U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
INTERNATIONAL CIGAR HOLDINGS, INC.
----------------------------------
(Name of Small Business Issuer as specified in its charter)
DELAWARE 65-0833041
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
98 Mill Plain Road; Danbury, CT 06811
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code 800-933-5949
------------
Securities to be registered under Section 12(b) of the Act: None
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK
(Title of class)
<PAGE>
DESCRIPTION OF BUSINESS
- -----------------------
THE COMPANY
Tungsten International, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on February 3, 1997. On April 13, 1998, the Company
purchased 100% of the issued and outstanding shares of Ambra Cigar, Inc.
(formerly known as International Cigar Holdings, Inc.), a Delaware corporation,
from its shareholders in exchange for 6,049,524 shares of the Company's common
stock. The name of the Company was then changed to International Cigar Holdings,
Inc.
The Company has sustained substantial losses from continuing operations since
its inception. As of March 31, 1999, the Company had a net deficiency in working
capital of approximately $588,300. The description of the Company and its
operations contained in this Form 10-SB, including the consolidated financial
statements of the Company, have been presented assuming that the Company will
continue as a going concern. The Company's losses and deficiency in working
capital raise substantial doubt about its ability to continue as a going
concern. Recoverability of a major portion of the reported asset amounts shown
in the Company's financial statements is dependent upon the success of future
operations of the Company and the continued funding of cash needs by its
shareholders. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Ambra Cigar, Inc. owns 97.8% of the outstanding shares of U.S. Cigar
Distributors, Inc., a Florida corporation ("U.S. Cigar"). Both U.S. Cigar and
Ambra Cigar, Inc. were established in 1996 by Juan A. Vega, Sr. and John J.
Kelly. As a result of these transactions, Ambra Cigar, Inc. is now a wholly
owned subsidiary of the Company and Ambra Cigar, Inc. owns 97.8% of U.S. Cigar.
Mr. Kelly is the President, Treasurer and Assistant Secretary of the Company.
The Company's principal offices are located at 98 Mill Plain Road, Suite 301,
Danbury, CT 06811 and its telephone number is (800) 933-5949. Until March 31,
1999, the Company was located in Miami, Florida. All references to the
operations of the Company refer to the operations of the Company and its direct
and indirect subsidiaries.
The Company has voluntarily elected to file this Form 10-SB. The Company thereby
intends to facilitate the trading of its common stock pursuant to Section 15(c)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 15c2-11
promulgated thereunder. If the Company's obligation to file reports pursuant to
the Exchange Act is suspended, the Company has not yet determined whether or not
it will voluntarily file those reports.
The Company has been in the cigar business since October 1996 and has a limited
operating history. The Company has completed only one and one-half years of
operations. The Company's operations presently consist of distributing cigars to
2
<PAGE>
a major distribution company, Swisher International, Inc., and selling tobacco
leaf to cigar manufacturers. In attempting to generate material revenues in
these activities, the Company will attempt to obtain sales orders from certain
retailers, act as a commission agent for Swisher, sell excess Don Pepe cigar
inventory, institute a marketing plan that includes telemarketing, hire
additional sales persons, develop a web page, reach agreements with upscale
catalogs to carry its brands, and seek second and third level retail
distributors to diversify its channels of distribution. The Company expects
sales to be generated by the end of 1999 and to have quarterly sales activity
going forward.
The Company has developed an association with a cigar manufacturer that has a
long-standing tradition in the premium cigar and leaf tobacco business. The
Suerdieck Group consists of two companies, Agro Comercial Fumageira, S.A. and
Suerdieck Charutos, Ltda. (collectively referred to as "Suerdieck"). Suerdieck
manufactures Don Pepe long filler, hand made premium cigars, in the state of
Bahia, Brazil. The Company has an exclusive distribution agreement with
Suerdieck for its cigars and other products, including cigar wrappers, in North
America. The Suerdieck family has been one of the leading producers of premium
tobacco leaf for premium cigars and hand and machine made cigars for over 100
years in the prime tobacco-growing region of Bahia, Brazil. Suerdieck's hand
made and machine made cigars and cigarillos have been sold in the United States
and Canada for over 20 years and in Europe since the late 1800's. In Brazil,
Suerdieck's share of the cigar market is over 60%. Suerdieck produces over 90%
of the Sumatra seed wrapper exported from Brazil to the United States and
Europe. Don Pepe has been advertised in numerous magazines, including Cigar
Aficionado, Tobacconist, Smoke, and Smoke Shop. The Don Pepe brand has been
featured in various articles as the leader in premium cigar products from
Brazil.
The Company will continue to work with Suerdieck in Brazil and other significant
producers and distributors of fine cigars and cigarillos to increase production
of premium cigars to sell in the markets in which the Company operates. In North
America, The Company now distributes all of the Suerdieck products, including
wrapper, filler, premium cigars and cigarillos pursuant to a distribution
agreement dated December 18, 1997. The distribution agreement is for a term of
10 years, with an automatic 5-year extension at the Company's option and a
renegotiable term of ten years. Suerdieck is the largest producer of premium
cigars in Brazil with over 60% of the domestic market. Their wrapper is grown
from Sumatra seed and produces a very high value light wrapper. This wrapper is
believed to make cigars like Suerdieck's premier brand, Don Pepe, a superior
hand made cigar.
The Company also has an exclusive distribution agreement with Swisher
International, Inc. ("Swisher") for the distribution of Don Pepe and a
non-exclusive distribution agreement for the distribution of flavored brands
under the Palomitas name. The Swisher distribution and sales agreement started
in February 1997 and runs until February 2001 with renewal clauses. The first
contract allowed Swisher to purchase up to $2,500,000 of products per year.
Sales under this agreement were $444,511 and $496,445 in the fiscal years ended
June 30, 1997 and 1998, respectively. There were no sales under this agreement
in the nine month period ended March 31, 1999.
3
<PAGE>
The Company is also considering distributing products of the Havana Sunrise
Group ("Havana Sunrise"), which has developed a niche market for its high-end
premium hand made cigars. Although the Company and Havana Sunrise have had
several discussions, no preliminary or other agreements or understandings have
been reached. Havana Sunrise is known for producing a product that has received
excellent reviews and normally retails for prices ranging from $8.00 to $16.00,
which is the middle to high end of the retail prices for quality premium cigars.
Havana Sunrise has established a facility in the Dominican Republic that will be
the manufacturing site for a line of premium products that may, if an agreement
with Havana Sunrise is concluded, be sold by the Company in Brazil, Argentina,
Chile and Canada. These products will be positioned in the middle to low end of
the retail prices for quality premium cigars. In addition, the Company may
expand sourcing from Central America and the Dominican Republic with the
acquisition of production capacity in those countries.
There is no assurance that these measures will increase the supply of cigars or
that they will be sufficient to enable the Company to meet any future demand for
its cigars. Any material inability of the Company to expand its current means of
supply in a timely manner could have a material adverse effect on the Company's
business, including the loss of sales.
The Company plans to add additional sales personnel to sell and distribute
cigars from Brazil, Central America, and the Dominican Republic. If the Company
is able to raise sufficient funds in the future, it may also pursue the
acquisition of distributors in certain key markets in North America and in
Brazil. The Company's main market focus will be in the $3.00 to $8.00 range for
premium hand made cigars. No preliminary or other agreements or understandings
have been reached with respect to such sales personnel or distributors.
The Company's main market focus will be both the premium hand made cigars and
machine made cigars and cigarillos. In the premium cigar market we will focus on
units that retail for between $3.00 and $8.00. In the machine made business we
will focus on flavored and unflavored cigars and cigarillos that will retail
between $.25 and $1.25 per unit. If the Company is successful in raising the
necessary funding, the Company's business plan contemplates an investment in
machinery and raw materials to expand the capabilities for producing the
machine-made cigars and cigarillos.
The Company will need to raise significant additional funds to accomplish its
goals as discussed herein. There are no preliminary or other agreements or
understandings between the Company and its officers, directors or affiliates or
lenders with respect to any such financing. The Company may seek loan financing
to either replace current debt or to purchase cigar-making equipment. If it
chooses to raise money through loan financing, the Company would be subject to
all of the risks associated with such activities, including being bound by
burdensome covenants, fluctuating interest rates, and liens on assets. If the
ratio of indebtedness to capital grew too large, the Company's operations might
be materially adversely affected by its debt burden.
There are currently no preliminary or other plans, proposals, arrangements or
understandings with respect to the issuance of additional securities by the
Company.
4
<PAGE>
FORWARD-LOOKING STATEMENTS. When used in this Form 10SB filing, the words
"believe", "should", "would" and similar expressions which are not historical
are intended to identify forward-looking statements that involve risks and
uncertainties. Such statements include, without limitation, expectations with
respect to the results for the next fiscal year, the Company's beliefs about
trends in the cigar industry and its views about the long-term future of the
industry and the Company, its plan to address the Year 2000 issue, the costs
associated therewith and the results of Year 2000 non-compliance by the Company
or one or more of its customers, suppliers or other strategic business partners.
In addition to factors that may be described in the Company's other Securities
and Exchange Commission filings, the following factors among others, could cause
the Company's financial performance to differ materially from that expressed in
any forward-looking statements made by, or on behalf of, the Company: (i)
changes in consumer preference resulting in a decline in the demand for and
consumption of cigars; (ii) sustained inventory imbalances at the
retailer/wholesaler level; (iii) an inability on the part of the Company to
increase its production of premium cigars as a result of, among other things, a
shortage of raw materials; (iv) an increase in the price of raw materials; (v)
additional governmental regulation of tobacco products or further tobacco
industry litigation; (vi) enactment of new or significant increases in existing
excise taxes on cigars and tobacco products; and (vii) difficulties, delays or
unanticipated costs in achieving Year 2000 compliance or unanticipated
consequences from non-compliance by the Company or one or more of its customers,
suppliers or other strategic business partners. The Company does not undertake
any responsibility to update the forward-looking statements contained in this
From 10SB filing.
RISK FACTORS
------------
The primary risks to which the Company is subject include those listed below.
LIMITED OPERATING HISTORY. The Company has been in the cigar business since
October 1996 and has a limited operating history. The Company has completed only
one and one half years of operations. The Company's operations consist of
distributing cigars and tobacco leaf. There is no assurance that the Company
will be able to sell enough of its products to ensure a profit. The Company must
be considered subject to all the risks inherent in any newly formed business,
including the absence of a long, profitable operating history, lack of market
recognition and limited banking and financial relationships. In addition, the
Company's business plan and operating strategy involve expansion in the cigar
business, which is highly competitive and typified by well established and
better financed companies with long established and a highly recognized market
presence. There can be no assurance that the Company will be successful in
completing its product development program, implement its corporate
infrastructure to support operations at the levels called for in its business
plan, conclude a successful sales and marketing plan to achieve significant
penetration of the cigar market, or generate sufficient revenues to meet its
expenses or to achieve and maintain profitability.
COMPETITION. The Company must compete with other companies whose business plans
and objectives are similar to its own. The Company is aware of many other
companies engaged in similar businesses, including Consolidated Cigar
Corporation, General Cigar Company, U.S. Tobacco and Tabacalera de Espana, which
have substantially greater resources and longer operating histories than it has.
