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
--------------------- ----------------------
September 30, 1997 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)
15651 North 83rd Way, Suite 3
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Registrant's telephone number, including area code: (602) 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 No X
--- ---
As of September 30, 1997, there were 3,469,092 shares of Premium Cigars
International, Ltd. common stock, no par value outstanding.
INDEX
-----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) as of September 30, 1997
Consolidated Statements of Operations (Unaudited) for the three and six
months ended September 30, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the period from the date of inception, June 1, 1996 through March
31, 1997 and for the six month period ended September 30, 1997.
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
2
PREMIUM CIGARS INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
ASSETS
Current Assets
Cash and cash equivalents $3,514,417
Receivables
trade 314,061
related parties 16,946
miscellaneous 6,212
----------
Total Receivables 337,219
Inventory 354,265
Held to maturity securities 3,411,897
Other current assets 152,511
----------
Total Current Assets 7,770,309
Property and Equipment, Net 197,484
Other Assets
Humidors, net 517,586
Notes receivable - related parties 86,225
Organizational costs, net 36,742
Miscellaneous 10,456
----------
Total Other Assets 651,009
----------
TOTAL ASSETS $8,618,802
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable - current portion $ 4,430
Accounts payable 683,068
Accrued expenses 250,678
----------
Total Current Liabilities 938,176
Total Long Term Liabilities 0
----------
TOTAL LIABILITIES 938,176
Equity
Common stock - no par value, 10,000,000 shares authorized,
3,469,092 shares issued and outstanding as of 9/30/97 8,807,049
Accumulated deficit (1,126,423)
----------
TOTAL EQUITY 7,680,626
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,618,802
==========
3
PREMIUM CIGARS INTERNATIONAL,LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended September 30 Six Months Ended September 30
------------------------------- -----------------------------
1997 1996 1997 1996
------------------------------- -----------------------------
NET SALES $1,372,316 $ 132,511 $2,000,496 $ 132,511
COST OF SALES 1,013,951 105,345 1,521,969 105,345
------------------------------- -----------------------------
GROSS PROFIT 358,365 27,166 478,527 27,166
SALES AND MARKETING 482,354 737 600,048 737
GENERAL AND ADMINISTRATIVE 237,492 29,153 538,997 29,153
------------------------------- -----------------------------
LOSS FROM OPERATIONS (361,481) (2,724) (660,518) (2,724)
OTHER INCOME (EXPENSE)
Interest and miscellaneous income 24,667 -- 25,797 --
Interest and miscellaneous expense (22,296) (1,354) (46,754) (1,354)
Loan Fees (95,000) -- (95,000) --
------------------------------- -----------------------------
TOTAL OTHER INCOME (EXPENSE) (92,629) (1,354) (115,957) (1,354)
------------------------------- -----------------------------
NET LOSS $ (454,110) $ (4,078) $ (776,475) $ (4,078)
=============================== =============================
LOSS PER SHARE $ (0.20) $ (0.01) $ (0.42) $ (0.01)
=============================== =============================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,251,371 1,480,500 1,868,042 1,480,500
=============================== =============================
4
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
for the period from the date of inception, June 1, 1996 through March 31, 1997
and for the six month period ended September 30, 1997.
