -----------
Operating Loss (3,759,310) (357,220) (4,116,530)
Other Income (Expense) 96,724 (10,019) 86,705
----------- ---------- -----------
Net Loss $(3,662,586) $ (367,239) $(4,029,825)
=========== ========== ===========
Loss per Share $ 1.16
===========
</TABLE>
15. Litigation Matters:
At December 31, 1999, the Company is involved in litigation with an
individual who alleges that the Company violated the requirements of
Proposition 65, a California Statutory Scheme, which requires that
manufacturers, distributors and retailers of certain products provide
warnings to consumers of the potential harm which may result from the
consumption of those products. The complaint seeks unspecified
statutory penalties, along with costs and attorney's fees. The Company
intends to vigorously contest the case. The Company's legal counsel
cannot estimate a reasonable range for potential outcome at this time.
As such, no amount has been accrued for any potential loss as of
December 31, 1999 in the accompanying financial statements.
16. Going Concern:
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates
continuation of the Company as a going concern. However, the Company
has sustained continuing operating losses.
As shown in the accompanying statements of operations, the Company has
incurred net losses of $3,770,161 and $4,029,825 for the years ended
December 31, 1999 and 1998, respectively. Unaudited information
subsequent to December 31, 1999 indicates that the losses are
continuing. In addition, the Company has a deficit working capital of
$1,114,061, and a stockholders' deficit of $806,215 as of December 31,
1999.
The above conditions indicate that the Company may be unable to
continue in existence. The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts, or the amounts and classification of
liabilities that might be necessary should the Company be unable to
continue in existence.
F-17
<PAGE> 65
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Exhibit Name Method of Filing
- -------------- ------------ ----------------
<S> <C> <C>
3.1 Articles of Incorporation **
3.2 By-Laws, as amended ***
4.1 Specimen Common Stock Certificate ****
4.2 Description of Rights of Security Holders *****
10.1 Accounts Receivable Line of Credit with Alliance Financial Exhibit filed herewith*
Capital dated March 12, 1999.
</TABLE>
<PAGE> 66
<TABLE>
<S> <C> <C>
27.1 Financial Data Schedule Exhibit filed herewith
99.1 "Underwriting" section of Registration Statement on Form ******
SB-2
</TABLE>
* Portions of the exhibit omitted and filed separately with the
Commission pursuant to the Confidential Treatment provisions of
Regulation ss. 230.406.
** 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 Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
**** 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 Exhibit 4.1 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.
<PAGE> 1
EX-10.1
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
ACCOUNTS RECEIVABLE FINANCING AGREEMENT
Alliance Financial Capital, Inc. (hereby "AFC"), a California corporation,
having its offices at 700 Airport Boulevard, Burlingame, California 94010 and
the undersigned SELLER (hereafter "SELLER") hereby agree as follows:
A. On a transaction-by-transaction basis and at each party's sole and absolute
discretion, AFC hereby agrees to buy SELLER'S accounts receivable (hereafter
"accounts") on a discounted basis. Including, without limitation, full power to
collect, compromise, sue for, assign, or in any manner enforce collection
thereof, in the name of AFC, or otherwise. Each transaction for said purchase
and sale of accounts should be on a daily batch basis, which is defined as all
original Invoices submitted to AFC by SELLER on a particular day. AFC shall
purchase said accounts, subject to the foregoing, as a group (hereafter "BULK")
and each of said Bulks shall be treated as a separate transaction on AFC's books
and records, which shall be accounted for as between AFC and SELLER separately
and independently from all other such transactions entered into between AFC and
SELLER. Each of said transactions shall be supported by a Bulk Assignment
Schedule, an exemplar of which is attached hereto and made a part hereof by this
reference as Exhibit "A", executed by SELLER, setting forth the transaction
amount, (which is defined as the total gross face amount of all Invoice(s)
included in each transaction), the consideration (hereafter "ADVANCE") paid by
AFC therefor, the contingency reserve, and the discount, therefor. Each of said
Bulk Assignment Schedules shall be deemed a separate sale and assignment of
accounts, regardless of the number of invoices listed therein, and shall
incorporate the terms, conditions and provisions of this agreement.