5
<PAGE>
DEPENDENCE ON KEY EXISTING AND FUTURE PERSONNEL. The Company's success will
depend to a large degree upon the efforts and abilities of its officers and key
management employees. The loss of the services of one or more of key employees
could have a material adverse effect on the Company's business prospects and
potential earning capacity. As its business plan is implemented, the Company
will need to recruit and retain additional management and key employees in
virtually all phases of its operations. There can be no assurances that the
Company will be able to recruit or retain such new employees on terms suitable
to it. The Company has no employment agreements with its current key personnel.
ADDITIONAL FINANCING REQUIRED - LACK OF TRADITIONAL FINANCING SOURCES. The
Company is pursuing an aggressive growth strategy, which will require
substantially more funding than is currently available to it. There can be no
assurance that all, or any part, of such additional financing will in fact be
realized. The Company may seek such financing from sources such as bank
financing or through the sale of additional debt or equity securities (or a
combination thereof) in future public or private offerings. However, there can
be no assurance that any such financing will in fact be available to the Company
when needed or upon terms acceptable to the Company. The Company's current
shareholders have indicated a willingness to continue to fund the Company as
required. There are, however, no binding agreements or understandings with
respect to any such loans or additional funding.
CURRENCY RISKS. There are possible currency risks associated with operations in
countries such as Brazil that have in the recent past experienced high rates of
inflation and devaluation. The Company will attempt to take prudent steps and
policies to mitigate and reduce those risks based on its experience operating in
those environments. However, no assurance can be given that those steps will be
successful.
EFFECTS OF FLUCTUATIONS IN CIGAR COSTS AND AVAILABILITY. The Company purchases
cigars, which are manufactured by suppliers outside the United States. The price
and availability of these cigars are subject to numerous factors out of the
Company's control, including weather conditions, foreign government policies,
potential trade restrictions and the overall demand for cigars.
HISTORICAL DEPENDENCE ON TWO SUPPLIERS. In 1997 and 1998, the Company purchased
approximately 100% of its cigars from one vendor, Suerdieck, who is a minority
shareholder, and 100% of its tobacco leaf from one vendor, Agro Comercial
Fumageira, S.A., who is a related party. Management of the Company believes that
in the event of a change in the relationships with these vendors, other vendors
with comparable merchandise are available at competitive prices.
HISTORICAL DEPENDENCE ON ONE CUSTOMER. Swisher, one of the largest cigar
distributors in the United States, has accounted for over 80% of the Company's
sales. The Company has expanded its customer base, but expects that sales to
Swisher will continue to account for a substantial percentage of sales. Problems
with Swisher could have a substantial adverse impact on the Company.
6
<PAGE>
AGREEMENTS WITH SUERDIECK. In December, 1996, U.S. Cigar entered into a series
of agreements with Suerdieck and members of the Suerdieck family, including a
Shareholder's Agreement, Operational Agreement, Distribution Agreement for the
distribution of cigars and tobacco products in North America. Additionally, the
agreements give the Company the option to acquire 35% of the Suerdieck Group.
The Company is currently in the process of renegotiating these agreements.
Failure to renegotiate these agreements could seriously impact the distribution
arrangement with Suerdieck.
DECLINING MARKET FOR PREMIUM CIGARS. According to industry sources, the cigar
industry was in substantial decline from approximately 1973 to 1991. While
premium cigar sales increased between 1991 and 1997, there has been a softening
in the market since then due in part to the fact that many new companies entered
the business and created an oversupply of premium cigars. The Company was
fortunate to not have built up a substantial inventory, but Swisher, the
Company's main distributor, has a large inventory. However, discussions with
Swisher show that the market may start normalizing as inventories are reduced,
prices firm, and demand resumes a more normal increase of approximately 5% per
year. The decrease in cigar sales as well as the general decline in smoking
followed the 1964 report of the United States Surgeon General. Numerous other
subsequent studies stressed the link between smoking, and medical problems such
as cancer, heart, and respiratory and other diseases. "No smoking" laws,
ordinances and prohibitions on cigar smoking in certain cases may have adversely
affected the sale of cigar products. The Company believes that these factors may
continue to have an adverse effect upon the cigar industry in general and the
Company's business in particular. The Company believes that a considerable
percentage of the recent increase in cigar sales, especially with respect to
premium cigars, is attributable to new cigar smokers attracted by the improving
image of cigar smoking and the increased visibility of cigar smoking by
celebrities. The Company can make no assurances that recent increases in cigar
sales are indicative of long-term trends or that these new customers will
continue to smoke cigars in the future.
RISKS RELATING TO SUPPLY OF CIGARS. The Company primarily sells moderately
priced cigars that are hand-rolled or machine-made and use tobacco aged six
months to two years. There is an abundant supply of tobacco available in a
number of countries for the types of cigars the Company primarily sells. The
Company also, however, sells a limited number of higher priced premium cigars
that require longer-aged tobacco. The Company's ability to acquire cigars in the
future may be constrained by a shortage of premium cigars made with longer-aged
tobacco. At times, producers have suspended shipping certain brands of cigars
when excessive demand results in a shortage of properly aged and blended
tobacco. Accordingly, the Company cannot assure that increases in demand would
not adversely affect its ability to acquire higher priced premium cigars.
DEMAND FOR CIGARS AND INVENTORY. While the cigar industry had experienced
increasing demand for cigars during the last several years, in 1997 there was a
noticeable drop in cigar sales. Several U.S. based cigar manufacturers have
closed both their U.S. and offshore facilities. The Company believes that the
excess cigar capacity has diminished but we cannot give any assurance that the
7
<PAGE>
trend will not continue. If the industry does not continue to grow or if the
Company experiences a reduction in demand, the Company may temporarily
accumulate inventory which could have an adverse effect on its business or
results of operations.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH FOREIGN OPERATIONS AND
INTERNATIONAL TRADE. The Company purchases virtually all of its premium cigars
from manufacturers located in countries outside of the U.S., including Brazil.
Social, political and economic conditions inherent in foreign operations and
international trade may change, including changes in the laws and policies that
govern foreign investment and international trade. To a lesser extent, social,
political and economic conditions may cause changes in U.S. laws and regulations
relating to foreign investment and trade. Social, political or economic changes
could, among other things, interrupt cigar supply or cause significant increases
in cigar prices. In particular, political or labor unrest in Brazil could
interrupt the production of premium cigars, which would inhibit us from buying
inventory. Accordingly, changes in social, political or economic conditions
could have a material adverse effect on the Company's business.
LIMITED INSURANCE COVERAGE. The Company does not carry general liability,
product liability or health hazard insurance. There is no assurance that the
Company will be able to obtain product liability insurance, or if available,
that it will be available on commercially reasonable terms. The Company could be
subject to liability, which is not covered by insurance. The Company does have
employee medical and dental insurance as well as required workers' compensation
insurance.
RISKS ASSOCIATED WITH THE TOBACCO INDUSTRY.
REGULATION. The tobacco industry is subject to regulation at federal, state and
local levels. Federal law has recently required states, in order to receive full
funding for federal substance abuse block grants, to establish a minimum age of
18 years for the sale of tobacco products, together with an appropriate
enforcement program. The recent trend is toward increasing regulation of the
tobacco industry, and the increase in popularity of cigars could lead to an
increase in regulation of cigars. A variety of bills relating to tobacco issues
have been introduced in the United States Congress. Included are bills that
would, if passed, (i) prohibit the advertising and promotion of all tobacco
products or restrict or eliminate the deductibility of such advertising
expenses; (ii) increase labeling requirements on tobacco products to include,
among other things, addiction warnings and lists of additives and toxins; (iii)
shift regulatory control of tobacco products and advertisements from the FTC to
the FDA; (iv) increase tobacco excise taxes; and (v) require tobacco companies
to pay for health care costs incurred by the federal government in connection
with tobacco related diseases. Hearings have been held on certain of these
proposals; however, to date, Congress has not passed any of these.
In August 1996, the FDA published a final rule on tobacco in the Federal
Register in which it announced that nicotine is a drug and that it therefore has
jurisdiction over nicotine-delivery products, including cigarettes and smokeless
tobacco products, as medical devices. Specifically, the rule prohibits a variety
of activities relating to the sale of cigarettes and smokeless tobacco. The
provision prohibiting retailers from selling cigarettes, cigarette tobacco or
smokeless tobacco to persons under the age of 18, and requiring retailers to
8
<PAGE>
check the photographic identification of every person under the age of 27 became
effective on February 28, 1997. The FDA has also announced that, at some future
point, it intends to apply additional requirements, potentially including
registration, listing, premarket notification and approval, record keeping and
reporting requirements, and good manufacturing practices. A number of tobacco
companies and other entities have filed legal proceedings challenging the FDA's
assertion of jurisdiction to regulate tobacco products. One tobacco company has
proposed, as an alternative to FDA regulation of tobacco products, a more
limited set of restrictions on cigarette sales and advertising aimed at curbing
youth smoking. The Company is unable to predict the effect on its business and
profitability of the FDA rules but, if upheld in court, such rules could have a
material adverse effect on the operations of the Company. Although these
regulations are not currently applicable to cigars, there can be no assurance
that these regulations will not be extended to include cigars in the future.
In addition, the majority of states restricts or prohibits smoking in certain
public places and restricts the sale of tobacco products to minors. Local
legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings 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 the Company. Numerous proposals
also have been considered at the state and local level restricting smoking in
certain public areas, regulating point of sale placement and promotion and
requiring warning labels. As an example, the state of Texas has mandated that
all cigars sold in the state have the chemical content of the cigars registered
with the state.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although there is no federal law currently
requiring that cigars or pipe tobacco carry such warnings, California has
enacted legislation requiring that "clear and reasonable" warnings be given to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. In addition,
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. Although similar legislation has been introduced
in other states, no action has been taken. There can be no assurance that such
legislation introduced in other states will not be passed in the future or that
other states will not enact similar legislation. Consideration at both the
federal and state level also has been given to consequences of tobacco smoke on
others who are not presently smoking (so called "second hand" smoke). There can
be no assurance that regulations relating to second hand smoke will not be
adopted or that such regulations or related litigation would not have a material
adverse effect on the Company's results of operations or financial condition.
The U.S. Environmental Protection Agency (the "EPA") published a report in
January 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. Issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal Science reported that a chemical found in
cigarette smoke has been found to cause genetic damage in lung cells that is
9
<PAGE>
identical to damage observed in many malignant tumors of the lung and, thereby,
directly links lung cancer to smoking. The National Cancer Institute also has
issued reports describing research into cigars and health. The study and these
reports could affect pending and future tobacco regulation and litigation. See
"Litigation."
Increased cigar consumption and the publicity such increase has received may
increase the risk of additional regulation. There can be no assurance as to the
ultimate content, timing or effect of any additional regulation of tobacco
products by any federal, state, local or regulatory body, and there can be no
assurance that any such legislation or regulation would not have a material
adverse effect on the Company's business.
LITIGATION. Historically, the cigar industry has experienced less health-related
litigation than the cigarette and smokeless tobacco industries have experienced.
