-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KiN1hXNON/uW3Edd7XUYGm7eAsOwQmgJ17BQSDE7p41v+0SbxOgu376VwHjPwkvd 2nyziYAxZWnspj36bVlbwQ== 0000950147-99-000906.txt : 19990818 0000950147-99-000906.hdr.sgml : 19990818 ACCESSION NUMBER: 0000950147-99-000906 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUM CIGARS INTERNATIONAL LTD CENTRAL INDEX KEY: 0001041479 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 860846405 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13273 FILM NUMBER: 99694646 BUSINESS ADDRESS: STREET 1: 15849 NORTH 77TH STREET CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 4809228887 MAIL ADDRESS: STREET 1: 15849 NORTH 77TH STREET CITY: SCOTTSDALE STATE: AZ ZIP: 85260 10QSB 1 QTRLY REPORT FOR THE PERIOD ENDED 06/30/99 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED COMMISSION FILE NUMBER June 30, 1999 0-29414 PREMIUM CIGARS INTERNATIONAL, LTD. (Exact name of small business issuer as specified in its charter) Arizona 86-0846405 (state or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 15849 North 77th Street Scottsdale, Arizona 85260 (Address of principal office) (Zip code) Registrant's telephone number, including area code: (480) 922-8887 Securities registered pursuant to Section 12(b) of the Act: No par value common stock Securities registered pursuant to Section 12(g) of the Act: No par value common stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of June 30, 1999, there were 3,939,092 shares of Premium Cigars International, Ltd. common stock, no par value outstanding. INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements.............................................3 Condensed Balance Sheet (Unaudited) as of June 30, 1999........................................................3 Condensed Statement of Operations (Unaudited) for the three and six months ended June 30, 1999 and 1998................4 Condensed Statement of Cash Flows (Unaudited) for the three and six months ended June 30, 1999 and 1998................5 Notes to Condensed Financial Statements..............................6 Special Note Regarding Forward-Looking Statements.........................9 Item 2 - Management's Discussion and Analysis or Plan of Operation.......10 PART II - OTHER INFORMATION Item 1 - Legal Proceedings...............................................14 Item 2 - Changes in Securities and Use of Proceeds.......................14 Item 3 - Defaults Upon Senior Securities.................................14 Item 4 - Submission of Matters to a Vote of Security Holders.............14 Item 5 - Other Information...............................................14 Item 6 - Exhibits and Reports on Form 8-K................................15 SIGNATURES....................................................................16 2 PREMIUM CIGARS INTERNATIONAL, LTD. CONDENSED BALANCE SHEET June 30, 1999 ----------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 59,861 Available for sale securities 25,000 Accounts receivable - trade, net 251,334 Inventory, net (Note 3) 175,282 Other current assets (Notes 5 and 8) 236,394 ----------- Total Current Assets 747,871 ----------- Property and Equipment, net 450,682 ----------- Other Assets: Other assets 63,102 ----------- 63,102 ----------- $ 1,261,655 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses 1,259,987 ----------- Total current liabilities 1,259,987 ----------- Commitments and Contingencies (Note 10) -- ----------- Stockholders' Equity: Common stock - no par value, 10,000,000 shares authorized, 3,939,092 shares issued and outstanding 8,974,299 Accumulated deficit (8,972,631) ----------- Total Stockholders' Equity 1,668 ----------- $ 1,261,655 =========== The accompanying notes are an integral part of the condensed financial statements 3 PREMIUM CIGARS INTERNATIONAL, LTD. CONDENSED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended June 30, June 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net Sales $ 1,248,600 $ 2,018,651 $ 2,566,286 $ 3,263,604 Cost of Sales 930,163 1,475,885 1,893,272 2,544,770 ----------- ----------- ----------- ----------- Gross Profit 318,437 542,766 673,014 718,834 Selling, General and Administrative 1,150,032 1,274,923 2,126,903 2,510,163 Loss on sale of subsidiary (Note 8) 1,200,638 -- 1,200,638 -- Writedown of cigar humidor program (Note 9) 1,017,524 -- 1,017,524 -- Severance Packages (Note 4) -- -- -- 395,173 ----------- ----------- ----------- ----------- Loss from Operations (3,049,757) (732,157) (3,672,051) (2,186,502) Other Income (Expense) (13,040) 28,181 (16,679) 94,913 ----------- ----------- ----------- ----------- Net Loss $(3,062,797) $ (703,976) $(3,688,730) $(2,091,589) =========== =========== =========== =========== Basic Loss per Share $ (0.79) $ (0.20) $ (0.98) $ (0.60) =========== =========== =========== =========== Weighted Average Number of Shares Outstanding 3,876,455 3,469,092 3,777,987 3,469,092 =========== =========== =========== ===========