Common Stock Total
------------------------------- Accumulated Treasury Stockholders'
Shares Amount Deficit Stock Equity (Deficit)
---------- -----------------------------------------------------------------
Balance, June 1, 1996 -- $ -- $ -- $ -- $ --
Shares issued for cash 1,433,400 212,050 -- -- 212,050
Shares issued for services 47,100 207,625 -- -- 207,625
Net loss -- -- (349,948) -- (349,948)
---------- -----------------------------------------------------------------
Balance, March 31, 1997 1,480,500 419,675 (349,948) -- 69,727
---------- -----------------------------------------------------------------
Purchase of treasury stock (15,000) -- -- (5,000) (5,000)
Shares issued for services 15,000 32,500 -- 5,000 37,500
Additional compensation recorded
on private transactions -- 72,500 -- -- 72,500
Net loss for the three month period
ended June 30, 1997 (unaudited) -- -- (322,365) -- (322,365)
---------- -----------------------------------------------------------------
Balance, June 30, 1997 1,480,500 524,675 (672,313) -- (147,638)
========== =================================================================
Additional required paid in capital -- 150,000 -- -- 150,000
Shares issued at Initial Public Offering 1,900,000 7,726,020 -- -- 7,726,020
Representative's Warrants -- 1,710 -- -- 1,710
Shares issued with Overallotment 88,592 404,644 -- -- 404,644
Net loss for the three month period
ended September 30, 1997 (unaudited) -- -- (454,110) -- (454,110)
---------- -----------------------------------------------------------------
Balance, September 30, 1997 3,469,092 $8,807,049 $(1,126,423) $ -- $ 7,680,626
========== =================================================================
5
PREMIUM CIGARS INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended September 30
-----------------------------
1997 1996
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $1,742,286 $ 132,511
Cash paid to suppliers and employees (2,307,865) (108,034)
Interest and loan fees paid (141,754) (1,354)
Interest earned 25,797 --
---------- ----------
Net cash provided (used) by operating activities (681,536) 23,123
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (183,137) --
Purchase of humidors (545,427) (23,124)
Short term investments made (3,411,897) --
Organizational costs (8,151) --
Deferred offering costs (879,279) --
---------- ----------
Net cash used by investing activities (5,027,891) (23,124)
---------- ----------
Cash flows from financing activities:
Proceeds from common stock issue 9,321,396 1
Proceeds from debt 1,185,000 --
Repayment of debt (1,345,000) --
Proceeds from lease financing 4,430 --
---------- ----------
Net cash provided by financing activities 9,165,826 1
---------- ----------
Net increase in cash and cash equivalents 3,456,399 --
Cash and cash equivalents - beginning of period 58,018 --
---------- ----------
Cash and cash equivalents - end of period $3,514,417 $ --
========== ==========
Reconciliation of Net Loss to Net Cash used
for Operating Activities:
Net loss $ (776,475) $ (4,078)
---------- ----------
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 100,831 737
Changes in assets and liabilities:
Receivables - trade (249,761) --
- related parties (8,449) --
- miscellaneous (6,212) --
Inventory (227,928) (44,781)
Other current assets (136,904) --
Other assets (10,456) --
Notes payable - related parties (19,641) --
Accounts payable - trade 573,814 45,464
Accrued expenses 79,645 25,781
---------- ----------
94,939 27,201
---------- ----------
Net cash used for operating activities $ (681,536) $ 23,123
========== ==========
6
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying consolidated financial statements of Premium Cigars
International, Ltd. and Subsidiary (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Item
310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's financial condition and operating results for the interim
periods presented, have been included. Operating results for the six
months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1998. These
interim financial statements should be read in conjunction with the
prospectus dated August 21, 1997, including the financial statements
and notes contained therein, filed with the Securities and Exchange
Commission.
2. Nature of Operations:
Premium Cigars International, Ltd. (the "Company") is a Corporation
organized under the laws of the State of Arizona on December 16, 1996.
CAN-AM International Investments Corp. (CAN-AM), a British Columbia
Canadian corporation, was incorporated on June 20, 1996. The Company
acquired all of the outstanding stock of CAN-AM on December 31, 1996.
The principal business purpose of the Company is the distribution of
premium cigars using countertop humidors in convenience stores, grocery
stores and other retail outlet markets. The Company conducts business
throughout the United States. The Company's wholly-owned subsidiary,
CAN-AM, operates in five Canadian Provinces.
3. Earnings Per Common Share:
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods. Fully diluted earnings
per share are not presented as they are anti-dilutive. The Company
completed an initial public offering of its Common Stock on August 21,
1997. Pursuant to Securities and Exchange Commission rules, shares of
Common Stock issued for consideration below the anticipated offering
price per share during the 12-month period prior to filing of the
registration statement have been included in the calculation of common
share equivalent shares as if they had been outstanding for all periods
presented.