Litigation against the cigarette industry has historically been brought by
individual cigarette smokers. In 1992, the United States Supreme Court in
CIPPOLLONE V. LIGGETT GROUP, INC. ruled that federal legislation relating to
cigarette labeling requirements preempts claims based on failure to warn
consumers about the health hazards of cigarette smoking, but does not preempt
claims based on express warranty, misrepresentation, fraud, or conspiracy. To
date, individual cigarette smokers' claims against the cigarette industry have
been generally unsuccessful. A jury in Florida, however, recently determined
that a cigarette manufacturer was negligent in the production and sale of its
cigarettes and sold a product that was unreasonably dangerous and defective,
awarding the plaintiffs a total of $750,000 in damages.
Current tobacco litigation generally falls within one of three categories: class
actions, individual actions (which have been filed mainly in the State of
Florida) or actions brought by individual states generally to recover Medicaid
costs allegedly attributable to tobacco-related illnesses. The pending actions
allege a broad range of injuries resulting from the use of tobacco products or
exposure to tobacco smoke and seek various remedies, including compensatory and,
in some cases, punitive damages together with certain types of equitable relief
such as the establishment of medical monitoring funds and restitution. The major
tobacco companies are vigorously defending these actions.
In May 1996, the Fifth Circuit Court of Appeals in CASTANO V. AMERICAN TOBACCO,
ET AL. reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers. Notwithstanding
the dismissal, new class actions asserting claims similar to those in Castano
have recently been filed in many states.
There can be no assurance that there will not be an increase in health-related
litigation involving tobacco and health issues against the cigarette industry or
similar litigation in the future against the cigar industry. The costs to the
Company of defending prolonged litigation and any settlement or successful
prosecution of any material health-related litigation against sellers of cigars
could have a material adverse effect on the Company's business.
10
<PAGE>
EXCISE TAXES. Cigars long have been subject to federal, state and local excise
taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 12.75% of the manufacturer's selling price, net of the
federal excise tax and certain other exclusions, capped at $30 per thousand
cigars.
In the past, there have been various proposals by the federal government to fund
legislative initiatives through increases in federal excise taxes on tobacco
products. Several state and federal jurisdictions have proposed significant
increases in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund health care programs. We believe that the volume of cigars sold
could be dramatically reduced if additional excise taxes are enacted as part of
the Administration's health care reform program. Future enactment of significant
increases in excise taxes, such as those initially proposed by the Federal and
state governments or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company. The
Company is unable to predict the likelihood of the passage or the enactment of
future increases in tobacco excise taxes.
Tobacco products are also subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. State cigar excise taxes generally range from 2% to 75% of the wholesale
purchase price and are not subject to ceilings similar to the federal cigar
excise tax.
CONTINUED CONTROL BY EXISTING STOCKHOLDERS. The Company was established by its
principal stockholders who own 45.9% of the issued and outstanding shares of
Common Stock of the Company. The three principal stockholders of the Company own
an aggregate of 55% of the Company's common stock and will be in a position to
control the affairs of the Company and any matters requiring a stockholder vote,
including the election of directors, the amendment of its charter documents, the
merger or dissolution of the Company and the sale of all or substantially all of
its assets.
PREFERRED STOCK OF SUBSIDIARY. The Company beneficially owns 97.8% of U.S.
Cigar, its operating subsidiary. Holders of preferred stock of U.S. Cigar are
entitled to a preference upon liquidation which could substantially eliminate
the Company's investment in U.S. Cigar.
UNCERTAIN ABILITY TO MANAGE GROWTH. As part of the business strategy, the
Company intends to pursue rapid growth. Its ability to achieve planned growth
depends upon a number of factors, including the Company's ability to hire and
train management and other employees, the adequacy of its financial resources,
its ability to identify new markets in which it can successfully compete and the
Company's ability to adapt its purchasing and other systems to accommodate its
expanded operations. In addition, planned expansion may not be achieved or we
may not be able to manage successfully the expanded operations. Failure to
manage growth effectively could adversely affect the Company's financial
condition, results of operations and prospects.
POSSIBLE FAILURE TO OBTAIN LISTING OF COMMON STOCK AND MARKET ILLIQUIDITY. The
Company intends to list its Common Stock on the National Association of
11
<PAGE>
Securities Dealers OTC Bulletin Board, a stock exchange or internet listing
service. In August and December, 1998, the Company borrowed an aggregate of
$300,000 from John McGinnis, a non-affiliate. The note was guaranteed by the
major shareholders of the Company. Because the Company was not so listed on
December 2, 1998, the loan became due on demand and was increased to $330,000.
At that time, Mr. McGinnis conveyed the note to Mercator Management Group, Inc.
The lender has agreed to an extension of the term of the loan.
ABSENCE OF DIVIDENDS ON COMMON STOCK. The Company has not paid any dividends on
any of its shares of Common Stock since its inception and does not currently
anticipate paying dividends on its Common Stock in the foreseeable future. See
"Dividend Policy."
AUTHORIZATION OF PREFERRED STOCK. The Company's Certificate of Incorporation
authorizes the issuance of Preferred Stock with such designations, rights and
preferences as may be determined from time to time by our Board of Directors.
Accordingly, the Board of Directors is empowered, without stockholder approval,
to issue Preferred Stock with dividend, liquidation, conversion, voting and
other rights that could adversely affect the voting power or other rights of the
holders of the Common Stock. See "Description Of Securities."
ISSUANCE OF ADDITIONAL SHARES. The Board of Directors has the power to issue
additional shares without shareholder approval. Any additional shares issued by
the Company below their book value may have the effect of further diluting the
interest of then current shareholders.
YEAR 2000 RISKS. The Company believes that it is Year 2000 compliance at the
present time. Given the relatively small size of the Company's software systems,
the Company uses standard software systems that are Year 2000 compliant. The
Company does not expect any disruptions in its operations as a result of any
failure by the Company to be in compliance.
The Company estimates that the cost of replacing non compliant hardware will not
be material and will be carried out during Fiscal 1999 in the ordinary course of
business. The Company's operating systems are commercially available. The cost
to be upgraded to be fully compliant is estimated to be less than $10,000.
PRODUCTS AND MARKETS
The Company now markets the leading Brazilian brands Don Pepe, Iracema, and
Palomitas. Don Pepe, a hand made long filler cigar, is produced in the six most
popular size with the Double Corona as the largest, followed by a Robusto,
Churchill, Petit Lonsdale, Half Corona, Slim Panatela and Small Cigar. This line
is wrapped in light Sumatra seed leaf. Don Pepe premium cigars retail in the
range of $2.00 to $6.00 for the larger sizes with the 10 pack of the small
cigars selling for $11.00 a pack. Iracema is a maduro wrapper hand made long
filler cigar that is offered in three basic mid sizes in the Lonsdales and
Panatela ring sizes. Iracema retails for approximately 35% less than the Don
Pepe line. Palomitas are little flavored cigarillos sold in packs of 20 units
and 50 units with suggested retail prices of $6.00 and $15.00 respectively.
12
<PAGE>
Current plans call for an expansion in the production of the Palomita products
to meet increasing demand for the product in the marketplace. The flavors
currently offered are clove, cherry and vanilla. Soon to be launched flavors are
cognac, rum, whisky and bourbon. Consumers of the Company's flavored cigarillos
praise the quality of the flavoring which is the result of using the best
flavoring essences from a well known German company as well as the proprietary
blend of premium filler tobacco with a binder of Sumatra homogenized paper
imported from Germany and wrapped in Mata Fina wrappers grown in Brazil from
Sumatra seed by Suerdieck.
The Company intends to launch the production expansion for machine made high
quality cigars and cigarillos through a newly-formed majority-owned subsidiary.
In addition, the Company is evaluating the feasibility of setting up a small
factory in the United States to make certain machine made cigars and cigarillos
to supplement the production from Brazil. Products will be standardized in order
insured consistent product quality and presentation.
The Company's distribution rights for the Don Pepe brands as well as all of the
other Suerdieck brands were acquired for 10 years with an automatic extension of
5 years that would allow the Company to re-orient its sourcing and sales should
the agreement lapse without renewal. However, the Company also has an option
agreement to acquire a significant equity position up to a voting majority
control of Suerdieck.
While the significant projections have attracted many new competitors, the cigar
industry has high barriers to entry for fully integrated producers due to high
costs, long lead times required to create brand identity and support.
MARKETING AND SALES STRATEGY
WHOLESALE DISTRIBUTION
The Company will sell its products through selected master distributors such as
Swisher and through tobacco stores and tobacco departments of large retail
chains. In some markets, the Company will sell directly to certain retailers in
order to obtain the widest possible sales coverage. Currently, the Company
shares the costs of advertising with Swisher and Suerdieck/Brazil for the Don
Pepe as the flagship line. The Company intends to launch a new campaign to
promote other products using the effect of the Swisher and Suerdieck quality
image.
ADVERTISING AND PROMOTIONS
The Company will support both wholesale and retail distribution of its cigars
through advertising in numerous publications, including Cigar Aficionado,
Tobacconist, Smokeshop, and Smoke magazines, along with general circulation
oriented to the type of consumer who, the Company believes, would smoke premium
cigars. To this end, the Company intends to use other marketing techniques that
have been identified as contributing to the increased interest in premium
cigars, including, but not limited to, the sponsorship of cigar smoking events.
The Company will also use direct mail and promotions at points of sale and
through the mails. The Company already participates in trade shows under
Swisher's lead and support.
13
<PAGE>
PRODUCTION AND MANUFACTURING
The Company's current lines of products are mainly hand-rolled in the Suerdieck
facilities in Bahia, Brazil. The flavored cigarillos are currently sourced from
the Suerdieck facilities in Cruz das Almas, Bahia, Brazil. All production and
manufacturing adheres to a very strict corporate standard of quality in keeping
with the Company's mission to deliver the highest quality products. The Company
has established strict standards to maintain product integrity in the blending
of the raw materials that identify its product.
The taste of the cigar is based on the quality and blend of the tobacco. The
Company's premium cigars use a blend of fine aged tobaccos. After tobacco is
grown, its is typically aged for a period of between 18 months to two years. The
lasting fermentation and aging process release ammonia, which occur naturally in
tobacco, and is believed to reduce the overall nicotine content in the tobacco.
The time period for aging has been reduced in recent months due to the high
demand for tobacco worldwide.
The particular tobacco blend for each of the Company's cigars is formulated to
highlight the attributes of the source whether from Brazil or Central America.
These blends usually involve two to four different tobacco types. Hand-made
premium cigars use exclusively long filler premium aged tobacco leaf. The actual
production process begins as each type of tobacco leaf is placed in different
boxes at the rollers desk, and the roller works from a precise formula to fit
the particular type of cigar he or she is making. The roller takes the leaves
and presses them together in their hand, then places the leaves on a binder leaf
(a flat elastic leaf of tobacco). The roller then rolls them together into a
"bunch", cuts them to the appropriate length and places them on the bottom half
of a wooden mold. After setting the upper half of the mold in place. the entire
box is put into a screw press. The press operator will usually break down the
press once, turn the "bunch" inside the mold and then re-box and press the
"bunch" again. The total pressing time is approximately one hour. The roller
removes the "bunch" and wraps it with the wrapper leaf (a supple, very elastic
leaf that has been cut in half). Keeping constant pressure on the "bunch" and
the wrapper, the cigar maker rolls the leaf around the "bunch" and applies a bit
of vegetable glue to bond the wrapper leaf together at the head to prevent
unraveling of the cigar.