The accompanying notes are an integral part of the condensed financial statements 4 PREMIUM CIGARS INTERNATIONAL, LTD. CONDENSED STATEMENTS OF CASH FLOWS Six Months Ended June 30, ------------------------- 1999 1998 ----------- ----------- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $(3,688,730) $(2,091,589) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 470,053 324,116 Loss on sale of subsidiary 1,200,638 Writedown of cigar humidor program 1,017,524 Accrual of severance packages 139,133 Net change in other assets and liabilities 577,496 (474,956) ----------- ----------- Net cash provided by (used for) operating activities (423,019) (2,103,296) ----------- ----------- Cash flows from investing activities: Purchase of humidors (64,283) (425,437) Purchase of equipment (7,053) (448,710) Proceeds from sale of subsidiary 250,000 Proceeds from sale of available for sale securities 2,024,323 ----------- ----------- Net cash provided by (used for) investing activities 178,664 1,150,176 ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 136,000 ----------- ----------- Net cash provided by financing activities 136,000 -- ----------- ----------- Effect of exchange rate changes on cash and cash equivalents -- 421 ----------- ----------- Net increase (decrease) in cash and cash equivalents (108,355) (952,699) Cash and cash equivalents, beginning of period 168,216 1,264,365 ----------- ----------- Cash and cash equivalents, end of period $ 59,861 $ 311,666 =========== =========== The accompanying notes are an integral part of the condensed financial statements 5 PREMIUM CIGARS INTERNATIONAL, LTD. NOTES TO CONDENSED FINANCIAL STATEMENTS 1. PRESENTATION OF INTERIM INFORMATION In the opinion of the management of Premium Cigars International, LTD. (the "Company"), the accompanying condensed financial statements include all normal adjustments considered necessary to present fairly the financial position as of June 30, 1999, and the results of operations for the three months and six months ended June 30, 1999 and 1998, and cash flows for the six months ended June 30, 1999 and 1998. Interim results are not necessarily indicative of results for a full year. The condensed financial statements and notes are presented as permitted by the instructions to Form 10-QSB, and therefore do not contain certain information included in the Company's audited consolidated financial statements and notes for the year ended December 31, 1998. 2. FINANCIAL STATEMENTS The condensed statements of operations and cash flows include the accounts of the Company and its wholly-owned subsidiary through the date of sale of the subsidiary (see Note 8). All significant intercompany accounts and transactions have been eliminated. Subsequent to the date of sale, the condensed financial statements include the accounts of the Company only. 3. INVENTORIES As of June 30, 1999, inventory consists of the following: PrimeTime and cigars $ 521,787 Reserve for obsolescence (346,505) --------- $ 175,282 ========= 4. SEVERANCE PACKAGES During the first quarter of 1998 the company terminated employment agreements with certain former officers and employees of the Company. Under the terms of the various employment agreements, severance pay ranged from six to nine months of salary, payable over the same six or nine month period. Additionally, three of the former officers received lump-sum payments of $40,000 each as settlement for potential claims against the company. 5. RELATED PARTY TRANSACTIONS The company has notes receivable from two director/shareholders of the Company in the aggregate amount of $86,225. The notes, which bear interest at 6%, were 6 originally due on March 31,1999. The independent members of the Company's board of directors approved a one-time extension for the repayment of these notes to September 30, 1999. As consideration for this extension, the interest rate has been increased from 6% to 10% during the extension period. Accrued interest as of June 30, 1999 is $17,676. The total of the notes receivable plus accrued interest is included in other current assets in the Company's condensed balance sheet. 6. ISSUANCE OF STOCK During the first quarter of 1999, the Company issued 370,000 restricted shares of its common stock for a total of $136,000. As more fully discussed in the notes to the Company's 1998 audited financial statements included in its 1998 Form 10-KSB, the proceeds include the sale of 100,000 shares of stock for an initial price per share of $.01 to its financial public relations provider. The sale is subject to certain performance criteria being met; if the criteria are met the provider has the option to pay between $.99 and $1.49 per share as additional consideration in exchange for the removal of a restrictive legend. If the performance criteria are not met, the Company may repurchase the shares at their original issue price. The Company issued an additional 100,000 restricted shares in connection with the sale of its wholly-owned subsidiary (see Note 8). 7. NASDAQ DELISTING On May 11, 1999 the Company was notified by the NASDAQ Listing Qualifications Panel that its shares would be delisted as of the close of trading that day. The securities of the Company are now trading on the OTC Bulletin Board. 8. SALE OF CAN-AM On or about June 2, 1999, the Company finalized the sale of all of its shares in its wholly owned subsidiary, Can-Am International Investments, Corp. ("Can-Am"), to Ultimate Cigars, Corp. ("ULTC"), a publicly traded company, for $375,000. In connection with the sale of Can-Am, the Company and ULTC exchanged 100,000 shares of each other's common stock. ULTC has already paid the Company the first required installment of $250,000. The second and third installments of $100,000 and $25,000 are due on or before July 6, 1999 and July 21, 1999, respectively. The total of $125,000 is included in other current assets in the Company's condensed balance sheet. Additionally, the Company has entered into an option agreement with ULTC (the "Option") pursuant to which ULTC has the option to acquire additional shares for a total of up to 50% of the Company's issued and outstanding stock for a payment of $2,500,000 and all outstanding shares of ULTC's common stock not owned by the Company. The Option is subject to the approval of the shareholders for both the Company and ULTC. In connection with the sale, the Company has also been granted a purchase discount of up to $125,000 on a product currently in development by ULTC, which would be sold by the Company. 