4. New Accounting Pronouncements:
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance
with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement
is effective for fiscal years and interim periods ending after December
15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its earnings per share
computations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB
is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15,
which has been superseded by SFAS No. 129. The Company does not expect
adoption of SFAS No. 129 to have a material effect, if any, on its
financial position or results of operations.
7
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. New Accounting Pronouncements: (Continued)
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective
for financial statements with fiscal years beginning after December 15,
1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its financial position or
results of operations, if any, from the adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131)
issued by the FASB is effective for financial statements beginning
after December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company does
not expect adoption of SFAS No. 131 to have a material effect, if any,
on its Results of Operations.
5. Held to Maturity Securities:
Held to maturity securities consist of proceeds from the initial public
offering temporarily invested in United States treasury bills. As of
September 30, 1997, these were comprised of treasury bills with a yield
of 5.234%, maturing on February 26, 1998.
6. Subsequent Event:
The Company's Board of Directors elected to change its fiscal year end
from March 31, to Dec 31, effective with the year ending Dec 31, 1997.
The accompanying financial statements have been presented on a March
31, year end basis.
8
Item 2 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
GENERAL
Premium Cigars International, Ltd. ("PCI" or the "Company"), an Arizona
corporation, is a national and international marketer and distributor of premium
cigars in convenience stores and other high volume retail stores in the United
States and Canada.
In recent years, cigar smoking has regained popularity in the United States.
Consumption and sales of cigars, particularly premium cigars, have increased
significantly since 1993. Sales in the U.S. of all types of cigars increased
from 3.4 billion units in 1993 to 4.4 billion units in 1996, an annual increase
of 8.7%. However, premium cigars, the type marketed and distributed by PCI,
increased at an annual rate of 67.0% from 1995 to 1996.
We have established the objective of placing our PCI Cigar Program, which
includes supplying humidors, cigars, service and information in 10,000 high
volume convenience, gas, grocery and drug stores and outlets by March 31, 1998,
and in 30,000 to 50,000 outlets within three to five years. In these selected
markets, we offer a broad range of brands as well as in-house private label
brands, priced at retail from $1.00 to $8.00.
We operate in one industry segment, which is the marketing and distribution of
premium cigars and accessory products.
Results of Operations
In December 1996, PCI acquired all of the outstanding stock of CAN-AM, which
prior to that had acquired the cigar distribution operations, including cigar
accounts, humidors and inventory of Rose Hearts, Inc, a Washington corporation,
and J&M Wholesale, Ltd., a British Columbia (Canada) corporation. J&M did not
begin its cigar distribution until June 1996 and had no material sales until the
three month period ended September 30, 1996, and then, principally to Southland
Canada (7-Eleven) outlets. Rose Hearts did not begin cigar distribution until
late summer of that year and distributed primarily in the State of Washington.
Therefore, any comparisons made to the results of operations in 1996 are limited
to the three month period ended September 30, 1996 (the "September 1996
Quarter").
Also, certain expenses and costs in the income statement for the three months
ended June 30, 1997 (the "June 1997 Quarter") that were included in our Initial
Public Offering Prospectus dated August 21, 1997 (the "Prospectus"), have been
reclassified to make them consistent with the presentation of these expenses and
costs in the income statements for the three months ended September 30, 1977
(the "September 1997 Quarter") and the six months year-to-date period ended
September 30, 1997 (the "September 1997 YTD Period"). We believe that the
reclassified income statements better present the performance of the Company on
a forward-looking basis.
9
Our revenues for the September 1997 Quarter and the September 1997 YTD Period
were $1,372,316 and $2,000,496, respectively, compared to revenues of $132,511
for the September 1996 Quarter. The increase in revenues for the September 1997
Quarter compared to the September 1996 Quarter was 935.6%.