Supervisors inspect every cigar by hand feeling the weight and looking for hard
spots that can result in uneven burning. In addition cigars are weighted in
bunches of 50 to assure consistency in weight. Significant variations can result
in rejections. The finished cigars are then aged for at least another thirty
days. The finished cigars are then packed in boxes designed to enhance
presentation and protect the product.
Suerdieck manufactures our flavored cigars from short-filler tobacco using a
proprietary flavoring process. The cigars are made from tobacco generated from
the manufacture of the premium cigar brands. This tobacco is then combined, and
flavored, and packaged for ultimate sale.
14
<PAGE>
RAW MATERIALS
The Company's cigars and cigarillos are made from a combination of internally
grown tobacco as well from selected tobaccos that are currently purchased from
sources in Brazil. While the market for leaf has become very tight, the Company
believes that its Brazilian Sumatra leaf makes it a strong competitor. The
Company will emphasize quality and value in its product line.
COMPETITION
The tobacco industry in general, including the cigar industry, is dominated a
small number of companies which are well known to the public. The Company
believes that as a manufacturer of premium cigars, it competes with a smaller
number of domestic and foreign companies that specialize in premium cigars, and
certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Corporation, Culbro Corporation, General Cigar Company and
U.S. Tobacco. There are also a few large foreign entities such as Tabacalera de
Espana that have aggressively entered the United States markets through
expansion of their presence and acquisitions. However, the market for premium
cigars constitutes a small portion of the cigar market. No assurance can be
given that the Company will continue to be able to compete effectively against
these competitors or any other or existing or future competitors in any of its
market segments.
The Company believes that smokers of premium cigars purchase cigars based on the
perceived quality of the tobacco and the taste profile of the cigar. The process
of producing premium cigars is not patented, but is based on the know-how and
experience of master craftsmen who can identify, purchase, and roll tobacco into
premium cigars. The Company expects that a reputation for producing fine premium
hand made cigars will be an asset in the effort to manufacture and sell machine
made cigars and cigarillos. It is also very critical that the Company produce a
well-constructed cigar with excellent shelf life so together with good
relationships with key distributors and tobacconists we project an image of
quality, service, and consistency.
EMPLOYEES
The Company currently has one employee. Mr. Kelly is the Company's President,
Treasurer, Assistant Secretary and Director. The Company will gradually add
administrative, sales, and marketing staff to support the expansion plans as
outlined. The Company will also engage personnel in Brazil to actively and
effectively manage the planned investments.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings or pending lawsuits.
FACILITIES
The Company's corporate offices are locatd at 98 Mill Plain Road, Suite 301,
Danbury, Connecticut. The Company sublets this space from John T. Kelly, a
15
<PAGE>
director, executive officer and principal shareholder of the Company. The
Company occupies the space on a month-to-month basis at a rental of $1,250 per
month. Until March 31, 1999, the Company's offices and warehouse, consisting of
approximately 2,500 square feet, were located at 7440 S.W. 50th Terrace, Suite
107, Miami, Florida 33155.
INTELLECTUAL PROPERTY
The Company believes our success and ability to compete are dependent to a
significant degree on our trademarks and licenses. The Company presently has a
license from Suerdieck for a term of 10 years, with an automatic 5-year
extension at its option and a renegotiable term of ten years at its option. for
the Don Pepe and all the other Suerdieck brands.
The Company has no present intention to be used as a vehicle for a reverse
acquisition. The Company has no present intention or potential to acquire or
merge with a business or company in which the Company's promoters, Management or
their affiliates or associates directly or indirectly have an ownership
interest. The existing corporate policy of the Company would not permit such
transactions as a result of an understanding among Management. Management is not
aware of any circumstances under which this policy may be changed.
The Company may need to raise additional capital either through private
placement of restricted stock and/or a public offering of its securities. There
is no present or other understanding or agreement with a company to sell any
securities.
REGULATORY MATTERS
Because the Company does not manufacture cigars in the United States, it is not
subject to any U.S. licensing requirement. Similarly, the Company is not subject
to any licensing or regulatory requirements in the state of Florida.
YEAR 2000 CONVERSION
The Year 2000 issue relates to the inability of certain computer software
programs to properly recognize and process date-sensitive information relative
to the Year 2000 and beyond. Without corrective measures, this issue could cause
computer applications to fail or to create erroneous results. Incomplete or
untimely resolution of the Year 2000 issue by the Company or by its key vendors,
customers, suppliers or by other third parties could have a materially adverse
impact on the Company's business in the future.
The Company has evaluated its Year 2000 compliance issues. The Company expects
that all remediation issues will be completed during 1999 by upgrading its
business information systems. There can be no assurance, however, that the
systems of other parties upon which the Company's business relies, including
vendors, customers, suppliers and other third parties, will be converted on a
timely basis. The Company is not able at this time to ascertain the extent of
any disruption caused by other parties.
16
<PAGE>
The Company believes that the most reasonably likely worst case scenario which
could occur with respect to Year 2000 is a delay in receiving payments on
accounts receivable from customers.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PLAN OF OPERATION
- ---------------------------------------------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. The Company has sustained substantial losses from
operations since inception, and has a net deficiency in working capital of
approximately $588,300 at March 31, 1999. Management continues to pursue certain
steps to address the going concern issue, including (a) obtaining sales orders
from certain identified retailers; (b) acting as a commission agent for Swisher
to sell the excess Don Pepe cigar inventory it has; (c) instituting a marketing
program that includes telemarketing; (d) reaching an agreement with a series of
upscale catalogs to carry its brands; (e) seeking second and third level
retailer distributors to reduce its major reliance on one channel distribution;
and (f) following up on contacts to sell product in Europe and other areas.
Management expects to have orders for product before the end of September 1999.
The Company has a verbal agreement that will allow it to sell the excess
inventory owned by a major cigar distributor at a commission. This will permit
the Company to generate sales without the need for immediate working capital to
obtain necessary inventory.
RESULTS OF OPERATIONS
Revenue declined from $2,250,000 in the fiscal year ended June 30,1997 to
$600,000 for the fiscal year ended June 30, 1998. Revenue from the sale of
tobacco leaf declined from $1,810,000 to $120,000 during the two periods, and
revenue from finished cigars increased from $440,000 to $480,000 during the same
periods. The decline in sales revenue between the two periods was due mainly to
the Company's lack of sales effort and additional operational difficulties. The
cost of sales for the 1998 fiscal year was $560,000, compared to $1,900,000 for
the year-earlier period. Operating expenses were constant between the periods,
at $315,000 for fiscal 1998 and $311,000 for fiscal 1997. The Company had net
losses of $29,830 and $273,364 for the years ended June 30, 1997 and 1998,
respectively, and accumulated deficits of $29,830 and $303,194 at June 30, 1997
and 1998, respectively. The Company's inventory dropped from $2,196 at June 30,
1997 to $128 at June 30, 1998. The Company is currently seeking outside sources
of financing to fund development, operations and working capital. Should the
Company be unable to obtain financing, our development and operations and
ability to continue as a going concern will be materially affected.
In the nine month period ended March 31, 1998 the Company had no material
revenues due to excess inventories of its product at the wholesale and retail
levels. Swisher, which distributes the Company's cigars to other distributors,
has a substantial inventory of the Company's cigars. Swisher will not take
additional product until the inventory levels are reduced. In addition,
management's efforts were directed to raising additional capital in order to
expand the business to include the manufacture of machine made cigars. Other
expenses during this period were mainly professional fees (legal and accounting)
of $74,124 incurred in anticipation of a public offering for the Company,
compared to $14,718 in the year-earlier period, and interest expense of $40,550,
compared to zero in the year-earlier period.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Even though the Company raised $350,000 in a private placement of convertible
debt and equity, the Company has had diminishing working capital resources due
to lack of sales as a result of an excess of premium cigar products in the
marketplace. The Company has entered into discussions and preliminary agreements
to expand its product lines and to expand its territory, therefore reducing its
dependence on one major source of products and one major customer.
On September 2, 1998, the Company borrowed $300,000 from John McGinnis, which
was personally guaranteed by the two principal shareholders of the Company. A
portion of this cash was used to reduce current payables and pay expenses. The
loan is convertible into 300,000 shares of Series A Convertible Preferred Stock
of the Company. In connection with the loan, the Company issued a warrant
entitling the holder to purchase up to 100,000 shares of common stock at $1.00
per share within two years of issuance. The Company defaulted on its obligations
under the note in December, 1998, and the principal amount of the loan was
increased to $330,000. In December, 1998, Mr. McGinnis assigned the obligation
to Mercator Management Group, Inc. At that time, the conversion price of the
preferred stock was reduced to $1.00. Messrs. Vega and Kelly each gave an option
to Mr. McGinnis or his assign to purchase 25,000 shares at $.10 per share. These
options expire in June, 2000. On February 22, 1999, the Company and the two
principal shareholders of the Company were granted an extension of the maturity
of the loan until April 15, 1999. As consideration for the extension, Messrs.
Kelly and Vega each transferred 1,000,000 shares of common stock of the Company
to Mercator. On March 15, 1999, Mr. Kelly purchased 50% of the note from
Mercator for $165,000 plus accrued interest and received a release from his
obligations as guarantor and a return of 1,000,000 shares of common stock of the
Company. Mr. Vega remains a guarantor of the note.
Currently, cash flow from operations is running at a deficit of approximately
$25,000 a month.
MANAGEMENT'S RESPONSE AND PLAN OF ACTION
The Swisher agreement gave the Company an immediate foothold into a distribution
network capable of servicing up to 250,000 outlets nationwide. However, the
Company is aware that dependence on one major source of sales leaves its sales
vulnerable to severe market changes. In addition, the Company further recognized
that with Suerdieck as its major supplier of products, the Company was left
exposed to supply disruptions in the event that Suerdieck would not be able to
honor its production commitments. With this in mind, the Company is aggressively
attempting to develop alternate sources of supply and widen its product offering
as well as enlarge the scope of its sales territory outside the United States.
The Company's main objective is to broaden product sources by developing
strategic alliances and acquiring sources through acquisitions. Additionally,
the Company intends to develop its own in house manufacturing product portfolio
such as quality premium machine made cigars and the fast growing segment of
cigarillos, both flavored and unflavored. The Company also established our
market presence with a Brazilian sourced product under the "Palomitas" name.
This product suffered from low rates of production due to antiquated machinery.
18
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of our Common Stock
beneficially owned by (i) each person who, as the date hereof, was known by us
to own beneficially more than five percent (5%) of its Common Stock; (ii) the
individual Directors of our Company and (iii) the Officers and Directors of our
Company as a group. As of the date hereof, there are 10,999,133 common shares
issued and outstanding.