7 9. WRITEDOWN OF CIGAR HUMIDOR PROGRAM Due to declining demand for its humidified cigar program, the Company has discontinued the program in most of the stores in which it had placed humidors. The cost to write-off the abandoned humidors and discontinued or unsalable product has been charged against operations for the three months ended June 30, 1999. 10. CONTINGENCIES One of the conditions of the Purchase Agreement for the sale of Can-Am specified that the buyer would not be responsible for past provincial tobacco taxes that were subsequently assessed against Can-Am based on a different method of calculation than had been historically used by Can-Am. On July 30, 1999 Can-Am was notified by the Alberta Treasury that it was being assessed back taxes in the amount of CAN $247,500 (approximately US $165,000) for the period April 1997 through April 1999. At the same time, the Alberta Treasury has submitted a claim in the amount of CAN $60,000 (approximately US $40,000) against the Tobacco Tax Bond. The Company is the indemnitor on this bond. The company does not agree with the assessment and intends to vigorously contest it in cooperation with the buyer. Furthermore, it disputes the claim against the bond, as it believes the bond had been effectively canceled at the time of the claim. Management is unable to determine at this time what amount, if any, will ultimately be paid to settle this claim and therefore has made no provision for it in the accompanying financial statements. 8 Special Note Regarding Forward-looking Statements Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition or state other "forward-looking" information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from forward-looking statements and projections include, for example: * failure of our products, particularly new products such as PrimeTime(TM) and Humidibox(TM), to be accepted and have a lasting presence in the marketplace; * our ability to maintain an adequate capital position and a sufficient cash flow as we add retail stores and new products; * our ability to obtain funding to enable us to maintain sufficient working capital for operating activities; * any decision by major retail chains to discontinue selling all tobacco products or to place our humidors or countertop control units in a disadvantageous location within their stores; * a decline in the popularity of cigar smoking and/or possible adverse public opinion against cigars and cigar smoking; * interruptions in the availability of PrimeTime(TM); * changes in government regulations, tax rates, the manner of tax calculation and collection and similar matters relating to our products, including any restriction on the self-service nature of merchandising displays and marketing promotions particularly or any retroactive application of such changes; * our ability to negotiate and maintain favorable distribution arrangements with our customers; * the effect of changing economic conditions; * the risk of any significant uninsured loss from settlement dealing with Proposition 65; * our ability to buy quality premium cigars at favorable prices and the effect on cigar prices and availability, of weather and other conditions in the countries that import cigars to the U.S. and Canada; and * other risks which may be described in our future filings with the SEC. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. 9 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You must read the following discussion on the financial condition and results of operations of Premium Cigars International, LTD. ("PCI") in conjunction with PCI's condensed financial statements, including the notes elsewhere in this Form 10-QSB filing. Historical results are not necessarily an indicator of trends in operating results for any future period. As a direct distributor of cigar products, PCI has built an infrastructure that provides high speed fulfillment of products to retailers. The Company's business plan is to provide these same business solutions to other companies. PCI operates in one business segment and has a December 31 fiscal year. RESULTS OF OPERATIONS COMPARISON OF THE SECOND QUARTER OF 1999 WITH THE SECOND QUARTER OF 1998 Net sales for the quarter ended June 30, 1999 decreased by $770,000 versus the same period last year, a 38% decrease. Most of the decrease ($600M) is attributable to declining sales at its former Canadian subsidiary; also, year ago results included three months of Canadian operations versus only two months for the current quarter. Canadian sales were negatively impacted due to increasing legislative pressure affecting cigar packaging and humidor placement within retail outlets. Sales in the United States were down 16% versus one year ago; however, revenue steadily increased during the quarter as the company continued rolling out its new flavored cigar PrimeTime. This was offset by a steep decline in sales via the company's now mostly discontinued in-store humidor program. Gross profit margin