We derived revenues principally from the initial "rollout" of new orders to
stores, which included a humidor and cigars among other items, and from
re-orders of cigars and accessories to restock the humidors. The rollouts for
our Program for each quarter were:
-------------------- ---------------- --------------- --------------------
September 30, 1996 March 31, 1997 June 30, 1997 September 30, 1997
-------------------- ---------------- --------------- --------------------
110 480 2,610 4,212
-------------------- ---------------- --------------- --------------------
We announced in our press release dated November 3, 1997, that re-orders for the
month of August 1997 averaged approximately $120 per month for our combined
United States and Canadian operations. Reorders for our substantially more
mature PCI Cigar Program in Canada averaged more than double that, up from
approximately $100 per month one year earlier. The increases in both the number
of rollouts and the average dollar amount of monthly reorders account for the
substantial change in revenues for the September 1997 Quarter and the
September 1997 YTD Period compared to the September 1996 Quarter.
As shown below, our revenues for the September 1997 quarter increased $744,136
or 118.5% over the revenues for the June 1997 Quarter.
--------------- ----------------------- ----------------------------
June 1997 Quarter September 1997 Quarter
--------------- ----------------------- ----------------------------
Revenues $ 628,180 $ 1,372,316
--------------- ----------------------- ----------------------------
$ Increase - $ 744,136
--------------- ----------------------- ----------------------------
% Increase - 118.5%
--------------- ----------------------- ----------------------------
Our gross margins for the September 1997 Quarter and the September 1997 YTD
Period were 26.1 % and 23.9 %, respectively, compared to 20.5% for the September
1996 Quarter. In the September 1997 Quarter, we were able to reduce the cost of
product relative to sales price by 7.0% compared to the September 1996 Quarter.
This was achieved by entering into certain strategic purchasing arrangements
designed to improve and protect our margins and by making large-volume purchases
with selected vendors. The improvements realized in product costing were offset
in part by the expense of building a core warehousing and shipping team to meet
the objectives set for both new store rollouts and re-orders. Even here, we used
temporary employees during peak demand periods to lessen the brunt of these
expenses.
Our ongoing efforts to reduce product, warehousing and shipping costs are
reflected in the 36.6% improvement in the gross margin we achieved during the
September 1997 Quarter compared to the June 1997 Quarter.
10
--------------- ----------------------- ----------------------------
June 1997 Quarter September 1997 Quarter
--------------- ----------------------- ----------------------------
Gross Margin 19.1% 26.1%
--------------- ----------------------- ----------------------------
% Change - 36.6%
--------------- ----------------------- ----------------------------
Selling, general and administrative expenses ("SG&A Expenses") for the September
1997 Quarter and the September 1997 YTD period included non-recurring charges of
$160,000 and $270,000, respectively. The $160,000 charge represents management
fees paid to two key executives, and the $110,000 charge represents compensation
expense related to common stock sold by the chief executive officer of the
Company at a price below fair market value.
June 1997 September 1997 September 1997
Quarter Quarter YTD Period
- ---------------------------------- ------------ ---------------- --------------
SG&A Expenses With
Non-recurring Expenses $ 419,199 $ 719,846 $1,139,045
- ---------------------------------- ------------ ---------------- --------------
% of Revenues 66.7% 52.5% 56.9%
- ---------------------------------- ------------ ---------------- --------------
Non-recurring Expenses
included in SG&A Expenses $ 110,000 $ 160,000 $ 270,000
- ---------------------------------- ------------ ---------------- --------------
SG&A Expenses Without
Non-recurring Expenses $ 309,199 $ 559,846 $ 869,045
- ---------------------------------- ------------ ---------------- --------------
% of Revenues 49.2% 40.8% 43.4%
- ---------------------------------- ------------ ---------------- --------------
We established an infrastructure to obtain the sales objectives outlined in the
Prospectus. Many selling and marketing expenses are typically incurred in
advance of the revenues that might be realized from the selling and marketing
efforts represented by these expenses. Accordingly, SG&A Expenses were high
relative to revenues during the June 1997 Quarter (49.2%) and the September 1997
Quarter (40.8%). With significantly increased revenues in the September 1997
Quarter, SG&A Expenses, relative to revenues, did decline from the June 1997
Quarter.