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
Common Juan Antonio Vega, Sr. 1,899,762 17.3%
Common John J. Kelly 3,149,762 (1) 28.6%
Common Mercator Management Group, Inc. (2) 1,000,000 9.1%
Common Tramdot Development Corp. (3) 664,840 6.0%
Common Charles B. Trapp 575,000 (4) 5.2%
Common Officers and Directors 3,149,762 (2) 28.9%
as a group (1 individual)
(1) Mr. Kelly owns directly 1,199,762 shares and controls directly or
indirectly through various family members 1,950,000 shares.
(2) Mercator Management Group, Inc., a Florida corporation, is in the business
of investment banking.
(3) Tramdot Development Corp. is controlled by Shirley Diamond and her family
and is in the real estate and investment business.
(4) Of these shares, 50,000 are issuable upon conversion of shares of Series A
Convertible Preferred Stock.
Except as described above, each entity or person listed in this table has sole
investment and voting power over the shares disclosed.
19
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and current positions with our Company
held by Directors, Executive Officers and Significant Employees. There is no
immediate family relationship between or among any of the Directors, Executive
Officers or Significant Employees and our Company is not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position.
NAME POSITION WITH COMPANY
- ---- ---------------------
John J. Kelly President, Assistant Secretary, Treasurer and Director
JOHN J. KELLY, 50, is a principal shareholder of our Company and devotes at
least 90% of his working time to the Company. He is a practicing attorney and
the principal and managing partner of Strategic Management Investments, Inc., a
Connecticut corporation dedicated to providing advisory services to small and
medium size firms, both publicly and closely held. Mr. Kelly has 25 years
experience in large industrial and manufacturing multinational concerns starting
with Dun & Bradstreet as the accountant in S.E.C. compliance reporting. Later,
Mr. Kelly worked in the Tax Department of American Can Company where he held the
positions of Manager, International Tax; Director, Research and Planning; and
Managing Director of Taxes. While in these positions, he worked directly on the
tax aspects of acquisition diversification which changed the corporation from a
packaging corporation to a conglomerate and later the spin-off of business
entities that removed all aspects of packaging, specialty retail and consumer
goods from the corporate entity. Mr. Kelly also worked as a Senior Manager for
the public accounting firm of Coopers & Lybrand L.L.P. in its Stamford,
Connecticut office. His clients included, among others, Tiffany's, Ciba Giegy,
and Maxwell Communications. From April 1993 through September 1995, Mr. Kelly
served as Chief Financial Officer, Member of the Board of Directors, and advisor
to the principal shareholders of KW Control Systems, Inc. where he was
responsible for restructuring the company, prevented bankruptcy, and
successfully negotiated the sale of the company to Piller Inc. (a subsidiary of
RWE) for four times book value. Until June 1996, he held the position of Vice
President and General Manager of Piller when he left to return to private
practice.
Until July, 1999, Mr. Vega was Vice President, Secretary and a Director of the
Company.
None of the Company's officer, directors, promoters, their affiliates or
associates have any preliminary or other plans, proposals, arrangements or
understandings to acquire additional securities of the Company. In addition,
none of the officers, directors, promoters or their affiliates or associates
have had any preliminary contact or discussions with, and there are no present
plans, proposals, arrangements or understandings with, any representatives of
the owners of any business or company regarding the possibility of acquisition
or merger.
20
<PAGE>
EXECUTIVE COMPENSATION
- ----------------------
U.S. Cigar entered into agreements whereby Messrs. Vega and Kelly receive
salaries of $150,000 and $120,000 respectively per year each in consideration of
their services to our Company. These agreements terminated on December 1, 1998.
The Company is currently developing a stock option program for key employees,
consultants and advisers at yet to be determined prices, which will include
Messrs. Vega and Kelly. To date, neither Mr. Vega nor Mr. Kelly has taken his
full salary and both have waived their rights to any accrued salaries prior to
September 30, 1998. The Company has no preliminary or other understandings with
respect to employment agreements with any officer or director of the Company. In
addition, the Company does not have any keyman life insurance policy on the
lives of its officers or directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ----------------------------------------------
On March 31, 1998, the Company issued 10,999,133 shares of stock at $0.001 per
share in reliance upon Rule 504 of Regulation D promulgated under the Securities
Act of 1933. On April 13, 1998, the Company purchased 6,049,524 shares from
certain shareholders for $23,500.00, all of which shares were retired.
In April, 1998, the Company purchased Ambra Cigar, Inc. which was wholly-owned
by Messrs. Kelly and Vega, in exchange for 6,050,000 shares of the Company. The
purchase price for Ambra Cigars, Inc. was arrived at through arms-length
negotiations.
John Kelly also loaned $23,500 to the Company on a demand basis at an annual
interest rate of 15%. The note was repaid in September of 1998.
Until March 31, 1999, the Company's corporate facilities were located at 7440
S.W. 50th Terrace, Suite 107, Miami, Florida 33155, under a five (5) year lease
from Lakeside Property Investors Group, Inc., a company owned by Messrs. Vega
and Kelly, for $2,000 per month. The Company sublet a major portion of the
facilities to Crystal Cascade Water Company, a company controlled by Juan A.
Vega, Sr., until March, 1999. The Company has a receivable of $18,000 due from
Crystal Cascade Water Company. In order to reduce costs, the Miami lease was
cancelled and the operations moved to 98 Mill Plain Road, Danbury Connecticut.
The Company sublets this space on a month-to-month basis from John J. Kelly at
$1,250 per month.
DESCRIPTION OF SECURITIES
- -------------------------
The Company has authority to issue 50,000,000 shares, $.001 par value, of which
20,000,000 are designated Preferred Stock and 30,000,000 shares are designated
Common Stock. A total of 10,999,133 shares of Common Stock are currently
outstanding and the number of holders of record of our Common Stock is
approximately 1,320. A total of 50,000 shares of Series A Convertible Preferred
Stock are outstanding and are held by Charles Trapp of Bridgewater, NJ.
21
<PAGE>
COMMON STOCK
The holders of Common Stock have one vote per share on all matters (including
election of directors) without provision for cumulative voting. The Common Stock
is not redeemable and has no conversion or preemptive rights. The Common Stock
currently outstanding is validly issued, fully paid and non-assessable. The
Board of Directors may, from time to time, declare and our Company may pay
dividends on its shares in cash, property or its own shares, except when our
Company is insolvent subject to the provisions of the Florida Statutes. Our
Company has paid no cash dividends on its Common Stock.
PREFERRED STOCK
Under the Articles of Incorporation, the Board of Directors is authorized,
subject to limitations prescribed by law, to provide for the issuance of shares
of Preferred Stock in one or more series, to establish the number of shares to
be included in each series, and to fix the designation, powers, including the
voting rights, if any, preferences, and rights of the shares of each shares, and
any qualifications, limitations, or restrictions thereof.
The Board of Directors authorized 350,000 shares of Series A Convertible
Preferred Stock. Holders of Series A Convertible Preferred Stock are not
entitled to receive any dividends and except as otherwise provided by law, have
no voting rights. Each Share is convertible into shares of our Common Stock at
$1.00 per share. The Series A Convertible Preferred Stock ranks prior to all
other classes or series of equity securities of our Company, including Common
Stock. Upon any liquidation, dissolution or winding-up of the Company, the
Series A Holders shall be entitled to receive out of the assets of the Company,
for each share of Series A Convertible Preferred Stock, an amount equal to the
stated value before any distribution or payment is made to the holders of any
junior securities.
WARRANTS
The Company has Warrants outstanding to purchase 166,666 shares of the common
stock of the Company. The Warrants are exercisable for a period of two years
from September 2, 1998 at an exercise price of $1.00 per share. The Company
relied upon Section 4(2) of the Securities Act of 1933, as amended, in the sale
of the Warrants.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
- -------------------------------------------------------------------------
SHAREHOLDER MATTERS
-------------------
NO PUBLIC MARKET
As of the date of this Form 10-SB, there is no established public trading market
for our Common Stock. The Company is attempting to have an authorized market
maker apply to have the shares listed for trading on the National Association of
Securities Dealers OTC Bulletin Board, a stock exchange or internet listing
service. In March 1999, the Company entered into an agreement with an agent to
find a broker/dealer willing to make a market in the Company's common stock.
22
<PAGE>
DIVIDEND POLICY
Our Company has never declared nor paid dividends on its Common Stock and does
not intend to do so in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
- ---------------------------------------
On March 31, 1998, the Company issued 10,999,133 shares of common stock at
$0.001 per share in reliance upon Rule 504 of Regulation D promulgated under the
Securities Act of 1933. On April 13, 1998, the Company purchased 6,049,524 of
these shares from certain shareholders for $23,500.00, all of which shares were
retired. On April 13, 1998, the Company issued 6,049,524 shares in a share for
share exchange, all of which are restricted shares. On September 2, 1998, the
Company issued the Warrants. The Warrants and the shares underlying the Warrants
are unregistered.
As disclosed above, the Company was formerly known as Tungsten International,
Inc. ("Tungsten"), and Tungsten had approximately 1300 shareholders prior to the
time it acquired Ambra Cigar, Inc. Tungsten was formed by a predecessor
corporation, which paid a dividend of shares of Tungsten to its shareholders.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
- -----------------------------------------
The Articles of Incorporation contain provisions which, in substance, eliminate
the personal liability of the Board of Directors and officers to the Company and
its shareholders for monetary damages for breach of fiduciary duties as
directors to the fullest extent permitted by Delaware law. By virtue of these
provisions, and under current Delaware law, a director of the Company will not
be personally liable for monetary damages for breach of fiduciary duty, except
liability for: (a) breach of his duty of loyalty to our Company or to its
shareholders; (b) acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (c) dividends or stock
repurchases or redemptions that are unlawful under Delaware law; and (d) any
transaction from which he or she receives and improper personal benefit. These
provisions pertain only to breaches of duty by individuals solely in their
capacity as directors, and not in any other corporate capacity, such as an
officer, and limit liability only for breaches of fiduciary duties under
Delaware corporate law and not for violations of other laws (such as Federal
securities laws). As a result of these indemnifications provisions, shareholders
may be unable to recover monetary damages against directors for actions taken by
them that constitute negligence or gross negligence or that are in violation of
their fiduciary duties, although it maybe possible to obtain injunctive or other
equitable relief with respect to such actions.
The inclusion of these indemnifications provisions in our Bylaws may have the
effect of reducing the likelihood of derivative litigation against directors,
and may discourage or deter shareholders or management from bringing in lawsuits
against directors for breach of the their duty of care, even though such an
action, if successful, might otherwise benefit our Company or our shareholders.
23
<PAGE>
The Company has entered into separate indemnification agreements with its
directors and officers containing provisions that provide for the maximum
indemnity allowed to directors and officers under Delaware law and the Company,
among other obligations, to indemnify such directors and officers against
certain liabilities that may arise by reason of their status as directors and
officers, other than liabilities arising from willful misconduct of a culpable
nature, provided that such person acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to me best interest of the
Company and, in the case of a criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful. In addition, the indemnification
agreements provide generally that the Company will, subject to certain
exceptions, advance the expenses incurred by directors and officers a result of
any proceeding against them as to which they may be entitled to indemnification.