was 26% for the quarter ended June 30, 1999 versus 27% for the quarter ended June 30, 1998. Margins were negatively impacted in Canada due to a higher than normal volume of returns of product that could not be resold. Margins in the United States held steady despite the heavy introductory efforts in launching PrimeTime. Selling, general and administrative expenses for the quarter ended June 30, 1999 decreased $125,000 or 10% from the same period one year ago. Excluding the cost of the introductory PrimeTime marketing spending that was charged off as account acquisition costs, SG&A decreased $326,000, or 26% from the comparable period one year ago. SG&A has declined due to staff cuts that were implemented during the first quarter of 1999 (in recognition of the declining importance of the Company's in-store humidor program), as well as an overall decrease in infrastructure spending that was ongoing during 1998. The favorable trend in SG&A is expected to continue, as the now disposed of Canadian operations were incurring higher average monthly SG&A during the current quarter versus one year ago. Other income for the quarter ended June 30, 1999 declined from the previous year because the prior year amount consisted mainly of interest income from short-term investments which were purchased with a portion of the net proceeds 10 from the Company's initial public offering. The current year expense also reflects interest expense from the factoring of the Company's accounts receivable. COMPARISON OF THE FIRST SIX MONTHS OF 1999 WITH THE FIRST SIX MONTHS OF 1998 Net sales for the six months ended June 30, 1999 decreased by $700,000 versus the same period one year ago, a 21% decrease. As discussed above, most of the decrease is attributable to declining sales at its former Canadian subsidiary; also, year ago results included six months of Canadian operations versus five months for the current year. Sales in the United States were down 10% versus one year ago; however, revenue has steadily increased during the current year as the company continues rolling out its new flavored cigar PrimeTime. This was offset by a steep decline in sales via the company's now mostly discontinued in-store humidor program. Gross profit margin was 26% for the six months ended June 30, 1999 versus 22% for the six months ended June 30, 1998. The margin improvement is attributable to a much lower margin in the United States during the first quarter of 1998 due to nonrecurring expenditures for consolidating warehouse space and inspecting inventory for possible damage, as well as the continuing trend towards more efficient warehousing and shipping operations throughout 1998 and into 1999. Selling, general and administrative expenses for the six months ended June 30, 1999 decreased $383,000 or 15% from the same period one year ago. Excluding the cost of the introductory PrimeTime marketing spending that was charged off as account acquisition costs during the second quarter of 1999, SG&A decreased $584,000, or 23% from the comparable period one year ago. SG&A has declined due to staff cuts that were implemented during the first quarter of 1999 (in recognition of the declining importance of the Company's in-store humidor program), as well as an overall decrease in infrastructure spending that was ongoing during 1998. The favorable trend in SG&A is expected to continue, as the now disposed of Canadian operations incurred higher SG&A for the current year versus last year. As discussed in our previous 10-KSB filings, we took a one-time charge in the first quarter of 1998 to reflect the cost of severance packages for previous management. Other income for the six months ended June 30, 1999 declined from the previous year because the prior year amount consisted mainly of interest income from short-term investments which were purchased with a portion of the net proceeds from the Company's initial public offering. The current year expense also reflects interest expense from the factoring of the Company's accounts receivable. LIQUIDITY AND CAPITAL RESOURCES The Company used $423,000 for operating activities for the first six months of 1999. The net loss of $3,689,000 was reduced by non-cash expenses for depreciation and amortization of $470,000, $1,200,000 for the loss on the sale of its Canadian subsidiary and $1,000,000 for the write-down of its humidors and cigars. 11 As part of Management's efforts to restructure the Company, unprofitable investments in our Canadian subsidiary and the in-store cigar humidor program were either divested or severely curtailed. Canadian operations were hampered by a difficult operating environment due to increasing legislative pressure that affected cigar packaging and humidor placement within retail outlets. Combined with a downward trend in cigar consumption and the likely inability to be able to place its PrimeTime countertop control units on the front counters, Management determined that the best course of action was to eliminate any future cash drain resulting from the Canadian operations. In early June, the Company finalized the sale of its Canadian subsidiary for $375,000 in cash, plus an exchange of 100,000 shares of stock with the buyer. The downward trend in cigar sales plus a surplus of inventory led Management to conclude that no further investment was justified in the in-store humidor program. Efforts to dispose of our discontinued inventory met with limited success; only through substantial markdowns were we able to