Substantially all of the interest income of $24,251 and $25,331 received during
the September 1997 Quarter and the September 1997 YTD Period was earned on the
net proceeds from our initial public offering, which was placed into short-term,
highly liquid, low-risk investments. Interest income is expected to decrease in
future periods as the proceeds from the initial public offering are used in the
operations of the Company.
We incurred interest expense of $19,307 and $43,622 during the September 1997
Quarter and the September 1997 YTD Period, respectively, on bridge financing
entered into with accredited investors, notes entered into with a related party
and an operating line of credit
11
entered into with Biltmore Investors Bank. Related to the bridge financing, we
incurred a non-recurring fee of $95,000, which was expensed during the September
1997 Quarter.
Although changes in the exchange rate between the U.S. and Canadian currencies
may have an impact on the profitability of the Company, we do not expect the
impact of these changes to be material to the consolidated financial statements
of the Company due to the significantly smaller size of our Canadian operations
and to the stable relationship historically of the United States and Canadian
currencies.
We incurred a loss of $776,475, or $.42 per share during the September 1997 YTD
Period inclusive of the non-recurring expenses. Excluding the non-recurring
expenses, the net loss was $411,475, or $.22 per share.
For the September 1997 Quarter, the net loss inclusive of the non-recurring
expenses was $454,110, or $.20 per share and $199,110, or $.09 excluding the
non-recurring expenses. This compares to a net loss of $4,078, or $.01 per share
for the September 1996 Quarter. For the September 1997 Quarter, both the amount
of the loss ($199,110 compared to $212,169) and the loss per share ($.09
compared to $.14), improved from the June 1997 Quarter.
- ------------------------- ---------------- ---------------- ------------------ ----------------
September
September 1996 June 1997 September 1997 YTD
Quarter Quarter 1997 Quarter Period
- ------------------------- ---------------- ---------------- ------------------ ----------------
Net Lost Including
Non-recurring Expenses $ (4,078) $ (322,365) $ (454,110) $ (776,475)
- ------------------------- ---------------- ---------------- ------------------ ----------------
% of Revenues 3.1% 51.3% 33.1% 38.8%
- ------------------------- ---------------- ---------------- ------------------ ----------------
Loss Per Share $ (.01) $ (.22) $ (.20) $ (.42)
- ------------------------- ---------------- ---------------- ------------------ ----------------
Non-recurring Expenses $ -0- $ 110,000 $ 255,000 $ 365,000
- ------------------------- ---------------- ---------------- ------------------ ----------------
Net Loss Not Including
Non-recurring Expenses $ (4,078) $ (212,365) $ (199,110) $ (411,475)
- ------------------------- ---------------- ---------------- ------------------ ----------------
% of Revenues 3.1% 31.8% 14.5% 20.6%
- ------------------------- ---------------- ---------------- ------------------ ----------------
Loss Per Share $ (.01) $ (.14) $ (.09) $ (.22)
- ------------------------- ---------------- ---------------- ------------------ ----------------
Other Information
On September 18, 1997, we announced in a press release that we had increased the
number of rollouts of our PCI Cigar Program to over 4000 participating stores.
On September 24, 1997, we announced in a press release that we had signed an
agreement with Lockwood Publications, Inc, publisher of Smoke Magazine, granting
us
12
the exclusive right in North America to market the magazine in the stores that
display or sell our PCI Cigar Program.
On September 29, 1997, we announced in a press release that we had begun a
statewide Arizona rollout, that also included select stores in New Mexico, of
our PCI Cigar Program into approximately 700 Circle-K (Tosco Corporation),
7-Eleven (The Southland Corporation) and Giant Industries stores.