We believe these arrangements are necessary to attract and retain qualified
persons as directors and officers.
24
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS
- ---------------------------------
(a) Financial Statements
1. Financial Statements as of and for the period ended June 30,
1997 (Audited)
2. Financial Statements as and for the year ended June 30, 1998
(Audited)
3. Financial Statements as of and for the nine months ended March
31, 1999 and 1998 (Unaudited)
(b) Exhibits
3(i)* Articles of Incorporation of International Cigar Holdings,
Inc.
3(ii)* Bylaws of International Cigar Holdings, Inc.
10.1* Agreement with Swisher International, Inc.
10.2* Agreement with the Suerdieck Group
10.4 Finder's Fee Agreement, dated March 9, 1999, by and between
MAS Financial Corp. and the Company.
21.* List of Subsidiaries
27. Financial Data Schedule
- ---------
*Filed Previously
25
<PAGE>
SIGNATURES:
- -----------
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTERNATIONAL CIGAR HOLDINGS, INC.
By: /s/ John J. Kelly
-------------------------------------
John J. Kelly, President
Date: July 27, 1999
26
<PAGE>
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
INTERNATIONAL CIGAR HOLDINGS, INC.
AND SUBSIDIARY
JUNE 30, 1998 AND 1997
<PAGE>
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6 - 13
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors
International Cigar Holdings, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of International
Cigar Holdings, Inc. and Subsidiary as of June 30, 1998 and 1997 and the related
consolidated statements of operations, and cash flows for the year ended June
30, 1998 and for the period from October 23, 1996 (date of inception) through
June 30, 1997. These financial statements are the responsibility of 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 audit 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 consolidated financial position of International
Cigar Holdings, Inc. and Subsidiary as of June 30, 1998 and 1997 and the
consolidated results of its operations and its consolidated cash flows for the
periods then ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has experienced losses since inception and has
a net deficiency in working capital that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
--------------------------
GRANT THORNTON LLP
Miami, Florida
September 22, 1998
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30,
-----------------------
1998 1997
---- ----
Current assets
Cash $ 42,403 $ 41,710
Accounts receivable, net of allowance
for doubtful accounts of approximately
$3,400 in 1998 and $-0- in 1997 6,089 245
Accounts receivable - related party 9,232 --
Due from shareholders -- 12,036
Inventory 128 2,196
Income taxes receivable 1,299 --
Other current assets 4,063 --
--------- --------
Total current assets 63,214 56,187
Office equipment, net 5,636 4,726
Other assets
Deposits 4,777 4,777
--------- --------
Total assets $ 73,627 $ 65,690
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 79,497 $ 39,174
Accounts payable - related party 155,856 28,660
Accrued expenses 515 631
Income taxes payable 1,803 1,803
Due to shareholders 52,810 9,081
Current portion of capital lease
obligation 2,049 1,765
--------- --------
Total current liabilities 292,530 81,114
Capital lease obligations, net of
current portion 326 3,406
Stockholders' deficit
Common stock - par value .001, authorized
30,000,000 shares issued and outstanding
10,999,133 shares 10,999 10,999
Convertible preferred stock - par value .0001,
authorized 20,000,000 shares issued and
outstanding 50,000 shares 50 --
Preferred stock-subsidiary - no par value,
authorized 10,000,000 shares issued and
outstanding 550,000 shares at a stated
value of -0- 1 1
Additional paid-in-capital 96,415 --
Accumulated deficit (326,694) (29,830)
--------- --------
Total stockholders' deficit (219,229) (18,830)
--------- --------
Total liabilities and stockholders'
deficit $ 73,627 $ 65,690
========= ========
The accompanying notes are an integral part of these statements.
2
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1998 AND PERIOD FROM OCTOBER 23, 1996
(DATE OF INCEPTION) THROUGH JUNE 30, 1997
1998 1997
--------- -----------
Net sales $ 617,696 $ 2,255,145
Cost of goods sold 578,294 1,972,168
--------- -----------
Gross profit 39,402 282,977
--------- -----------
Operating expenses
Selling 44,541 43,950
General and administrative 270,731 267,054
--------- -----------
Total operating expenses 315,272 311,004
--------- -----------
Loss from operations (275,870) (28,027)
Other income (expenses)
Interest 1,207 --
Merger costs (23,500) --
--------- -----------
Total other income (expenses) (22,293) --
Net loss before (benefit from)
provision for income taxes (298,163) (28,027)
(Benefit from) provision for income taxes (1,299) 1,803
--------- -----------
Net loss $(296,864) $ (29,830)
========= ===========
Per share data
Loss per common share - basic $ (.03) $ --
========= ===========
Loss per common share - diluted $ (.03) $ --
========= ===========
The accompanying notes are an integral part of these statements.
3
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED JUNE 30, 1998 AND PERIOD FROM OCTOBER 23, 1996
(DATE OF INCEPTION) THROUGH JUNE 30, 1997
Preferred Stock Common Stock
------------------------- --------------------------
Additional
Number of Number of Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 17, 1996 -- -- -- $ -- $ -- $ -- $ --
Issuance of
common stock -- -- 10,999,133 10,999 -- -- 10,999
Issuance of
preferred stock -
by subsidiary 550,000 1 -- -- -- -- 1
Net loss -- -- -- -- -- (29,830) (29,830)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1997 550,000 1 10,999,133 10,999 -- (29,830) (18,830)
Purchase of
treasury stock -- -- (6,049,524) (6,049) (17,451) -- (23,500)
Issuance of stock
in acquisition of
company -- -- 6,049,524 6,049 17,451 -- 23,500
Issuance of
preferred stock -
Series A 50,000 50 -- -- 49,950 -- 50,000
Preferred stock
subscribed -- -- -- -- (3,535) -- (3,535)
Capital contribution -- -- -- -- 50,000 -- 50,000
Net loss -- -- -- -- -- (296,864) (273,364)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at
June 30, 1998 600,000 $ 51 10,999,133 $ 10,999 $ 96,415 $ (326,694) $ (219,229)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
4
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1998 AND PERIOD FROM OCTOBER 23, 1996
(DATE OF INCEPTION) THROUGH JUNE 30, 1997
1998 1997
--------- ---------
Cash flows from operating activities
Net loss $(296,864) $ (29,830)
Adjustments to reconcile net loss to net cash
Depreciation 1,705 1,182
Provision for uncollectible accounts 3,455 --
(Increase) decrease in operating assets
Accounts receivable (9,299) (245)
Accounts receivable - related party (9,232) --
Inventory 2,068 (2,196)
Income taxes receivable (1,299) --
Increase (decrease) in operating liabilities
Accounts payable 40,322 39,174
Accounts payable - related party 127,196 28,660
Accrued expenses (116) 631
Income taxes payable -- 1,803
--------- ---------
Nets cash (used in) provided by operating
activities (142,064) 39,179
--------- ---------
Cash flows from investing activities
Due from shareholders 12,036 (12,036)
Deposits -- (4,777)
Purchase of securities (4,063) --
Purchase of office equipment (2,615) (5,908)
--------- ---------
Net cash provided by (used in) investing
activities 5,358 (22,721)
Cash flows from financing activities
Due to shareholders 43,729 9,081
Borrowings under capital lease obligation -- 5,590
Principal payments under capital lease obligation (2,796) (419)
Proceeds from issuance of common stock -- 10,999
Capital contribution 50,000 --
Proceeds from issuance of preferred stock 46,466 1
--------- ---------
Net cash flows provided by financing
activities 137,399 25,252
--------- ---------
Increase in cash 693 41,710
Cash and cash equivalents, beginning of year 41,710 --
--------- ---------
Cash and cash equivalents, end of year $ 42,403 $ 41,710
========= =========
The accompanying notes are an integral part of these statements.
5
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
--------------------
International Cigar Holdings, Inc. and its Subsidiary, U.S. Cigar
Distributors, Inc. (the "Company") are engaged in the wholesale
distribution of cigars and the sale of tobacco leaf.
Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include the accounts
of International Cigar Holdings, Inc., and its Subsidiary, U.S. Cigar
Distributors, Inc. All material intercompany transactions and balances
have been eliminated in the consolidation. The 1997 financial statements
include the combined assets and operations of the two companies. On April
29, 1998, International Cigar Holdings, Inc. acquired the common stock of
U.S. Cigar Distributors, Inc. by an exchange of 63,050,000 shares of
common stock of U.S. Cigar Distributors, Inc. for 6,049,524 shares of
common stock of International Cigar Holdings, Inc. creating a reverse
merger in which former shareholders of U.S. Cigar Distributors Inc.
became the principal shareholders of International Cigar Holdings Inc.
This transaction has been accounted for as a pooling of interests.
Accordingly, the consolidated financial statements for both years include
the accounts and operations of both companies.
Inventory
---------
Inventory, which consist of finished cigars, is stated the lower of cost
or market, determined on a first-in, first-out method.
Office Equipment
----------------
Office equipment is recorded at cost and depreciated using the straight
line method over a useful life of 5 years. Maintenance and repairs are
charged to expense as incurred.
Income Taxes
------------
The Company accounts for income taxes under the asset and liability
method. Deferred income taxes are recognized for the tax consequences for
temporary differences by applying enacted statutory tax rates applicable
to future years to differences between tax basis and financial reporting
basis of assets and liabilities.
6
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Loss Per Share
--------------
The Company adopted Financial Accounting Standards No. 128 (FAS 128),
"Earnings Per Share " in 1997. FAS 128 requires dual presentation of
basic and diluted earnings per share on the face of the income statement.
Basic net earnings per share equals net earnings divided by the weighted
average shares outstanding during the year. The computation of diluted
net earnings per share includes dilutive common stock equivalents in the
weighted average shares outstanding. The reconciliation between the
computations is as follows:
Basic Diluted Diluted
Net Loss Basic Shares EPS Shares EPS
-------- ------------ ----- ------- -------
1998 $(296,864) 10,999,133 $ (.03) 10,999,133 $ (.03)
1997 $ (29,830) 10,999,133 $ -- 10,999,133 $ --
Estimates
---------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts and disclosure of assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
NOTE B - REALIZATION OF ASSETS
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the company as a going concern. However, the company has
sustained substantial losses from operations since inception, and has a
net deficiency in working capital of approximately $230,000 at June 30,
1998.
7
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE B - REALIZATION OF ASSETS - Continued
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in
the accompanying balance sheet is dependent upon the success of future
operations of the Company and the continued funding of cash needs by
shareholders. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or amounts and classification of liabilities that might be
necessary should the company be unable to continue in existence.
Management intends to change the Company's focus from solely the sale of
hand-made cigars and raw tobacco to include the production and sale of
machine-made cigars. The shareholders intend to continue to fund the
Company as required.
NOTE C - OFFICE EQUIPMENT
Office equipment at June 30, 1998 and 1997, consist of the following:
1998 1997
------ ------
Telephone equipment $6,041 $5,908
Computer equipment 2,482 --
------ ------
8,523 5,908
Less: accumulated
depreciation 2,887 1,182
------ ------
$5,636 $4,726
====== ======
Depreciation expense was $1,705 for 1998 and $1,182 for 1997 and is
included in operating expenses in the financial statements.