move some of this inventory. Although most of the stores have now dropped the in-store humidor program, we were able to place PrimeTime in the majority of these stores. The cost to write off the investment in the humidors and write-down the discontinued cigar inventory and packaging materials is shown as a charge against current operations for the three months ended June 30, 1999. As part of the Company's roll out of Prime Time, a countertop control unit ("CCU") is sent to each store as part of the initial order. However, the Company's supplier of Prime Time provides the CCU's at no cost to the Company. Therefore, as we continue to add more Prime Time accounts, no additional capital investment in the CCU's is required on our part. Management has determined that there is a tremendous opportunity and value in our core competencies as a high-speed order and fulfillment center. Our unique distribution system that we have developed for the convenience store industry is very efficient and valuable. Therefore, we are now pursuing new products to sell, market and distribute directly through our expanding convenience store distribution channel. As we begin to provide product fulfillment for others, we do not anticipate any significant capital expenditures beyond a modest investment to enhance our existing systems. Should the volume of business exceed our current capacity, we will need to acquire additional warehouse space and invest in additional equipment such as forklifts and racking. We invested nearly $600,000 in capital additions during 1998 as we developed our infrastructure and moved into our new facility. We do not anticipate any significant capital expenditures for the foreseeable future beyond those discussed above. The Company has incurred substantial operating losses since inception. As of December 31, 1998 the Net Operating Loss carryforward was approximately $5,300,000. We expect to incur another substantial operating loss for the current year. The Net Operating Loss carryforward may be attractive to another company wishing to offset its own tax liability. We have secured a $1,000,000 accounts receivable financing package which, assuming sales forecasts are achieved, we believe will provide the necessary working capital for our immediate ongoing needs; however, we cannot assure you that that we can generate sufficient revenues to provide the cash flow necessary to meet our ongoing working capital needs, nor to repay prior existing trade 12 indebtedness. We raised $136,000 during the first quarter of 1999 through the issuance of additional shares of the Company's shares. The Board of Directors has authorized the issuance of additional shares for up to an additional $200,000. We raised an additional $375,000 ($250,000 received in the second quarter with the balance to be received in the third quarter) from the sale of our Canadian subsidiary. However, the Company will have to raise additional capital to repay the trade debt it has incurred over the past several months. We cannot assure you that we will be able to raise sufficient capital to enable us to repay our outstanding trade debt in a timely manner. YEAR 2000 READINESS We purchased most of our computers within the past year and do not anticipate any significant problems relative to their Year 2000 ("Y2K") capabilities. Testing of each machine's capability will be completed by the third quarter of 1999. We have not yet implemented a plan to identify the non-IT (Information Technology) systems (i.e., those systems with an imbedded technology such as microcontrollers) which may require repair or replacement; however, given the nature of our operations and the age of our business, we do not believe that we face any material risk from these types of systems. Our business relies to a large extent on our integrated accounting, order entry, and inventory control system (SBT Pro Series 5.0), which is represented by the vendor as being Y2K compliant. We also rely on standard office productivity software (Microsoft Office 97) which is also represented as being Y2K compliant. Our EDI software, which we use to transmit invoices and receive payment information from our largest U.S. customer is now represented as being compliant. We are in the process of determining the compliance of our other software and will have this completed by the third quarter of 1999. We have begun the process of contacting key customers, vendors, service providers and other third parties with whom business is conducted to determine what impact, if any, their Y2K readiness will have on us; this process will be completed by the third quarter of 1999. Although we do not anticipate any material adverse effect on our business as a result of such parties failure to achieve Y2K readiness, we cannot assure you that these parties will have accurately assessed their Y2K readiness status. At this time, we do not believe that we will incur any material expenditures to identify and replace, as necessary, any Y2K non-compliant systems. We do not anticipate any material effect to our business from any non-compliant PCI-owned systems; however, we are unable at this time to determine what, if any, effect on our business will occur from any third parties non-compliant systems. We expect to be better able to assess this uncertainty as we obtain more Y2K information from these parties. We do not currently have a contingency plan in place to handle a "worst case scenario", as we believe that any non-compliant systems on