Capital Resources
During the September 1997 Quarter and the September 1997 YTD Period, we made
capital purchases, including the purchase of humidors, of $450,956 and $696,025,
respectively. As part of our PCI Cigar Program, one humidor is shipped with each
new store rollout. The humidor, which remains the property of PCI, is
capitalized as an Other Asset and written off over a twenty-four month period.
Liquidity
Our cash, cash equivalents and short-term investments and our current ratio
were:
- ---------------------------- --------------------- ---------------- --------------- ---------------------
At September 30, At March 31, At June 30, At September 30,
1996 1997 1997 1997
- ---------------------------- --------------------- ---------------- --------------- ---------------------
Cash, cash
equivalents and
short-term investments $ -0- $ 58,018 $ 26,424 $ 6,926,314
- ---------------------------- --------------------- ---------------- --------------- ---------------------
Current ratio .63 .78 1.23 8.32
- ---------------------------- --------------------- ---------------- --------------- ---------------------
Situation Start-up company Prior to the With the Following the
bridge loans bridge initial public
financing offering
- ---------------------------- --------------------- ---------------- --------------- ---------------------
We believe that the net proceeds received from our $9,975,000 Initial Public
Offering completed August 29, 1997, together with cash flows generated from
operations, will be sufficient to meet anticipated expansion and working capital
needs for the foreseeable future. If additional funding is required, the Company
expects that it will be able to raise capital through the issuance of long-term
or short-term debt or the issuance of securities in private or public
transactions. However, there can be no assurances that we can generate
sufficient revenues or obtain acceptable future financing.
13
Special Note Regarding Forward-looking Statements
Some of the statements contained in this report discuss future
expectations, contain projections of results of operation 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
projections include, for example:
o our ability to raise sufficient capital to purchase cigars and
humidors to meet any unanticipated increase in the aggressive
"roll-out" schedules required by our contracts and commitments
with stores and distributors;
o the effect of a settlement announced June 20, 1997 of
litigation among 40 States and major U.S. tobacco companies;
o our ability to buy quality premium cigars at favorable prices;
o our ability to negotiate and maintain favorable distribution
arrangements with stores affiliated with major national
convenience store chains;
o the effect of changing economic conditions;
o any decision by major retail chains to remove all tobacco
products from their shelves or place our humidors in a
disadvantageous location within their stores;
o changes in government regulations, tax rates and similar
matters;
o our ability to attract and retain quality employees;
o the decline in popularity of cigar smoking; and
o 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.
14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
None
Item 2 - Changes in Securities and Use of Proceeds
-----------------------------------------
(a) None.
(b) None.
(c) Use of Proceeds.
The Company provides the following information in accordance with Item
701(f) of Regulation S-B:
1. The Company's Registration Statement on Form SB-2 (File No.
333-29985) was declared effective on August 21, 1997;
2. The offering commenced on August 21, 1997;
3. The offering did not terminate before any securities were
sold;
4(i). On August 29, 1997, the Company closed the sale of 1,900,000
shares of its common stock to W.B. McKee Securities, Inc., the
Underwriters' Representative (the "main offering"). On
September 24, 1997, W.B. McKee Securities, Inc. purchased
88,592 of the 285,000 shares available for the over-allotment
option provided for in the Company's Underwriting Agreement
(the "over-allotment offering"). See "Underwriting" section of
the Company's Registration Statement on Form SB-2 and Item 5
herein. The over-allotment option on the remaining 196,408
shares of common stock expired on September 29, 1997.
Therefore, the main offering terminated on August 29, 1997,
after the sale of all of the securities registered; the
over-allotment offering terminated on September 29, 1997, with
196,408 registered shares unsold.
4(ii). W.B. McKee Securities, Inc. served as the managing underwriter
for the offering.
4(iii). The Company registered common stock, no par value, in its
Registration Statement on Form SB-2.
4(iv). The Company registered 2,185,000 shares of common stock, no
par value, in its Registration Statement on Form SB-2, for an
aggregate offering price of $11,471,250. These figures include
the full over-allotment of 285,000 shares;
15
however, as stated above, only 88,592 over-allotment shares
were purchased by the Underwriters' Representative.