B. AFC shall advance to SELLER toward the purchase of said accounts, the
following percentage of each BULK, less sales tax, so long as SELLER is not in
breach of this agreement: 80%
Account Credit Limit $500,000.00
C. SELLER makes the following representations, warranties and covenants with
respect to each such transaction which may be entered into between AFC and
SELLER hereafter:
1. SELLER shall be the sole and absolute owner of said account(s), and
shall have the full legal power to make said sales, assignments and
transfers.
2. Said account(s) shall be presently due and owing to SELLER with terms
not to exceed net 30 days, the amount(s) thereof shall not be in dispute,
and the payment of said account(s) shall not be in dispute or contingent
upon the fulfillment of this, or any other contract(s), past or future.
3. There shall not be any set-offs or counterclaims against said
account(s), and said account(s) shall not have been previously assigned or
encumbered by SELLER in any manner whatsoever.
4. AFC shall have the right to reduce contingencies, (the total of each
Bulk, less ADVANCE and net discount) and to apply contingencies, as defined
hereafter, from any transaction(s) to any other transaction(s) between the
parties by the amount of any dispute(s), discount(s), return(s),
defense(s), or offset(s) taken by any account debtor(s). If contingencies
are inadequate AFC shall have the right to deduct said amount(s) from any
other billing rights purchased by AFC from SELLER to demand payment of any
other accounts receivable of SELLER, whether or not purchased by AFC,
and/or demand reimbursement from SELLER.
5. Said account(s) shall be the property of and shall be collected by AFC,
but if for any reason any amount(s) thereof should be paid to SELLER by any
of said account debtor's, SELLER shall immediately deliver all such checks
or other instruments in kind to AFC.
6. AFC shall have the power of endorsement for any purpose on any and all
checks, drafts, money orders, or any other instruments in AFC's possession
and payable to SELLER, SELLER hereby appoints AFC its agent for said
purpose.
D. A gross discount of Twenty Percent (20%), less any applicable fees, as
described below, shall be retained by AFC from the collection of each total
transaction amount, SELLER, however shall be entitled to a rebate, regarding
each transaction, which shall be deducted from said gross discount, if each
<PAGE> 2
transaction amount is paid within 30 days by said account debtor(s), as follows:
FEES:
[ * ]% on funds employed.
[ * ]% administrative fee, per 30 day period, or a part thereof, per invoice
amount, up to the maximum gross discount.
Documentation and due diligence fee of $[*], payable upon acceptance of the
proposal.
TERM:
12 months with a minimum monthly fee of [*]% of the account credit limit for the
first 3 months, and [*]% for the balance of the term.
All checks received by AFC will be credited on the actual date of receipt. The
collection period, regarding each specific BULK, shall be calculated by counting
the days from the date of each ADVANCE through and including three (3) days
after the date upon which the total monies collected from said account
debtor(s), is equal to or greater than the sum of the ADVANCE and the net
discount (gross discount less rebate). AFC shall remit to SELLER its contingency
reserve (all sums collected in excess of a sum equal to the net discount and
advance) regarding each BULK, providing SELLER is not in default or breach of
this agreement.
E. should any of the above warranties expressed by SELLER be inaccurate, and it
becomes necessary for AFC to utilize an attorney to enforce its rights against
SELLER, SELLER agrees that such attorneys' fees shall be borne by SELLER.
F. AFC shall have the right in its sole discretion after 90 days from the
invoice date or if any of the representations, warranties or covenants are
inaccurate and reasonable notice to SELLER to demand payment from SELLER of any
unpaid invoices sod, assigned and transferred to AFC by SELLER pursuant to the
terms and conditions hereof or to proceed against SELLER or against any account
debtor(s) for the collection or offset of any unpaid invoice or amount due.