our part do not pose a material risk to PCI. If, and to the extent that we identify material risks to the company from third parties non-compliance, we will formulate a plan at that time. 13 PART II - OTHER INFORMATION Item 1 - Legal Proceedings PROP 65. PCI and Southland have received a notice of violations of Proposition 65, a California regulation which requires warning labels on certain cancer causing products, from a California attorney, Morse Mehrban. PCI believes it is currently in compliance with Proposition 65. A new notice was submitted to PCI following the dismissal of the prior civil suit brought by Mr. Merhban, which was dismissed without prejudice for improper notice. It is expected that Mr. Mehrban will re-file a lawsuit against PCI. With respect to the lawsuit filed against Southland, the complaint indicates that the lawsuit covers a vast quantity of products other than PCI's products. Accordingly, PCI has determined not to retain California counsel to defend these claims on behalf of Southland. If Mr. Mehrban files suit against PCI, PCI will retain California counsel to defend the claims brought against it. Item 2 - Changes in Securities and Use of Proceeds (a) None. (b) None. (c) Sale of Unregistered Securities. The Company sold a total of 100,000 shares of unregistered common stock during the first quarter to Ultimate Cigar Corp. as more fully described in Item 5 herein. (d) Use of Proceeds. All proceeds from the Company's initial public offering have been expended as set forth in the Company's Form 10-KSB for the year ended December 31, 1998. Item 3 - Defaults upon Senior Securities None Item 4 - Submission of Matters to a Vote of Security Holders None. Item 5 - Other Information Sale of Can-Am International Investments, Corp. On or about June 2, 1999, Premium Cigars International, Ltd. (the "Company") finalized the sale of all of its shares in its wholly owned subsidiary, Can-Am International Investments, Corp. ("Can-Am"), to Ultimate Cigars, Corp. ("ULTC"), a publicly traded company. The original sales price for Can-Am was $500,000. In connection with the sale of Can-Am, the Company and ULTC also exchanged 100,000 shares of each other's common stock. The purchase price was restructured in July, and ULTC has a paid a 14 total of $375,000 in cash for the purchase of Can-Am. The remaining $125,000 due under the sales contract was restructured as an incentive to PCI for future purchases of Web Access Cards provided by ULTC. Pursuant to the revised agreement, PCI will obtain a purchase discount for Web Access Cards purchased by PCI until such time as the total amount of such discounts equals $125,000. Appointment of New Chief Executive Officer. As previously disclosed in the Company's Form 8-K dated June 17, 1999, the Company named Scott Lambrecht as the new President and Chief Executive Officer. Scott Lambrecht was an original founder of the Company and previously served as Vice President of Operations and Secretary to the Company. Scott Lambrecht's appointment followed the resignation of John E. Greenwell as President, Chief Executive Officer and Director of the Company. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Method Number Exhibit Name of Filing - ------ ------------ --------- 3.1 Articles of Incorporation * 3.2 Amended and Restated Bylaws, Adopted May 8, 1998 ** 4.1 Specimen Common Stock Certificate *** 4.2 Description of Rights of Security Holders **** 10.1 Terms and Conditions for Sale of Can-Am Exhibit filed herewith 27.1 Financial Data Schedule Exhibit filed herewith 99.1 "Underwriting" section of Registration Statement on **** Form SB-2 - ---------- * Incorporated by reference to Exhibit 3.1 of Registration Statement on Form SB-2 (file no. 333-29985) declared effective on August 21, 1997. ** Incorporated by reference to Exhibit 3.2 of the Form 10-QSB filed by the Registrant for the quarter ending June 30, 1998. *** Incorporated by reference to Exhibit 4.2 of Registration Statement on Form SB-2 (file no. 333-29985) declared effective on August 21, 1997. 15 **** Incorporated by reference to pages 56-57 of Registration Statement on Form SB-2 (file no. 333-29985) declared effective on August 21, 1997. (b) Reports on Form 8-K Form 8-K filed by the Company on June 17, 1999 disclosing Nasdaq delisting, sale of Can-Am, the appointment of a new CEO and other matters. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIUM CIGARS INTERNATIONAL, LTD. (Registrant) /s/ Scott Lambrecht Date: August 16, 1999 - ------------------------------------------- Scott Lambrecht President & Chief Executive Officer /s/ Stanley R. Hall Date: August 16, 1999 - ------------------------------------------- Stanley R. Hall Controller and Principal Accounting Officer 16 EX-10.1 2 TERMS AND CONDITIONS OF SALE TERMS AND CONDITIONS FOR ULTC TO PURCHASE OF THE NET ASSETS OF CAN-AM INTERNATIONAL FROM PCIG AND ULTC'S OPTION TO BE ACQUIRED BY PCIG MAY 15, 1999 TERMS AND CONDITIONS FOR ULTC PURCHASE OF THE NET ASSETS OF CAN-AM INTERNATIONAL FROM PCIG Ultimate Cigar Co. Inc. (herein after referred to as "ULTC"), a Nevada, U.S.A. corporation publicly traded as a NASDAQ OTCBB issue, hereby makes a conditional offer to purchase the net assets of Can-Am International, a subsidiary corporation of Premium Cigars International Ltd.