8
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE D - CAPITAL LEASE OBLIGATIONS
The Company leases telephone equipment for its operations. For financial
reporting purposes, minimum lease rentals relating to this equipment have
been capitalized. The following is a schedule of leased equipment under
capital leases as of June 30, 1998 and 1997:
1998 1997
------ ------
Office equipment $6,041 $5,908
Less: accumulated
depreciation 2,390 1,182
------ ------
$3,651 $4,726
====== ======
Obligations under capital leases consist of the following at June 30,
1998 and 1997:
1998 1997
------ ------
Lease contract payable in
monthly installments of $209
including principal and
interest, maturing at April
2000 and bearing interest at a
rate of 15% $2,375 $5,171
Less: current portion 2,049 1,765
------ ------
$ 326 $3,406
====== ======
9
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE D - CAPITAL LEASE OBLIGATIONS - Continued
The following is a schedule of future minimum lease payments under this
capital lease, together with the obligation under the capital lease
(present value of minimum lease payments) as of June 30, 1998:
Year Ending June 30, Amount
-------------------- ------
1999 $2,514
2000 2,095
------
4,609
Less: amount representing interest 2,234
------
Present value of obligation under
capital lease $2,375
======
Depreciation of leased property under capital leases was $1,208 in 1998
and $1,182 in 1997, and interest expense on the outstanding obligation
under such leases was $749 in 1998 and $150 in 1997.
NOTE E - CONCENTRATION RISK
The Company purchased approximately 100% of its cigars from one vendor,
who is a minority shareholder, and approximately 100% of its tobacco leaf
from one vendor, who is a related party, during 1998 and 1997. Management
believes that in the event of a change in the relationships with these
vendors, other vendors with comparable merchandise are readily available
at competitive prices.
Two customers accounted for 80% and 11% of the Company's total sales
during the year ended June 30, 1998. Three customers accounted for 41%,
39% and 20% of the Company's total sales during the period ended June 30,
1997.
NOTE F - INCOME TAXES
For the year ended June 30, 1997, the Company had taxable income of
approximately $8,700. As of June 30, 1998, the Company has a federal net
operating loss carryforward of $268,246 and state net operating
carryforward of $276,908. These net operating losses will expire
beginning in year 2012.
10
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE F - INCOME TAXES - Continued
The following represents the significant deferred tax assets at June 30,
1998 and June 30, 1997:
1998 1997
------- ------
Accumulated amortization of
organization costs $ 3,763 $5,018
Allowance for doubtful accounts 680 --
Depreciation (201) --
------- ------
4,242 5,018
Less: valuation allowance 4,242 5,018
------- ------
Net deferred tax asset $ -- $ --
======= ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. At June 30, 1998 and 1997, the Company recorded a full
valuation allowance for the deferred tax assets as the Company's ability
to realize these benefits is not "more likely than not." Accordingly,
there is no net deferred tax asset included in the accompanying
consolidated balance sheets at June 30, 1998 and 1997, respectively.
NOTE G - RELATED PARTY TRANSACTIONS
In 1997, the Company made non-interest bearing advances to the
shareholders. The amounts are due on demand. The outstanding balance on
June 30, 1997 was $12,036.
As of June 30, 1998 and 1997, the Company had borrowings from
shareholders in amounts of $52,810 and $9,081, respectively. The advances
are unsecured and non-interest bearing.
At June 30, 1998 and 1997, the Company had accounts receivable from
related party in the amount of $9,232 and $-0-, respectively.
At June 30, 1998 and 1997, the Company had accounts payable to related
party (minority shareholder in subsidiary) in the amount of $155,856 and
$28,660, respectively.
During the year ended June 30, 1998 and period ending June 30, 1997, the
Company purchased approximately $384,000 and $410,000, respectively, of
cigars from a minority shareholder (see Note E).
11
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE G - RELATED PARTY TRANSACTIONS - Continued
During the year ended June 30, 1998 and period ending June 30, 1997, the
Company purchased approximately $115,000 and $1,600,000, respectively, of
tobacco leaf from a related party (see Note E).
The Company leases its warehouse and office from an entity owned by the
majority shareholders (see Note H).
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company occupies its warehouse and office under a long-term operating
lease with majority shareholders for a term of 5-years for $2,000/month.
In addition, the Company is obligated to pay real estate taxes, insurance
and other costs in connection with the property. Rent expense for the
year ended June 30, 1998 and period ending June 30, 1997 was $24,000 and
$10,000, respectively.
The total minimum obligations under operating leases at June 30, 1998 are
approximately as follows:
Year Amount
---- --------
1999 $ 24,000
2000 24,000
2001 24,000
2002 14,000
--------
$ 86,000
========
NOTE I - STOCK
Series A Convertible Preferred Stock - International Cigar Holdings, Inc.
-------------------------------------------------------------------------
International Cigar Holdings authorized 20,000,000 shares of Series A
Convertible Preferred Stock, par value $.001 and issued 50,000 shares.
Holders of the Series A Convertible Preferred Stock are not entitled to
receive any dividends. The Series A Convertible Preferred Stock has no
voting rights. Each share is convertible to one share of Common Stock at
$1.50 per share and has a liquidation preference over all other
outstanding preferred and common stock. In the event of liquidation of
the Company, the Series A Convertible Preferred Stock holders are
entitled to receive a priority distribution for each share equal to the
stated value before any distribution or payment is made to the holders of
any junior securities.
12
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 1998 AND 1997
NOTE I - STOCK - Continued
Series A Preferred Stock - U.S. Cigar Distributors, Inc.
--------------------------------------------------------
U.S. Cigar Distributors, Inc. authorized 10,000,000 shares of Series A
Preferred Stock, no par value and issued 550,000 shares at a stated value
of $5.00. Holders of the Series A Preferred Stock have the same dividend
rights and voting rights as holders of Common Stock. Each share is
convertible to one share of Common Stock for a period of three years from
the date U.S. Cigar Distributors, Inc. is publicly listed. and has no
liquidation preference. The preferred stock was recorded at the value of
the exclusive distribution rights of the holder's product at June 30,
1998 and 1997 of $1.00.
Common Stock
------------
The Company has authorized 30,000,000 shares of Common Stock, par value
$.001 per share and issued and outstanding 10,999,133 shares at June 30,
1998 and 1997. The holders of Common Stock are entitled to one vote per
share on all matters to be voted on by the Company's shareholders. In
addition, the subsidiary had 7,000,000 shares of common stock issued and
outstanding prior to the reverse merger.
During 1998, the principal shareholders contributed $50,000 as a capital
contribution.
NOTE J - SUBSEQUENT EVENT
On September 2, 1998, the Company borrowed $300,000 from an individual
bearing interest at 6% due 90 days after issuance. The Company has
non-binding agreements for the infusion of $700,000 in capital,
contingent upon the stock being actively traded at agreed-upon price
levels. The $300,000 loan may also be converted to equity. This note is
personally guaranteed by the two principal shareholders.
13
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET AS AT MARCH 31, 1999 AND 1998
------------------------------------------------------------------
MARCH 31, MARCH 31,
1999 1998
--------- ---------
CURRENT ASSETS
Cash $ 55,915 $ 9,174
Accounts Receivable, net of allowance for
doubtful accounts of approximately $14,840
in 1999 and -0- in 1998 -- 10,538
Other Accounts Receivable -- 138
Due from Shareholders -- 5,786
Investments 1,394 --
Inventory -- 68,955
Income Taxes Receivable 228 --
--------- ---------
TOTAL CURRENT ASSETS 57,537 94,591
OFFICE EQUIPMENT, NET 4,766 7,342
OTHER ASSETS
Deposits -- 4,777
--------- ---------
TOTAL ASSETS $ 62,303 $ 106,710
========= =========
CURRENT LIABILITIES
Accounts Payable $ 55,148 $ 63,494
Accounts Payable-related party 146,936 146,936
Accrued Expenses -- --
Due to Shareholder -- 9,081
Income Tax Payable 504 1,575
Current portion of Notes Payable
and Accrued Interest 340,550 --
Current portion of Capital Lease Obligation -- 3,044
--------- ---------
Total Current Liabilities 543,138 224,130
LONG TERM LIABILITIES
Capital Lease Obligation, net of current
portion -- --
Notes Payable and Accrued Interest -- --
--------- ---------
Total Long Term Liabilities -- --
TOTAL LIABILITIES 543,138 224,130
========= =========
STOCKHOLDER'S DEFICIT
Common Stock 10,999 10,999
Convertible Preferred Stock 50 --
Preferred Stock-Subsidiary 1 1
Additional Paid In Capital 96,415 50,000
Accumulated Deficit (326,694) (29,830)
Net Income (Loss) (261,606) (148,590)
TOTAL STOCKHOLDERS' DEFICIT (480,835) (117,420)
========= =========
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 62,303 $ 106,710
========= =========
14
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
Unaudited Consolidated Statement of Operations
For the Nine Months Ended March 31, 1999 and 1998
MARCH, 1999 MARCH, 1998
----------- -----------
Net Sales $ 5,880 $ 615,043
Cost of Goods Sold 6,635 509,340
--------- ---------
Gross Profit (755) 105,702
Operating Expenses
Selling 22,520 25,600
General and administrative 239,330 229,868
--------- ---------
Total operating expenses 261,850 255,468
Other Income--Interest 999 1,176
--------- ---------
Net Loss before (benefit from)
provision for income taxes (261,606) (148,590)
(Benefit from) provision for income taxes -- --
--------- ---------
Net Loss (261,606) (148,590)
Shareholder Deficit At June 30, 1998 (326,694) --
Shareholder Deficit At June 30, 1997 -- (29,830)
--------- ---------
Accumulated Deficit at March 31 $(588,300) $(178,420)
--------- ---------
Per share loss for the nine month period
Loss per common share-basis $ (0.02) $ (0.01)
--------- ---------
Loss per common share-diluted $ (0.02) $ (0.01)
--------- ---------
15
<PAGE>
INTERNATIONAL CIGAR HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the nine month periods ended March 31, 1999 and 1988
MARCH, 1999 MARCH, 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(261,606) $(148,590)
Adjustments to reconcile net (loss) earnings to
net cash
Depreciation 4,300 --
Provision for uncollectible accounts 14,840 --
(Increase) decrease in operating assets
Accounts receivable 481 (10,293)
Accounts receivable-related parties --
Inventory 128 (66,759)
Other Current Assets
Income taxes receivable 1,071 --
Increase (decrease) in operating liabilities
Accounts payable (24,351) 24,181
Accounts payable-related parties 31,630 118,276
Accrued expenses (515) (631)
Income taxes payable (1,299) (228)
--------- ---------
Net cash used in operating activities (235,321) (84,043)
CASH FLOWS FROM INVESTING ACTIVITIES
Due from shareholders 6,250
Deposits 4,777 --
Investments 2,670 --
Purchase of office equipment (3,429) (2,616)
--------- ---------
Net cash provided by investing activities 4,018 3,634
CASH FLOWS FROM FINANCING ACTIVITIES
Due to shareholders (52,810)
Principal payments under capital lease program (2,375) (2,127)
Proceeds from issuance of common stock 50,000
Proceeds from issuance of convertible note 300,000 --
--------- ---------
Net cash provided by financing activities 244,815 47,873
Increase (decrease) in cash 13,512 (32,536)
Cash and cash equivalents beginning of period 42,403 41,710
Cash and cash equivalents, end of period $ 55,915 $ 9,174
The accompanying notes are an integral part of these interim unaudited financial
statements.