Interest on the outstanding balance shall otherwise accrue from said time, at
the rate of one and a half (1 & 1/2) of the monthly discount rate. As security
for the payment of AFC's fees and other charges and for the payment of advances
made by AFC to or on behalf of SELLER, SELLER hereby grants a security-interest
in and to the following described property, whether now or hereafter owned or
existing, leased, consigned by or to, acquired by Debtor and regardless of where
located: (1) All accounts, contract rights, chattel paper, general intangibles,
instruments, documents, letter of credit, bankers acceptances, drafts, claims,
causes of action, rights in and under insurance policies, rights to tax refunds
and inventory and all proceeds of the foregoing. Including Debtor's rights to
any returned or rejected good: (2) All Debtor's rights to monies, refunds, and
other amounts, due from whatever source, including Debtor's right of offset and
recoupment: (3) All goods, including but not limited to equipment, farm
products, machinery, furniture, furnishings, fixtures, tools, supplies, and
motor vehicles, and (4) All proceeds of the foregoing, whether due to voluntary
or involuntary disposition, including insurance proceeds and reserving the right
to file and prosecute lawsuits, pertaining thereto, in SELLER's or AFC's name or
otherwise. (5) All books and records relating to the same. (6) Seller
irrevocably appoints Buyer and any of Buyer's officers as Seller's attorney to
execute such financing statements, continuations and amendments and to take such
other actions as Buyer deems appropriate to perfect and continue the perfection
of the security interest granted hereunder.
G. AFC warrants that it will use its best efforts to collect the amounts due
under this Agreement, and SELLER agrees that AFC may, in its sole discretion,
settle, compromise, or otherwise accept payment of less than the full amount, if
in its judgment such action is necessary to effect collection. SELLER agrees
that the amount of such reduction shall be applied as a reduction of the
contingency reserve.
H. If it should become necessary for AFC to enforce its rights against the
account debtor(s) SELLER agrees that AFC may apply a maximum sum equal to the
total unpaid contingency reserve of SELLER, to compensate AFC for its attorney's
fees therefore. AFC may correct patent errors herein or in any BULK Assignment
Schedule executed by SELLER and fill in blanks. Any provision hereof contrary
to, prohibited by or invalid under applicable laws or regulations shall be
inapplicable and deemed omitted herefrom, but shall not invalidate the remaining
provisions hereof. The laws of the State of California shall govern the
validity, interpretation, enforcement and effect of this agreement, and SELLER
hereby consents to the exclusive jurisdiction of all courts in the County of San
Mateo, in the State of California. SELLER acknowledges receipt of a true copy
and waives acceptance hereof. If the SELLER is a corporation, this agreement is
executed pursuant to the authority of its Board of Directors. AFC and SELLER as
used in this agreement include the heirs, executors, or administrators,
successors or assigns of those parties. The obligations of SELLER and guarantors
<PAGE> 3
herein shall be joint and several. AFC is hereby authorized to obtain periodic
Expertan credit reports concerning all signatories hereof. AFC may inspect and
audit SELLER's guarantor's books and records during normal business hours, the
actual cost of which shall be reimbursed by SELLER to AFC.
I. SELLER agrees to reimburse AFC for any of its out-of-pocket incidental costs
and expenses, including but not limited to, wire transfers of funds, delivery
expenses and postage.
J. This agreement contains the entire agreement between the parties with respect
to the contemplated transactions, and it may not be modified or any of its terms
waived, except by an instrument in writing signed by the party or parties to be
charged, and no collateral representation, whether oral or written, shall
survive execution of this agreement.
* Confidential Portion Deleted
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,096
<SECURITIES> 11,000
<RECEIVABLES> 48,278
<ALLOWANCES> 143,676
<INVENTORY> 3,718
<CURRENT-ASSETS> 7,369
<PP&E> 577,496
<DEPRECIATION> 288,272
<TOTAL-ASSETS> 382,307
<CURRENT-LIABILITIES> 1,188,522
<BONDS> 0
0
0
<COMMON> 8,995,586
<OTHER-SE> 42,000
<TOTAL-LIABILITY-AND-EQUITY> 382,307
<SALES> 4,021,859
<TOTAL-REVENUES> 4,021,859
<CGS> 2,871,043
<TOTAL-COSTS> 6,431,790
<OTHER-EXPENSES> 1,360,230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (47,607)
<INCOME-PRETAX> (3,770,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,409,931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,770,161)
<EPS-BASIC> (0.95)
<EPS-DILUTED> 0
</TABLE>