(herein after referred to as "PCIG" and renamed Product Express.com) an Arizona corporation publicly traded as a NASDAQ OTCBB issue and 100,000 common shares, for US$500,000.00 and 400,000 common shares (300,000 of which will be non diluting) of Ultimate Cigar Co. Inc.'s stock. In order to effect this purchase and sale it may be required that PCIG and ULTC register the shares. The purchase and sale shall be effective on May 20, 1999 with all rights, possession, and transference of net assets including all the issued share capital of Can-Am International and control of operations on that date. The closing of the stock transfer shall be on the date of the purchase and sale but may be extended to not later than June 20, 1999 if additional time is required to effect said transfer (not applicable to shares held as security described below). It is generally agreed that the following terms and conditions will be met to effect a purchase of the net assets of Can Am. 1. Purchase Price of US$500,000.00 is payable as follows: a. US$250,000.00 cash paid to PCIG on or before May 20, 1999. b. US$250,000.00 cash paid to PCIG on or before June 20, 1999 secured by 500,000 non diluting (unrestricted after June 20,1999) ULTC common shares, and/or the assets of ULTC, and/or the repossession of Can-Am, to whatever extent PCIG deems is necessary to recover said payment if said payment is not made on June 20, 1999. 2. Stock transference of 400,000 common shares of ULTC's stock to PCIG as follows: a. The following shares and restrictions shall become null and void if ULTC completes the merger with PCIG as outlined in the option phase of this agreement: 300,000 ULTC (non diluting) common shares to be held in a third party trust account for the benefit PCIG to be released to PCIG if the option to merger with PCIG is not completed by September 20,1999 with the following restrictions: 1 i. 100,000 restricted trading shares until September 20, 1999. ii. 100,000 restricted trading shares until December 20, 1999. iii. 100,000 restricted trading shares until March 20, 2000. b. 100,000 ULTC (dilutable) common shares to PCIG restricted as to trading until June 20, 2000. 3. Stock transference of 100,000 common shares of PCIG's stock to ULTC as follows: a. 100,000 ULTC (dilutable) common shares to ULTC restricted as to trading until June 20, 2000. 4. ULTC will have the first right of refusal to form an alliance to participate in the Product Express.com program as a shipping facility in Canada to serve the convenience, drug, and small grocery outlets in Canada to whatever extent the program can be developed in Canada by ULTC utilizing PCIG's products and systems for E-commerce. 5. ULTC will pursue an alliance with PCIG in the development of a similar product to PCIG's Prime Time(TM) flavored cigarillo and/or other non tobacco flavored smokes in individually sealed units, and make that product available to PCIG exclusively in its U.S. markets as an alternate to PCIG's Prime Time(TM) should PCIG elect to use an alternate cigarillo and/or other non tobacco flavored smoke. 6. Management and employees will be interviewed by ULTC's Management as to their future employment. The following Employee, Jim Stanley, has a severance of six months wages if he is unjustly fired or laid off. This creates a liability to this individual and as a condition of this offer to purchase and sale, it is required that the severance clauses in this contract be made null and void with no payment of severance or bonuses, past, present, or future or that ULTC assumes the liability for his contract. All wages, both now or in the future are to remain at the current level until a review of Management and each employee is completed by ULTC's Management. The CEO/President of PCIG (with no compensation, bonus or severance, past, present, or future) will tender his resignation at the time of acceptance and approval of the Board of Directors of PCIG of this Terms and Conditions for ULTC Purchase of the net assets of Can-Am International from PCIG with an effective date of May 19, 1999. 7. General components to the Terms and Conditions for ULTC Purchase of the net assets of Can-Am International from PCIG with an effective date of May 15, 1999 and as defined and further outlined in Exhibit "A", and guaranteed through a offset in the second payment of US$250,000.00 not to be materially different in Exhibit "B" of which both Exhibits shall become part and parcel to this agreement are as follows: a. The ULTC will purchase the assets and assume the liabilities of Can-Am, excluding the inter company (PCIG) receivable and stockholder's equity. This will be accomplished by PCIG signing all of Can-Am's stock and 100,000 shares of PCIG's common stock (restricted as outlined herein) over to ULTC and delivering to a trust account of which ULTC will deposit for dispersal to PCIG the first installment amount of US$250,000.00 and deliver 100,000 shares of ULTC stock(restricted as outlined herein) signed over to PCIG. 2 b. ULTC will assume responsibility for any returns after the closing date. c. ULTC will establish and escrow account at the closing date to be used to pay current liabilities. Federal and provincial taxes at the time of the closing would be determined using the methodology Can-Am has used historically. Any further tobacco tax liabilities that may arise associated with the time period prior to the closing would not be the responsibility of UTLC. d. ULTC would assume Can- Am's lease commitments. 8. Steven A. Lambrecht has constructed this tender offer to sell Can-Am to ULTC on behalf of and at PCIG's request delineating the acceptable terms and conditions outlined herein and at PCIG's direction. 