16
<PAGE>
International Cigar Holdings, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1) The consolidated balance sheets as of March 31, 1999 and 1998 and the
related statements of operations and cash flows for the six months ended
March 31, 1999 and 1998 of International Cigar Holdings, Inc. and its
subsidiary have been prepared by the Company without audit. In the opinion
of management of the Company, all adjustments (consisting of normal
recurring accruals) necessary for the fair presentation of the unaudited
interim periods have been reflected herein.
2) The results of operations for the nine months ended March 31, 1999 are not
necessarily indicative of the results for the entire year.
3) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
International Cigar Holdings, Inc., and its Subsidiary, U.S. Cigar
Distributors, Inc. All material intercompany transactions and balances have
been eliminated in the consolidation. The 1997 financial statements include
the combined assets and operations of the two companies. On April 29, 1998,
International Cigar Holdings, Inc. acquired the common stock of U.S. Cigar
Distributors, Inc. by an exchange of 63,050,000 shares of common stock of
U.S. Cigar Distributors, Inc. for 6,049,524 shares of common stock of
International Cigar Holdings, Inc. creating a reverse merger in which
former shareholders of U.S. Cigar Distributors Inc. became the principal
shareholders of International Cigar Holdings Inc. This transaction has been
accounted for as a pooling of interests. Accordingly, the consolidated
financial statements for both years included the accounts and operations of
both companies.
4) INVENTORY
Inventory, which consist of finished cigars and raw tobacco leaf, is stated
the lower of cost or market, determined on a first-in, first-out method.
5) OFFICE EQUIPMENT
Office equipment is recorded at cost and depreciated using the
straight-line method over a useful life of 5 years. Maintenance and repairs
are charged to expense as incurred.
6) INCOME TAXES
The Company accounts for income taxes under the asset and liability method.
Deferred income taxes are recognized for the tax consequences for temporary
differences by applying enacted statutory tax rates applicable to future
years to differences between tax basis and financial reporting basis of
assets and liabilities.
17
<PAGE>
At March 31, 1999 and 1998 , the Company had no deferred tax benefit
related to its net operating loss as the Company's ability to realize these
benefits is not "more likely than not" as defined by FASB Statement No. 109
"Accounting for Income Taxes"
7) ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affect the reported amounts and disclosure of assets and liabilities at the
date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from these estimates.
8) DEBT
On September 2, 1998, the Company borrowed $300,000 from an individual
bearing interest at 6% due 90 days after issuance. The Company defaulted on
the agreement in December 1998 and, as per the agreement, the $300,000 note
became a demand note for $330,000. In the Nine Month Statement of
Operations, the $30,000 was reflected as an expense against operations. The
loan as originally entered into was personally guaranteed by two principal
shareholders (Messrs. Kelly and Vega). Although in default at December 31,
1998, the Company and the two principal shareholders obtained an additional
extension of the terms of the loan in February 1999 from Mercator
Management Group, Inc. A key element of the debt extension called for full
payment in April 1999 by either the Company or the guarantors. On March 15,
1999, John Kelly purchased half the note from Mercator for $169,875, which
included interest of $4,875, and received a release on the guarantee as
well as the joint and several liability provisions thereunder. Mr. Vega
remains a guarantor on the balance of the note. The entire debt
($330,000.00) plus accrued interest ($10,550.00) is recorded as a current
liability as the terms of the original agreement have not been changed.
9) NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statements of Financial
Standards Nos. 130 ("SFAS 130"), Reporting Comprehensive Income" and 131
("SFAS 131") "Disclosures about Segments of an Enterprise and Related
Information." SFAS 130 prescribes standards for reporting comprehensive
income and its components. SFAS 131 establishes guidance as to the required
disclosure for reporting segment information. The Company has adopted these
standards, which have no impact on the Company.
10) DUE TO AND FROM SHAREHOLDERS
At December 31, 1998 the Company had a Note Receivable from Juan A. Vega in
the amount of $20,000. The note carried interest at 8%. The note and
interest was paid in March 1999. In Accounts Receivable there is an amount
due from Crystal Cascade Water, Inc. which rents a major portion of the
Company's warehouse. At March 31, 1999 and 1998 this receivable was $18,166
18
<PAGE>
and $7,663 respectively. There is a disagreement between a major
shareholder, Crystal Cascade Water (which the shareholder owns) and the
Company. The Company has reserved the entire Account Receivable amount at
March 31, 1999 and is reviewing its options in recovering monies due.
The Company rented an office/warehouse from an entity owned by Juan Vega
and John Kelly through March 1999. The monthly rent was $2,130.00 plus
taxes and common fees. This lease has been cancelled since the facility was
sold by the entity controlled by Messrs. Vega and Kelly. In the interim,
the Company has moved the administrative operations to Danbury, CT where it
has a month to month sublease on offices leased by John Kelly. The monthly
rent is $1,250.00.
19
MAS FINANCIAL CORP.
1710 E. Division St. Tel: (812) 479-7266
Evansville, IN 47711 Fax: (812) 479-7267
- --------------------------------------------------------------------------------
FINDER'S FEE AGREEMENT
This agreement is entered into on this 9th day of March, 1999 by and between MAS
Financial Corp. (hereinafter referred to as "MAS"), and INTERNATIONAL CIGAR
HOLDINGS, INC., their heirs, designees or assignees, (hereinafter referred to as
"CLIENT"), and is made with reference to the following recitations:
WHEREAS, MAS has contacts with market makers, and,
WHEREAS, for the purpose of advancing the business plans of CLIENT, CLIENT
wishes to apply for trading on the OTC Bulletin Board, and,
(1) MAS agrees to introduce CLIENT to a market maker to file its 15C-2-11.
(2) CLIENT agrees to pay MAS a finder's fee of $5,000 cash and 15,000 shares of
common stock of INTERNATIONAL CIGAR HOLDINGS, INC. The cash and stock shall be
escrowed with an attorney, Mr. Arthur W. Schlenkert, Attorney At Law, 2610 SW
23rd Terrace, Ft. Lauderdale, FL 33312. The cash and stock escrowed shall be
released upon filing of the 15C-2-11 and assignment of a stock trading symbol.
(3) MAS is not rendering legal advice to client. Each party is responsible for
all of it's own professional, legal, accounting, Broker-Dealer, and consulting
fees as they may apply to each party.
(4) This agreement shall be governed by the laws of the State of Indiana. The
parties agree to the jurisdiction of the Courts of the State of Indiana and the
United States District Court for the Southern District of Indiana as the forums
for the resolution of any legal disputes between the parties. Client agrees to
pay court costs, attorney fees in a reasonable amount, and interest on any
unpaid balances at the judgment rate then in effect in the State of Indiana
should it become necessary for MAS to engage in legal action to recover any
portion of the purchase price or any other fees from Client.
(5) Neither party may assign this agreement without the prior written consent of
the other party, which consent shall not be unreasonably withheld.
(6) This documents contains the entire agreement between the parties hereto. No
oral or other representation or warranty has been given to CLIENT by MAS, and
this agreement controls over any and all oral representations made by any party
to this transaction. This agreement may only be modified by a writing, signed by
the parties.
(7) Each party agrees to execute all of the documents and do all of the things
necessary to effectuate the purpose of this agreement, without delay or
limitations.
Accepted and Agreed: Accepted and Agreed:
/s/ Aaron Tsai /s/ John J. Kelly
- ------------------------------ ----------------------------------
MAS Financial Corp. International Cigar Holdings, Inc.
By: Mr. Aaron Tsai, President By: John Kelly, President
Mailing Address:
MAS Financial Corp. International Cigar Holdings, Inc.
1710 E. Division St. 7440 S.W. 60th Terrace, #107
Evansville, IN 47711 Miami, FL 33154
1
<PAGE>
CLOSING STATEMENT
Pursuant to the Finder's Fee Agreement dated the 9th day of March, 1999 by
and between MAS Financial Corp. and International Cigar Holdings, Inc., the sum
of $5,000.00 (the "Money") and 15,000 shares of common stock of International
Cigar Holdings, Inc. (the "Stock") to be wired and sent to be held in trust by
attorney Arthur W. Schlenkert, Esq. whose offices are located at 2610 SW 23rd
Terrace, Ft. Lauderdale, FL 33312.
It is acknowledge that the Stock issued in the name of MAS Financial Corp.
and $5,000 cash will be held in a custodial account of Arthur W. Schlenkert,
Esq. as trust agent for the closing of this transaction and that the attorney is
authorized to transfer Money and Stock to MAS Financial Corp. after
International Cigar Holdings, Inc.'s 15C-2-11 is filed with NASD and NASD has
assigned a trading symbol.
Accepted and Agreed: Accepted and Agreed:
/s/ Aaron Tsai /s/ John J. Kelly
- ------------------------------ ----------------------------------
MAS Financial Corp. International Cigar Holdings, Inc.
By: Mr. Aaron Tsai, President By: John Kelly, President
March 9, 1999 March 9, 1999
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statement for the period ended June 30, 1998 as well as the interim
financials for the nine month period ended March 31, 1999. This financial
information is qualified in its entirety by reference to the audited financial
statements and the footnotes to the interim financials.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> JUN-30-1998 JUN-30-1999
<PERIOD-END> JUN-30-1998 MAR-31-1999
<CASH> 42,403 55,915
<SECURITIES> 4,063 1,394
<RECEIVABLES> 18,721 14,840
<ALLOWANCES> (3,400) (14,840)
<INVENTORY> 128 0
<CURRENT-ASSETS> 61,914 57,309
<PP&E> 8,524 11,953
<DEPRECIATION> (2,887) (7,187)
<TOTAL-ASSETS> 73,627 62,303
<CURRENT-LIABILITIES> 292,530 543,138
<BONDS> 0 0
0 0
51 51
<COMMON> 10,999 10,999
<OTHER-SE> (230,279) (491,885)
<TOTAL-LIABILITY-AND-EQUITY> 73,627 62,303
<SALES> 617,696 5,880
<TOTAL-REVENUES> 618,903 6,879
<CGS> 578,295 6,635
<TOTAL-COSTS> 619,435 29,155
<OTHER-EXPENSES> 270,731 183,940
<LOSS-PROVISION> 3,400 14,840
<INTEREST-EXPENSE> 0 40,550
<INCOME-PRETAX> (274,663) (261,606)
<INCOME-TAX> (1,299) 0
<INCOME-CONTINUING> (273,364) (261,606)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (273,364) (261,606)
<EPS-BASIC> (0.02) (0.02)
<EPS-DILUTED> (0.02) (0.02)
</TABLE>