Accordingly, the Company has sold 1,988,592 shares at an
aggregate offering price of $10,440,108.
4(v). The amount of expenses incurred through September 30, 1997 in
connection with the issuance and distribution of the
securities registered was $2,309,444. This amount is made up
of $1,044,011 in underwriter's discounts and commissions,
$313,203 in underwriter's non-accountable expenses, and
$952,230 in other expenses, including $118,662 in consulting
fees to directors.
4(vi). The net offering proceeds after deducting the above expenses
were $8,130,664.
4(vii). From the effective date of the Company's Registration
Statement, August 21, 1997 to September 30, 1997, the net
offering proceeds were applied as follows: $1,212,835 to
repayment of debt, $156,025 to purchase humidors, $544,186 to
purchase inventory, $345,503 for sales and marketing, $137,239
for working capital, $3,411,895 as a temporary investment in
six month treasury bills and $2,322,981 as a temporary
investment in a money market account.
4(viii). The use of proceeds described above represents no material
change from the use of proceeds described in the prospectus.
Item 3 - Defaults upon Senior Securities
-------------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 - Other Information
-----------------
W.B. McKee Securities, Inc. ("McKee") served as the Representative of
the Underwriters in the Company's initial public offering which became effective
on August 21, 1997. Under the terms of the Underwriting Agreement, McKee was
given an over-allotment option to purchase up to 285,000 shares of the Company's
common stock at the public offering price, less certain underwriting discounts
and commissions. On September 24, 1997, McKee exercised a portion of the
over-allotment and purchased 88,592 of the 285,000 total over-allotment shares.
The Company realized total proceeds from the over-allotment exercise of
$465,108, minus discounts and commissions of $46,510.80 and non-accountable
expenses of $13,953.24, for net proceeds totaling $404,643.96. The
over-allotment option on the remaining 196,408 shares of common stock expired on
September 29, 1997.
For additional information regarding the specific terms and conditions
of the Underwriting Agreement, please refer to the "Underwriting" section of the
Company's Registration Statement on Form SB-2 (file number 33-29985) declared
effective on August 21, 1997, which is incorporated herein by reference as an
exhibit to this Form 10-QSB and in response to this item.
16
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit Exhibit Name Method of Filing
- ------- ------------ ----------------
Number
- ------
3.1 Articles of Incorporation **
3.2 By-Laws, as amended ***
4.1 Specimen Common Stock Certificate ****
4.2 Description of Rights of Security Holders *****
10.1 Form of Indemnity Agreements between the Exhibit filed herewith
Company and its Officers and Directors
10.2 Marketing and Sales Agreement dated Exhibit filed herewith*
September 17, 1997, between the Company and
Lockwood Publications, Inc.
10.3 Retailer Agreement dated August 25, 1997, Exhibit filed herewith*
between the Company and Tosco Marketing
Co.
10.4 Distributorship Agreement dated October 24, Exhibit filed herewith*
1997 between the Company and Irvine Breath
Products, Inc.
11.1 Statement Re: Computation of Exhibit filed herewith
Per Share Earnings
27.1 Financial Data Schedule Exhibit filed herewith
99.1 "Underwriting" section of Registration ******
Statement on Form SB-2
* Portions of the exhibit omitted and filed separately with the
Commission pursuant to the Confidential Treatment provisions of Regulation ss.
230.406.
** Incorporated by reference to Exhibit 3.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
*** Incorporated by reference to Exhibit 3.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
**** Incorporated by reference to Exhibit 4.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
17
***** Incorporated by reference to Exhibit 4.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
****** Incorporated by reference to pages 56-57 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
(b) Reports on Form 8-K
None
18
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/ Steven A. Lambrecht Date: November 14, 1997
- ---------------------------------------
Steven A. Lambrecht
President & C.E.O.
/s/ Karissa B. Nisted Date: November 14, 1997
- ---------------------------------------
Karissa B. Nisted
Chief Financial Officer
19