9. Conditions Precedent: Vote by a majority of each respective Board of Directors approving this agreement in its entirety. OPTIONAL ACQUISITION OF ULTC BY PCIG Ultimate Cigar Co. Inc. (herein after referred to as "ULTC"), a Nevada, U.S.A. corporation publicly traded as a NASDAQ OTCBB issue, hereby reserves an option under conditional terms to be acquired by Premium Cigars International Ltd.(herein after referred to as "PCIG" and renamed Product Express.com) an Arizona corporation publicly traded as a NASDAQ OTCBB issue for up to 50% of PCIG's equity in common shares in exchange for all of ULTC's equity (including Can-Am's) to be delivered in the form of common shares and a US dollar amount that would be 20% per share less than the then current 20 day prior trading average per share of PCIG's common trading shares, but in no event shall the total amount paid to PCIG be less than US$2,500,000.00 described as follows: 1. All of ULTC's equity (including Can-Am's) in the form of common shares shall be delivered to PCIG plus a US dollar amount that would be 20% per share less than the then current 20 day prior trading average per share of PCIG's common trading shares, but in no event shall the total amount paid to PCIG be less than US$2,500,000.00 shall be paid to PCIG on or before September 20, 1999 for a total of 50% of PCIG's equity in the form of common shares (includes the 100,000 shares of PCIG stock exchanged in the purchase of Can-Am). 2. The entire Board of Directors of PCIG will tender their resignations at the time of acceptance and approval of the Board of Directors of PCIG of this option of ULTC to be acquired by PCIG and the Private Placement terms and conditions, subject to the entire amount of funds being made available with an effective date of the resignations being the date the entire funds necessary to complete a 50% acquisition of PCIG's common stock are made available to PCIG. 3. In the event ULTC's shareholders and/or associates cannot raise the entire amount required to obtain the 50% equity then the percentile of equity to ULTC's shareholders in the form of common shares of PCIG 3 shall be adjusted to the amount of US dollars raised times the equity of PCIG to be delivered (in no event less than US$25,000.00 for every .5% equity in the form of common stock, less a percentile adjustment to account for the 100,000 of PCIG's common shares exchanged in the purchase of Can-Am) to the nearest US$25,000.00 increment up to a total of not less than US$2,500,000.00 plus all the equity of ULTC in the form of common stock for up to 50% equity of PCIG in the form of common stock. 4. The share totals for each public company may be increased or decreased dependent on the conditions of reinstating the listing of PCIG as a Small Cap NASDAQ listing, however the equity position percentile in the form of common shares shall not be altered from the ratios of equity in the form of common stock delineated herein as part of the acquisition of ULTC by PCIG for all of ULTC's equity in the form of common shares and not less than US$2,500,000.00 for up to 50% of PCIG equity in the form of common stock as defined herein. 5. In order to effect this acquisition it may be required that PCIG and possibly ULTC register the shares so that all shares become free trading. 6. Steven A. Lambrecht has constructed this tender offer to sell Can-Am to ULTC on behalf of and at PCIG's request delineating the acceptable terms and conditions outlined herein and at PCIG's direction. Gary Sherman and/or Steven A. Lambrecht and/or their associates will be compensated by ULTC for their efforts in promoting the private arrangement of portions of the funding of the not less than $2,500,000.00 commensurate to their efforts (to be determined by the parties involved) as a result of privately helping with the raising of the funds. 7. Conditions Precedent: Vote by a majority of each corporations respective Board of Directors approving the merger and shareholder ratification of said approval. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same document. Agreed to as the principle outline of the Purchase and sale and subsequent Merger effective as of this 18th day of May, 1999, with the approval of the undersigned as to whatever authority they have and as to their irrevocable proxy to vote their shares in favor of this purchase subject to the majority approval of the respective Board of Directors of the respective Corporations and ratification of the shareholders with respect to the exercising of the option for ULTC acquisition by PCIG only. 4 Ultimate Cigar Co. Inc. Inc. Premium Cigars International, Ltd. - ----------------------------------- ----------------------------------- Rep. of Shareholders date Steven A. Lambrecht,Board Member-date - ----------------------------------- ----------------------------------- Phillip Cote, President -date Gary Sherman Board Member-date ----------------------------------- John Greenwell, President/CEO/BoD-date ----------------------------------- Gregory P. Lambrecht, Board Member-date ----------------------------------- Colin A. Jones, Board Member-date ----------------------------------- Greg Emery, Board Member-date 5 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1 59,861 25,000 251,334 25,329 175,282 747,871 450,682 211,891 1,261,655 1,259,987 0 0 0 8,974,299 0 1,261,655 2,566,286 0 1,893,272 6,238,337 16,679 38,578 10,546 (3,688,730) 0 0 0 0 0 (3,688,730) (.98) 0
-----END PRIVACY-ENHANCED MESSAGE-----